Except you have to cover taxes. And insurance. And at least 1-2 months of the year the property is vacant. And your time in finding another tenant. And repairs when the tenant decides to fix his motorcycle on the carpet you installed six months ago. (Happened to me.) When you factor all that crap in, suddenly that rent payment doesn't look so great. I've been a landlord, and it's certainly a viable business. I made a lot of dough at it during the bubble. But man do you have to be careful. Right now I make $1000/month in mortgage payments on my own $160k house (cheap!) My brother is RENTING a $300,000 house for $1200/month. It's absolutely insane. The landlord for that house is probably losing $1500 ever time he collects a rent check. I pity him when it's vacant! Bottom line: If you have a little cash and want to invest in something long term (and don't want that investment to swallow a chunk of your life) go with stocks. If you have a nicely diversified stock portfolio and want to move into real estate, or you just like the idea of being a rental property owner as a part-to-full-time job, go for it.
Were they returning that between, say, 1955 to 1998? (I honestly don't know.) I doubt it, but if they did it's probably because they were basically like mutual funds: carefully managed businesses designed to maximize investment in certain sectors of real estate that had demonstrated long-term growth. That's not really what I'm talking about. I'm discussing the thousands of mom and pops like me who dabbled in owning a rental or two, or experimented with flipping houses. It looked like a great idea during this bubble, but the party is over. It's just not a smart place to put your small nest egg.
I'd bet with real estate there is a horror story to every success, much like in the stock market. You've been burned 1 way, I've been burned the other. Look at how many people were burned today. It's all about making wise purchases. I do agree owning property is less liquid of an investment than other assets, but they have their strengths too. As you mentioned there is taxes, that and other costs are tax deductible. -Petey
I was thinking more of a personal residence than investment property. As far as those numbers above, it's got to be more complicated than that. There is yearly property tax, property insurance, interest rate on money borrowed, maintance, managemetn company fees and the 6% comminsion costs invloved when you finally sell the house. So no way should someone think they will be making 25% profit/yr on real estate. I''ve always said I'm not a finance guy, but a strategy I've heard when thinking of buying that beach house is instead put the down into a money market, take what you make off that each year and use it to rent a place iat the beach for two weeks a year. Less headaches and risks invovled. Maybe you lose out in the housing boom, but you also don't have to lose sleep over the housing bubble burst.
Here's a fantastic article from CNN Money that summarizes the major points. http://money.cnn.com/galleries/2007/real_estate/0704/gallery.stocks_v_realestate.moneymag/index.html It's conclusion: The shocking thing about that article is they came to that conclusion in 2006, when the bubble was just speculative.
A house is absolutely an investment. The whole "real estate appreciates at the rate of inflation" argument is actually an argument FOR buying the house. If the owner is properly leveraged, then that 3-4% appreciation can turn out to be a huge percentage return. Now, people bring up upkeep, taxes, etc. Well, if it is an investment property, you get to write-off all of those expenses, PLUS you get to depreciate the structure itself. Those are great write-offs. If you know what you are doing, you can purchase a rental property that is monthly cash neutral, including taxes, loan payments, insurance, etc. If you are monthly cash flow neutral, and leveraged correctly, that 3% per year becomes 15% per year. I would like to see somebody do that consistently in the market. Not to mention you still get to write-off the taxes paid, and depreciate the structure. Also, it can be a great investment as a primary residence. The tax code is setup such that you can make a huge profit on your home TAX FREE (up to 500k as a couple). There are other games you can play, like using an investment home, 1031 exchanging into a nicer home, then moving into that home to later take advantage of the 500k tax free exception. Now you have used houses as a way to make a huge profit tax free. So, as you can tell, I have always had a strong bias in favor of buying houses as investments.
Best thing I've ever done is buy my house. Also, I heard if you put a stripper pole in the basement that you can write it off? True?
yes and it depreciates depending on how much body juices are on it Drag your fingernail down it. If you get a residue piling underneath your fingernail withing 6 inches then you can use it for depreciation
I know. What I'm saying you can do is: You can purchase an investment property and let it appreciate as long as you like. Then, you can 1031 exchange it into something nicer, that you might want to live in and make your primary residence. However, it must remain as an investment property for a minimum amount of time, since the 1031 exchange stipulates the two properties being "like properties". After this minimum amount of time, you can move in to it as a primary residence. Then, years later, you can sell this primary residence, and not pay any tax on $500k of profit ($250k for an individual). That is a pretty amazing investment to not pay any tax on. Show me another investment that is absolutely tax free for $500k of profit.
This one is DEFINITELY a huge benefit of real estate, no doubt. I have no damned clue why it exists, though. Seriously, why should I pay taxes to go work, but not on the windfall that happens from selling a house? How is the dough suddenly dropping in your lap from a house sale any different than, say, winning a bunch of money on a game show or lottery (which you pay taxes on)? Our tax laws are so screwy.
Agree with it or not, I think it goes back to the idea that real estate appreciates with inflation. I believe the thought is that individuals should not have to bare the tax burden due to inflation. I can see some justification for this because the Fed is so responsible for inflation. It turns out that the profits are much larger than the inflation due to being leveraged.
I think it is to promote familes being home owners. Also, I hear the lobbists for the real esate are very influential. : ) I have a lot of friends who own property as investments (those damn slum lords) . . . they are often busy on the weekends and justs seems like a big old headache to me. But maybe they will be laughing all the way to the bank. Of course the assumption in all this is you make 500K on the investment . . . anyone who decided to start buying properties a year ago are probably wishing they picked a different investment for their money.
A 1031 exchange must remain as a rental property for 2 years before it can be converted to a primary residence. That is my understanding from a recent transaction anyway.
First table is historical, cumulative, compounded. <table border="0" cellpadding="5" cellspacing="0"><tbody><tr><td> </td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite<sup>1</sup></td> <td>Dow Jones Ind Avg<sup>1</sup></td> </tr> <tr> <td>1-Year</td> <td> -5.95 </td> <td> -3.08 </td> <td> -11.09 </td> <td> -6.71 </td> <td> -8.67 </td> <td> -13.88 </td> </tr> <tr> <td>3-Year</td> <td> 1.27 </td> <td> 3.78 </td> <td> 2.85 </td> <td> 2.92 </td> <td> 2.10 </td> <td> 2.26 </td> </tr> <tr> <td>5-Year</td> <td> 11.61 </td> <td> 13.89 </td> <td> 7.03 </td> <td> 9.75 </td> <td> 6.03 </td> <td> 4.26 </td> </tr> <tr> <td>10-Year</td> <td> 10.64 </td> <td> 11.78 </td> <td> 2.91 </td> <td> 6.81 </td> <td> 2.19 </td> <td> 2.51 </td> </tr> <tr> <td>15-Year</td> <td>10.90</td> <td> 11.63 </td> <td> 9.19 </td> <td> 9.09 </td> <td> 8.28 </td> <td> 8.10 </td> </tr> <tr> <td>20-Year</td> <td> 9.93 </td> <td> 11.56 </td> <td> 10.41 </td> <td> 9.73 </td> <td> 9.38 </td> <td> 8.74 </td> </tr> <tr> <td>25-Year</td> <td> 9.90 </td> <td> 12.30 </td> <td>11.37</td> <td> 9.13 </td> <td> 8.48 </td> <td> 9.42 </td> </tr> <tr> <td>30-Year</td> <td> 11.80 </td> <td> 13.89 </td> <td> 12.12 </td> <td>NA</td> <td> 10.20 </td> <td> 8.98 </td> </tr> <tr> <td>35-Year</td> <td> 10.48 </td> <td> 13.28 </td> <td> 10.77 </td> <td>NA</td> <td> 9.15 </td> <td> 7.43 </td> </tr> </tbody> </table> <sup>1</sup> Price only returns. Highest total return for the period in bold. Total returns expressed in percent. Data for periods ending April 30, 2008. Calendar Year Total Returns, Periods Ending December 2007: <table border="0" cellpadding="5" cellspacing="0"> <tbody> <tr> <td> </td> <td>FTSE NAREIT All REIT</td> <td>FTSE NAREIT Equity REIT</td> <td>S&P 500</td> <td>Russell 2000</td> <td>Nasdaq Composite<sup>1</sup></td> <td>Dow Jones Ind Avg<sup>1</sup></td> </tr> <tr> <td>1-Year</td> <td>-17.83</td> <td>-15.69</td> <td>5.49</td> <td>-1.57</td> <td>9.81</td> <td>6.43</td> </tr> <tr> <td>3-Year</td> <td>6.13</td> <td>8.50</td> <td>8.62</td> <td>6.80</td> <td>6.83</td> <td>7.15</td> </tr> <tr> <td>5-Year</td> <td>16.64</td> <td>18.17</td> <td>12.83</td> <td>16.25</td> <td>14.71</td> <td>9.72</td> </tr> <tr> <td>10-Year</td> <td>9.63</td> <td>10.49</td> <td>5.91</td> <td>7.08</td> <td>5.38</td> <td>5.31</td> </tr> <tr> <td>15-Year</td> <td>12.33</td> <td>13.02</td> <td>10.49</td> <td>10.10</td> <td>9.53</td> <td>9.72</td> </tr> <tr> <td>20-Year</td> <td>10.86</td> <td>12.31</td> <td>11.81</td> <td>11.34</td> <td>10.97</td> <td>10.09</td> </tr> <tr> <td>25-Year</td> <td>10.73</td> <td>13.17</td> <td>12.73</td> <td>10.79</td> <td>10.23</td> <td>10.69</td> </tr> <tr> <td>30-Year</td> <td>12.01</td> <td>14.15</td> <td>12.95</td> <td>NA</td> <td>11.36</td> <td>9.67</td> </tr> <tr> <td>35-Year</td> <td>10.26</td> <td>13.16</td> <td>10.97</td> <td>NA</td> <td>8.91</td> <td>7.60</td> </tr> </tbody> </table> <sup>1</sup> Price only returns. Highest total return for the period in bold. Total returns expressed in percent. Data for periods ending December 31, 2007.
Dang, that looks really good. Isn't an REIT basically just a stock for real estate? If so, it eliminates most of the problems mentioned here. Although it doesn't have all the tax advantages, right?
It's a trust for real estate, and you DO get the depreciation benefits passed on to you in the form of a "return on capital" which is not taxable. The beauty of the things are that they're liquid and pay a high dividend. The downside is that they may have to sell income property to meet the dividends, lowering their book value over time.
Speaking of REITs, I once modeled a sort of REIT in the form of an LLC. A small number of partners would have put up $9M in cash, which would have bought 20-30 vacation rental condos in Hawaii. At 50% occupancy and including the depreciation and $300K annual expenses (renting them out, management, maid service, repairs), the estimated ROI was close to 18%. All the condos would have been bought for cash. Extending it would be to buy on other islands or in other vacation areas (ski resorts, etc.). Turns out if I had found the investors to fund it, the properties would have (and did) double by appreciation, and the occupancy rate would have been about 90%. Some REITs focus on commercial properties, others on rental homes, and so on.
