All Forum Posts by: Scott Trench

 Hey now.. we bought our own here at the HQ ;)

 The BiggerPockets "Logoman" is on the front!  We kept it simple.  Check out the teespring link!

Adam - quite correct on all points.  I simply didn't bake this into my model as I believe that I would be challenged on various tax strategies.  For example - is the house owner-occupied and therefore the interest is written off agains personal income?  Or is it in a business, and the property is depreciated?  And that's just the tip of the iceberg. 

I would prefer to leave the tax advantages of the two types of investments to a separate discussion, as I think it is a layer of complexity that takes away from the more wholistic, larger discussion that might be driven from my model.

Thanks for this point.  All cash-flow, whether from dividends, or from the net of expenses from the property, is considered to be tax-free and is reinvested in the stock indices immediately.  

Sure that's simplistic, but no matter how I structure the income and tax strategies of both types of investments, I open up those strategies to critique, and begin a discussion on the best way to tax advantage real estate income.  Real Estate would arguably produce even greater incremental returns over stocks if an intelligent tax deferral strategy were pursued.

Thanks Christian!  Really like this comment.  I intentionally leave those inputs free to be changed in my model and if you only buy properties that meet superior criteria, then you will be better off than the stock market if your assumptions prove correct.  My intention with the defualt inputs was to simply expose average market conditions for the average investors with no savvy like yourself.  

That said, I think (and I think you may agree) that Real Estate is an investment niche in which it little easier to pick winners in over time than the stock market.  

So I want to make a couple additional points here:

@Adam Hershman When it comes to the long-term, I'd be interested to seee evidence that leveraged ETFs outperform market indices over the long-term.  It's my understanding that they are usually not for the passive investor.  

With regards to liquidity - liquidity is a minor concern for me on an investment that I plan to keep for 30 years. I understand that this is an important factor for some investors - but for a long-term investment that I purchase with the full intention of holding for 30 years, I guess I'm just not as concerned with the ability to liquidate my property in the next 12 months. I consider the huge upside over the course of the next 30 years that comes with my FHA financed 5% down property and the historical returns of Denver, CO to vastly outweigh the detracting consideration of less liquidity on the property than a position in the stock market.

@Jay Hinrichs and @Matt R. I don't particularly like the Apple argument.  It's easy to point out how stocks are great when you pick the most successful company of all time as your example.  It's the average that counts for me.  

@Adam Hershman Thanks for the thoughtful response!

Two address your two criticisms:

1) Over the long-term (10-30 years), it is extremely difficult to leverage your stock portfolio.  Could you please provide examples of how folks are able to leverage 10 to 30 year positions in the stock market at interest rates in the same ballpark of real estate?

2) With a long-term focus, my interest in liquidity is dismissed.  I am not investing for rapid gains that I have instant access to.  I am investing for long-term wealth.   

Overall - as a young person that does not have a portfolio to diversify, it is my belief that I can really only reasonably make a single investment with my first $20,000.  To that end, I believe that it really IS Real Estate vs. The Stock Market.  The question is "what is the best possible use of my money to create long term wealth for myself?"  The math that I've done seems to indicate that leveraged Real Estate is far more powerful on average than the stock market.

@Andrew Martin I'd make the same point to you as well - I don't have a portfolio to diversify this early in my professional life.  I plan to be diversified in the future, but as of now, I am making the most with my first significant investment.  I do plan to pour money into the stock market over time.  But what comes first?  For me - that's the investment with the highest total long-term potential.

@Matt R. Thanks for the comment!  I agree that stocks are better if you are unwilling to risk leverage or to put in the dirty work to get those above average performing properties.

This video says it all:

http://www.vsss.com/

Dalton - Currently there is a real shortage of condos in Denver.  I think that you may find that the price to rent ratios on luxury condos will leave you with a low rental cash return and that you risk competing heavily with higher quality condos in the near future.  This situation is largely due to a set of laws that I heavily criticize regarding builder defect laws.  Check out this link:

http://www.westword.com/news/has-condo-development...

Basically, it is super easy for the builders of condos in the Denver area (and all of Colorado for that matter) to get sued on a large scale for relatively minor problems in the construction of these structures.  This results in the situation we have today in Denver  - a situation where a very tiny fraction of available housing is in the form of condos - a small percentage compared to other similar markets.  Instead, apartment buildings are constructed with apartments that are often hard to distinguish from condos but are currently rented by apartment style tenants. 

It is my view that investors should be wary when purchasing condos in the Denver area, because I tend to believe that the mounting pressure to protect builders and incentivize them to bring condos to the region will drive down the price of existing condos over time.  Further, there is already quite a bit of inventory in place ready to be converted to condos when/if the legal status of these current apartments ripens them for sale as condominiums.

My two cents!

I was asking myself this question the other day:

If I was an average person investing in a random town in a random part of the United States, would I be better off investing in Real Estate, or the Stock Market?

Turns out that that's pretty easy.  It seems clear that you'd be better off over the long term investing in the stock market if you buy a median priced property and rent it at a median rate in the United States.

Unless you leverage.  And the more the better. 

I'd invite you to check out this model that I built (which can be downloaded for free from the fileplace) and put input the assumptions that best match your local market. How does a property acquisition in your market fare compared to an investment in the stock market? What happens when you lever up? How about with HUGE leverage as in FHA Financing (28.5-1 levarage ratio at 3.5% down)?

In some markets with unfavorable rent to price ratios, you'll need a lot of appreciation to make up for an average investment with relatively low cashflow.  How much appreciation do you need for Real Estate to earn you a better return than the stock market?

Notice that the default assumptions I use are for a pretty standard purchase - a 20% down property that appreciates at the national average rate of 3.4% and that cashflows at the median price to rent ratio of 10.08 to 1.  

It's funny - my math (which is open to interpretation - please challenge my assumptions or the construction of my model!) suggests that a monkey randomly choosing properties throughout the country would do pretty well by just continuing to invest in leveraged real estate at random over the long term.  

Do you agree?  What is your market like? Does this change your strategy or how you think about investing in your local market?