Real Estate vs. Mutual Funds

[21pro]

another statistically flawed and biased article... thanks for that.

in fact the very 1st paragraph is a lie... the real truth, 6 of the 10 wealthiest Americans inherited their wealth.

 

[21pro]

I have some investments in duplex apartments and small strip plazas.

these are the exact kind of investments i am currently selling off... they don't make enough money to be worthwhile for me.

and you know what's funny? i am a realtor... go figure.

 

[Berlin]

FLMAO ...some interesting ,and some amazingly revealing posts in here indeed.

Fellas, all the best with your investment , on either end of the discussed spectrum.

 

[21pro]

However, you can typically leverage a real estate investment anywhere from 75% to 95% thus dramatically increasingly your return on equity.

Minor oversight that you've conveniently omitted.

you can do that with stocks too.

BTW - the only push/pull factor affecting or prolonging the real estate boom is interest rates... they will rise as energy prices rise and that's bad for RE investors, unless you choose to invest in Calgary or Edmonton...

 

[james t kirk]

1. You can't live in a mutual fund.

2. You can buy a house and still buy stocks too (with all that extra cash )

Buy Uranium stocks...

 

[lickrolaine]

Wrong by a long shot. The vast majority of wealthy people made their money through extradinarily hard work, brilliant execution of fundamentally sound business strategies and buckets of good, dumb, stupid, luck. Even those who acquired fortunes through real estate investment did so by actively manipulating certain variables in order to arbitrage the risk/return paradigm. Passive real estate (such as the kind that appears to be promoted in this forum) is typically just a money pit. As with anything in life, the return is commensurate with the risk and the effort and never discount the influence of sheer good fortune.

this is very true,most people are confusing the family brick and mortar with an investment,it is nothing more then a place to live,and you try to minimize the amount you pay through various decisions.IE,size of mortgage,size of house,location,and then there is the possibility that renting is cheaper.But that is a whole other topic.The question here is what is a better vehicle for most money returned.A lot of real estate guroos have won,and lost,depends where they are in the cycle.Bill Player won,then he lost,remember greymac.Reichmans won,lost and maybe at a draw now.Cadilac Fairview won,lost and are gone now.The Donald has won and lost more than anyone,but manages to survive.Remember that net worth can be measured in different ways,depends on who does it.Warren Buffett has won,but because he is conservative he will always be second,Bill Gates wins,hard work and relentless business practises.As has been said before,your portfolio must consist of Luck,the more you have,the more you have,plus you need money,money makes money period.Falling into a pile of shit and coming out smelling like a rose is important,a very good trait.
Most people that win big lotteries end up with nothing,why,because sometimes that is just the way it is.Remember,life is short,and getting shorter all the time.Arnold Swarzenegger once said he would trade all his wealth just so his baby girl could have a healthy heart.Wealth has no value without health,so in fact a healthy person is one of the wealthiest people you can find.

 

[Esco!]

this is very true,most people are confusing the family brick and mortar with an investment,it is nothing more then a place to live,and you try to minimize the amount you pay through various decisions

Wrong, it is both!!
It's a place to live and its an investment

 

[FOOTSNIFFER]

Exactly!

not true.

no stats to prove this. only Rich Dad/Poor Dad would make such a false claim.

it would be true that the vast majority of wealthy people hold their net worth in real estate, but have made it elsewhere.

Business ownership is by far the greatest creator of wealth.

....RE prices track median income gains because real people have to actually inhabit property if it's to provide a return to its owners. So the real increase in RE prices can't much deviate from the combination of the pop. increase and the growth in real incomes in any locale. But RE prices often anticipate future growth during booms and then must underperform other asset classes to allow for people's real incomes to 'catch up' to the estwhile boom.

Business has fewer constraints on its growth. Dell was hardly a company twenty years ago but is now in the S&P 500; you can't do that with RE

 

[toronto04]

I'm an appraiser and I guarantee you RE prices have risen quite a bit more than 6-7% per year since 2000 in many parts of the GTA even without renos. Ontario also makes an excellent point regarding leverage not to mention tax benefits. But then no investment vehicle is risk free and guarantees returns excpet US Treasuries perhaps. I stick mostly to individual stocks like 21Pro and would never go with mutual funds. ETFs like spiders or triple Qs yes, mutual funds no. But then I'm willing to spend quite a bit of time doing "homework" and am fairly risk tolerant. If not, I would probably just buy some no load funds and forget about it.

 

[lickrolaine]

Wrong, it is both!!
It's a place to live and its an investment

most people end up with more, or at best the same, invested in their home then the sale value of their home,in the form of interest,maintenance,taxes and monthly bills.So if you call braking even a good investment,ok.The comfort of your own home is not a cheap luxury.It used to be,but not anymore.A newly wed couple has to pay what to live in Toronto or GTA.Coupled with all their combined debt,commuter costs,and they will be in debt a long time.That is why they need another source of investments.Not one that takes thousands and thousands of dollars to just maintain.Yes a house is good,but it takes a lifetime to create any equity,and that equity comes with a huge debt load.
oh yea,throw in one divorce and the hill becomes a mountain.

 

[21pro]

1st off, lickrolaine, your post makes sense that others should be mentioning themselves as they proclaim to be RE investors... read my earlier page 3 reply about how you can take the difference between expenses going into RE and split it between your rent and put the rest into stocks instead of buying a house... in 8 years you can buy your dream house for cash by only putting out the same downpayment, costs and cash flow requirements the mortgage on that house would require you to pay for 25 years... you'd be able to by it with cold hard cash and no mortgage in only 8 years...

I'm an appraiser and I guarantee you RE prices have risen quite a bit more than 6-7% per year since 2000 in many parts of the GTA even without renos..

yes, that's since 2000... i bought and later sold 2 houses in maple that appreciated about 17% per year between 2001 and 2003 after sales and all costs accounted for... but, we are forward looking. prices are soft in alot of areas since the hike in interest rates, expected closing time is longer now, and the days of multiple offers are starting to dry up...

and besides, this is the question we are trying to answer...

In your opinion, what is a better investment - buying property, i.e. land, a house, or channeling your money into mutual funds?? I.e. contributing to an RRSP. (assume you can only pick one, not both). Discuss.

if anyone is searching for highest returns with lowest possible risk I don't think they should even consider touching real estate unless they know the market so well that they can guarantee themselves at least 25% per year ROI with all costs included...(no one in this thread was able to provide that)... it is simply not worth touching real estate unless you fully understand the risks involved. i give this advise even as a licensed realtor...

that same 25% is easily achieved through a carefully selected basket of stocks that you only have to mind looking into about 1 hour per month and expect each stock to appreciate in anywhere from 1 to 6 years... and, also it can be done easily without leveraging debt. ... or you can leverage debt and get annual returns of 300 to 900% if you can sleep at night with that kind of risk... personally, i can't.

 

[toronto04]

21Pro,

Like I said, I stick to individual stocks myself. I agree that things are slowing down in the RE market. But let's not make it sound like getting 25% returns invesing in equities is easy as in 1 hr per month of research. I am not disagreeing with you in the virtues of investing in equities but I must be retarded since I can't achieve that kind of returns even with much more than 1 hr per month of research.

 

[goodtime]

Remember,life is short,and getting shorter all the time.Arnold Swarzenegger once said he would trade all his wealth just so his baby girl could have a healthy heart.Wealth has no value without health,so in fact a healthy person is one of the wealthiest people you can find.

So true.

 

[goodtime]

another statistically flawed and biased article... thanks for that.

in fact the very 1st paragraph is a lie... the real truth, 6 of the 10 wealthiest Americans inherited their wealth.

Guessing you won't be buying this study?

http://www.harrisongroupinc.com/wealthmethodology



CNBC show HNW, high net-worth had on the family heir of Carnation, like others who inherited wealth don't know how to retain it.
http://moneycentral.msn.com/content/Retirementandwills/Planyourestate/P147046.asp
http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/24/353786/index.htm
The old saying of 4th generation will wasted it away is so true. Know few still can't live that down.

 

[Esco!]

Guessing you won't be buying this study?

http://www.harrisongroupinc.com/wealthmethodology



CNBC show HNW, high net-worth had on the family heir of Carnation, like others who inherited wealth don't know how to retain it.
http://moneycentral.msn.com/content/Retirementandwills/Planyourestate/P147046.asp
http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/24/353786/index.htm
The old saying of 4th generation will wasted it away is so true. Know few still can't live that down.

Well if the Harrison Group says so then it must be true

I've never even heard of this group

 

[goodtime]

Real Estate investors

See Tor Star Apr 8, 2006 article titled Buying real estate on a long-term plan,
for interest-only mortages free up capital.

 

[wonkyknee]

what a mish mash of opinions...

most people will agree that if you can afford to own the house you live in, it is better than renting. When you rent, even if it is cheaper then you have to do something with the difference(invest)...this is hardly arguable.


the second thing that is hardly arguable...in fact it is black and white:

stock markets out perform real estate...bottom line.

Where the confusion is here: mutual funds or real estate?

1. mutual fund could be real estate, could be gold, could be canadian stocks, could be technology etc etc. Mutual fund is just a vehicle for holding investments of any kind.

2. individual real estate purchases usually come hand in hand with leverage(mortgage), so to be fair the only true comparison is a leveraged investement in an index....the most suitable for this example would be the Toronto index TSE/S&P.....the comparison between a leveraged investment in these two over almost any 10-15 year period would be ,hands down, STOCK INDEX.


HOWEVER:

Real Estate investments tend to enjoy certain psychological advantages where they are:

*set up with rental income(hopefully)
*they are not evaluated daily
*you can physcially see your investment and show it off to friends etc
*you feel you have more control over the outcome
*you tend to not look at 100% of the costs involved

100% of the costs includes:
taxes
hydro
loss rent due to vacancies
legal
accounting
renovations(including cash deals that don't show up on the books)

Lastly your own time!!!


Many people who have held real estate for long periods of time only look at purchase price and selling price....never the expenses....and they rarely even calculate the compounded annual return.

"...bought our house in 1970 for $20 000 and sold it this year for $300 000 !!!!!!!".....wow......8% not including a single expense and that was leverage by a mortgage for the first some odd years probably....average is probably 6%!!! Pick one of the few funds that was around since then: Templeton Growth Fund...most FA's don't sell this fund cause they think it has been sucking for the last 10 years:...its averaged 13%...no leverage no expense.

 

[Fortunato]

While I agree with a lot of what you said, some corrections are in order....

stock markets out perform real estate...bottom line.

No, they don't. Real estate does have issues, but nearly any long term study you can quote will find that real estate investing (diversified portfolios, unleveraged) has (1) slightly higher returns, in the 11 - 13% range, whereas the equities have been in the 10 - 12% range, and (2) DRASTICALLY lower standard deviation of returns. That means to say, the DATA suggests higher expected returns, with lower risk...

If you think that more current statistics vary, I have yet to see that as well. Data for diversified real estate returns is hard to come by (most use REIT indices as a proxy, which is not perfect), and the Journal of Financial Planning quotes REITs outperformed the SP500 between 1972 and 1997 (14% vs. 13.3% respectively), while a more recent comparison of 1978 through 2005 has REITs outperforming the SP500 as well (15.7% vs. 14.2%).

If you can find anything to the contrary, I'd be happy to see it... but all the data I've seen suggests that equity returns do NOT outperform real estate.

2. individual real estate purchases usually come hand in hand with leverage(mortgage), so to be fair the only true comparison is a leveraged investement in an index....the most suitable for this example would be the Toronto index TSE/S&P.....the comparison between a leveraged investment in these two over almost any 10-15 year period would be ,hands down, STOCK INDEX.

The only "leverage figures" I have seen in this discussion are from the fellow who thinks one can "easily" get 300 - 900% with it... or 25% without.

Real Estate investments tend to enjoy certain psychological advantages where they are:

*set up with rental income(hopefully)
*they are not evaluated daily
*you can physcially see your investment and show it off to friends etc
*you feel you have more control over the outcome
*you tend to not look at 100% of the costs involved

100% of the costs includes:
taxes
hydro
loss rent due to vacancies
legal
accounting
renovations(including cash deals that don't show up on the books)

Lastly your own time!!!


Many people who have held real estate for long periods of time only look at purchase price and selling price....never the expenses....and they rarely even calculate the compounded annual return.

I happen to agree with most of this. That's why all of this anecdotal "proof" (ranging from the Tom Vu sorts one side, vs. the self proclaimed Ivan Boeskys on the other) should be dismissed, and one should look for real data.

Or, more importantly, look for PROFESSIONAL advice.

"...bought our house in 1970 for $20 000 and sold it this year for $300 000 !!!!!!!".....wow......8% not including a single expense and that was leverage by a mortgage for the first some odd years probably....

So? You weren't including the "leverage" in your return calculation. You used the return on the asset (which is proper), not the return on the equity (which would have meant the $20k was actually closer to $5,000)....


Now, don't get me wrong... I'm not "slighting" equities... in order to GET a diversified portfolio of real estate, you need to have a very large amount of capital (even with leverage), making it prohibitive to your average investor. Also, the correlation of real estate to equities (-.26 to the SP500, according to Bodie, Kane and Marcus) would suggest prudent investors have BOTH. But your "bottom line" is inconsistent with any data or study that I've seen.

Best regards,

F.

 

[Esco!]

100% of the costs includes:
renovations(including cash deals that don't show up on the books)

But you forget to mention that if I do renovations on my duplex apartments I can, under current rent control legislation, increase my rent a certain percentage.
This means extra revenue over the long run.

 

[lickrolaine]

But you forget to mention that if I do renovations on my duplex apartments I can, under current rent control legislation, increase my rent a certain percentage.
This means extra revenue over the long run.

as long as you depreciate the value through capital costs and make the proper adjustments when you sell.This only works if you have a mortgage that is more then your income.Not sure how all this works,but it can get complicated.