Comments on: What is the True Rate of Return on Real Estate? http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/ Everything to do with thickening your wallet by entrepreneur turned President of an Investment Company Wed, 17 Mar 2010 13:21:25 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Ask the Readers: Is Your Home an Investment? | Million Dollar Journey http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-18479 Ask the Readers: Is Your Home an Investment? | Million Dollar Journey Mon, 30 Mar 2009 11:34:41 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-18479 [...] providing that you purchase at a decent price with affordable payments.  Real estate has proven to beat inflation over the long term by a couple percentage points, thus a long term inflation hedge.  However, it isn’t a [...] [...] providing that you purchase at a decent price with affordable payments.  Real estate has proven to beat inflation over the long term by a couple percentage points, thus a long term inflation hedge.  However, it isn’t a [...]

]]> By: Home Owner http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-10465 Home Owner Tue, 13 May 2008 23:56:31 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-10465 I also wanted to respond to what was said about mortgage payments staying fixed and rent going up. For the many years I rented, it went up significantly every year. If I was retired and on a fixed or somewhat reduced income, it would have been hard if not impossible to keep up with the rent. At some point, if the rent went up too rapidly, I may have had to move out anyway to something less expensive. That probably would have meant a smaller apartment or one in an area that wasn't as nice as I was living in. Now, I'm building equity and paying down a mortgage that is fixed and will eventually be paid off. Plus, the house offers so much more than my apartment did. I also wanted to respond to what was said about mortgage payments staying fixed and rent going up. For the many years I rented, it went up significantly every year. If I was retired and on a fixed or somewhat reduced income, it would have been hard if not impossible to keep up with the rent. At some point, if the rent went up too rapidly, I may have had to move out anyway to something less expensive. That probably would have meant a smaller apartment or one in an area that wasn’t as nice as I was living in. Now, I’m building equity and paying down a mortgage that is fixed and will eventually be paid off. Plus, the house offers so much more than my apartment did.

]]> By: Home Owner http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-10464 Home Owner Tue, 13 May 2008 23:51:48 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-10464 You also have to take into consideration that mortgage interest and property and school taxes are deductible. Rent is not at all. After years of renting with no equity, no investment, no tax deductions, buying a house was the best decision I ever made in terms of lifestyle and especially financially. What Suze Orman says is true. Unless renting affords you convenience that you need, a house is too much work, or you live in a place, like a city, where a large percentage of people rent, buying property (house, condo, co-op) is THE way to go! You also have to take into consideration that mortgage interest and property and school taxes are deductible. Rent is not at all. After years of renting with no equity, no investment, no tax deductions, buying a house was the best decision I ever made in terms of lifestyle and especially financially. What Suze Orman says is true. Unless renting affords you convenience that you need, a house is too much work, or you live in a place, like a city, where a large percentage of people rent, buying property (house, condo, co-op) is THE way to go!

]]> By: Four Pillars http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8430 Four Pillars Wed, 26 Mar 2008 11:12:34 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8430 Thanks for the great post and link! Mike Thanks for the great post and link!

Mike

]]> By: FinancialJungle http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8426 FinancialJungle Wed, 26 Mar 2008 08:26:14 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8426 End point bias can drastically alter the compounded appreciation of real estate. Vancouverites, who bought homes at the market top in 1980, had to wait 26 years just to recover their inflation-adjusted principal back. The lucky ones who bought 5 years ago have already doubled their money. That's why the cited studies are all over the map because they're measured in different periods. A real estate investor once told me "you make money on the day you buy." Buying a house is like buying stocks. The more attractive the entry price is, the better the return. I know many people don't treat their home as an investment which is fine, but this is just another form of mental accounting. Every extra dollar paid in your home is one dollar less in your retirement investment account. You may not label your home as your investment, but it should be handled like one; buy the best home you can find at your price point. To Traciatim, the rent versus buy formula is just garbage-in-garbage-out. My rent-to-value ratio is 4.7%. On the other hand, a 5-year fixed is 5.79%. Throw in 1.21% for property taxes, condo fees and insurance to round the expenses to 7%. This excludes the principal portion of the mortgage payment. Obviously, I'm better off renting and investing the 2.3% difference. This is similar to what Millionaire Mommy Next Door is doing, although in a more humble scale. End point bias can drastically alter the compounded appreciation of real estate. Vancouverites, who bought homes at the market top in 1980, had to wait 26 years just to recover their inflation-adjusted principal back. The lucky ones who bought 5 years ago have already doubled their money. That’s why the cited studies are all over the map because they’re measured in different periods.

A real estate investor once told me “you make money on the day you buy.” Buying a house is like buying stocks. The more attractive the entry price is, the better the return. I know many people don’t treat their home as an investment which is fine, but this is just another form of mental accounting. Every extra dollar paid in your home is one dollar less in your retirement investment account. You may not label your home as your investment, but it should be handled like one; buy the best home you can find at your price point.

To Traciatim, the rent versus buy formula is just garbage-in-garbage-out. My rent-to-value ratio is 4.7%. On the other hand, a 5-year fixed is 5.79%. Throw in 1.21% for property taxes, condo fees and insurance to round the expenses to 7%. This excludes the principal portion of the mortgage payment. Obviously, I’m better off renting and investing the 2.3% difference. This is similar to what Millionaire Mommy Next Door is doing, although in a more humble scale.

]]> By: admin http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8413 admin Tue, 25 Mar 2008 22:35:37 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8413 I agree with both CC and Hannah in principal re: rental income. But I previously cited a study where less than 45% of property owners reported a profit. If you invest in real estate on a commercial or wholesale purpose than I am more willing to agree that there will be profits from rental income. I agree with both CC and Hannah in principal re: rental income. But I previously cited a study where less than 45% of property owners reported a profit. If you invest in real estate on a commercial or wholesale purpose than I am more willing to agree that there will be profits from rental income.

]]> By: Hannah http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8401 Hannah Tue, 25 Mar 2008 17:06:51 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8401 I think it also depends at how you plan on using your Real Estate: if you're just going to be living in it then yes, you're not going to see much appreciation over time compared to other forms of investment, but if you're using your property as an investment, then things are different. Buying a property and renting it for profit actually does give a good ROR. If you keep a positive cash flow, then your mortgage is paid for and any remainder is passive income. Any appreciation in the value of the land should be secondary. Compare it to the people who purchase stocks with the intention of getting dividends. I agree that Real Estate isn't always the best investment, but ROR for investment properties is higher than you make it seem when you consider income. I think it also depends at how you plan on using your Real Estate: if you’re just going to be living in it then yes, you’re not going to see much appreciation over time compared to other forms of investment, but if you’re using your property as an investment, then things are different.

Buying a property and renting it for profit actually does give a good ROR. If you keep a positive cash flow, then your mortgage is paid for and any remainder is passive income. Any appreciation in the value of the land should be secondary.

Compare it to the people who purchase stocks with the intention of getting dividends. I agree that Real Estate isn’t always the best investment, but ROR for investment properties is higher than you make it seem when you consider income.

]]> By: Canadian Capitalist http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8398 Canadian Capitalist Tue, 25 Mar 2008 15:25:34 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8398 Thicken: I disagree with your analysis because it ignores a major component of real estate returns - viz. the rental income or the imputed rental income for a owner-occupied home. That said, it is not clear to me what the total return on real estate is. Some books claim "equity-like" returns and David Swensen in "Unconventional Success" says that real estate ranks higher than bonds but lower than equities in the risk-reward spectrum. Thicken: I disagree with your analysis because it ignores a major component of real estate returns – viz. the rental income or the imputed rental income for a owner-occupied home.

That said, it is not clear to me what the total return on real estate is. Some books claim “equity-like” returns and David Swensen in “Unconventional Success” says that real estate ranks higher than bonds but lower than equities in the risk-reward spectrum.

]]> By: admin http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8397 admin Tue, 25 Mar 2008 15:19:20 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8397 Traciatim- thanks for the thorough comments. A more accurate description is real estate returns t-bill pre-tax and I will make that change accordingly. Thanks for pointing that out. I don't substantially disagree with you about houses being inflation protectors (as stated in the post). My larger point though is that houses are substantially inflation protectors and that's about it. If one is investing in a home thinking it will go up 10% plus year over year, statistically speaking, this would be a false assumption over a long study period. To address your point though, in certain markets, real estate appreciation substantially outstrips the increase in rentals. In such a case, the prudent approach would be to rent rather than buy since this indicates a bubble market may be forming (especially where the increase in prices far outstrip the increase in the costs of rent). Whether people do this or not is another question... Traciatim- thanks for the thorough comments. A more accurate description is real estate returns t-bill pre-tax and I will make that change accordingly. Thanks for pointing that out. I don’t substantially disagree with you about houses being inflation protectors (as stated in the post). My larger point though is that houses are substantially inflation protectors and that’s about it. If one is investing in a home thinking it will go up 10% plus year over year, statistically speaking, this would be a false assumption over a long study period.

To address your point though, in certain markets, real estate appreciation substantially outstrips the increase in rentals. In such a case, the prudent approach would be to rent rather than buy since this indicates a bubble market may be forming (especially where the increase in prices far outstrip the increase in the costs of rent). Whether people do this or not is another question…

]]> By: Traciatim http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/comment-page-1/#comment-8396 Traciatim Tue, 25 Mar 2008 14:58:12 +0000 http://www.thickenmywallet.com/blog/wp/2008/03/25/what-is-the-true-rate-of-return-on-real-estate/#comment-8396 Actually, the renter will probably have to move, since CPP/OAS will only provide about half their income in retirement . . . So they will have to get something that's around 1200 bucks, but in 25 years that same 1200 bucks will surely not get a rental place anywhere near what they are used to living in. Probably instead of renting a home, you're going to be in a run down apartment somewhere . . . Actually, the renter will probably have to move, since CPP/OAS will only provide about half their income in retirement . . . So they will have to get something that’s around 1200 bucks, but in 25 years that same 1200 bucks will surely not get a rental place anywhere near what they are used to living in. Probably instead of renting a home, you’re going to be in a run down apartment somewhere . . .

]]>