Comparing ‘apples and oranges’

[gwasser]

You may have noticed that I have my own blog on investing `Canadian Diversified Investing`. What follows is my newest posting which I think may be of interest to REIN investors as well.

So there is an important distinction between investing and `investing in real estate`. Investing in the strictest sense of my definition means that your money is working for you rather than that you are working for money. `Real estate investing` often entails the running of a business, i.e. buying a house, renovating it and reselling it - hopefully for a profit. Or buying a property, renting the property and creating positive cash flow plus appreciation. Members of REIN who own properties and operate them are running a real estate business; their proceeds are a combination of investment profits and salary. Their salary is not guaranteed, it is performance based just like the compensation of many senior managers in large corporations.

If you truly invest in real estate and you have a JV partner (finder) or operator-owner run the place, the only thing you do is getting a return on money without being involved in the operations. This is not much different from investing in a REIT, a MIC or mortgage investment corporation or just investing in a loan. Hence, the returns, at first sight, should not be much different and are basically determined based on risk and on the comparison with results from other investments. The key word is `risk`.

Here is another matter to consider when comparing investing and `real estate investing`: leverage. This is often called the major advantage of real estate investing. But it is again an incorrect perception. In some cases the passive JV investor (true investor) qualifies for the mortgage taken out on the property and provides a personal guarantee to the lender regarding the repayment of such a mortgage. This increases the risk level of his investment considerably and consequently so should the returns increase. Furthermore, in a true partnership, the passive JV investor may not only be liable for the mortgage but also for any liabilities regarding operations and regarding the property`s liability in general. This is another reason for higher returns on investment.

If the passive JV investor raises his investment capital by taking out moneys from another property, say through a line-of-credit (LOC), he does exactly the same as an investor investing in the stock market who buys on margin or uses money from a LOC to buy the shares. In fact, the passive JV investor is now over-leveraged to a degree that no stock trading brokerage would normally allow. Some mortgage lenders are now asking explicitly whether moneys obtained for a down payment are borrowed. No wonder because the underlying JV property is basically over-leveraged and improperly insured or not insured at all through CMHC.

To complete the corporate investor analogy, the stock market investor uses leverage exactly the same way except for his personal liability. As mentioned earlier, an investor buying stock on margin is in the same position as the passive JV investor borrowing money for a down payment. But also, his corporate asset, just like the real estate property is also encumbered by loans: corporate debt! That is why stock market investors are concerned about the corporate debt/equity ratio and related numbers. The only difference is that the stock market investor is not liable for the corporate debt.

I think, over the last number of posts, it is now clearly demonstrated that investing in corporations through the stock market and (passive) real estate investing have much in common and also that there are essential differences. Comparison of their investment performance is often presented in an incorrect light. Passive JV investors are often exposed to much higher risks than a typical stock market investor due to over-leverage, mortgage liability and operational as well as building liability. A stock market investor`s funds are more liquid – i.e. it is easier to sell while liability is generally limited to the size of his/her investment except when borrowing on margin. When comparing `real estate return` versus stock market returns, the above issues are usually not considered and on many occasions we are comparing `apples and oranges`.

 

[Thomas Beyer]

QUOTE (gwasser @ Mar 31 2010, 12:04 PM) ..When comparing `real estate return` versus stock market returns, the above issues are usually not considered and on many occasions we are comparing `apples and oranges`.
I agree 100% !

You have to count "blue $s" i.e. time invested AND also "green $s" (i.e. money) invested .. and both have to have an ROI that is a reflection of "market" !

Thus, in many cases, a self managed real estate portfolio may not outperform a passive (real estate) investment with others, a JV, a stock market or a REIT !

 

[gwasser]

QUOTE (ThomasBeyer @ Apr 2 2010, 01:23 AM)
I agree 100% !



You have to count "blue $s" i.e. time invested AND also "green $s" (i.e. money) invested .. and both have to have an ROI that is a reflection of "market" !



Thus, in many cases, a self managed real estate portfolio may not outperform a passive (real estate) investment with others, a JV, a stock market or a REIT !


http://2.bp.blogspot.com/_nYzKeglaLNU/S7yn...ent+Returns.jpg

Well, here is the real comparison (as I see it) between real estate investments and other investments. All data is expressed as compounded rate of return. The rate based on the compound interest equation:

FV=PV x (1+rate) ^yr




FV= Future Value; PV= Present Value; rate= Compounded annual rate of return; yr= investment time in years.



Numbers are derived from the extensive stock market analysis by Jeremy Siegel (The Future for Investors, published in 2005). There is also comparison data based on the performance of Warren Buffett's Berkshire Hathaway and John Templeton's Growth Fund from inception in 1954 to today.



Jeremy Siegel compared long term (200 years) stock market performance with that of various asset classes and the second best asset class was U.S. Government Bonds which had over the last 80 years an average nominal annual return of 7.9%. All these rates include inflation.



In a REIN forum post by Thomas Beyer commenting on the first posting titled "Comparing 'apples and oranges'" stated that real estate returns comprise two components:

1. Return on Time (or labor) investment

2. Return on Capital investment



The Return on Time Investment is basically work compensation, while Return on Capital Investment represents the rent paid for the use of capital. We consider the latter the true return on investment as it represents money working for you rather than you working for money.



A real estate investor can buy a property, rent it out and manage the rental operation, use leverage (a mortgage) to enhance his/her profits and after a number of years the property can be sold (hopefully) at a profit. This is the most basic form of real estate investing (apart from owning your own residence). In this scenario, profits represent a combined return on work and on capital.



The same real estate investor (Finder) may use a partner to provide the capital and financing portion of the transaction. The Finder of such a Real Estate Joint Venture (JV) provides the expertise in locating an appropriate property, finds passive investing partners, arranges for the acquisition, and organizes the financing. The Finder also manages of the property and is responsible for the accounting. In return, the profits of the JV are split on a 50/50 basis.



The question arises as to what the returns of such a JV operation are and how they compare with the return of the other investment classes? The author ran two JV scenarios using a typical Calgary two-bedroom apartment bought at a low capitalization rate (2.6%) and a second property more typical for an average Canadian property at a cap rate of 6.5%. Calgary is known for its low cap rates when compared with the average Canadian property, but the rate of appreciation is typically higher to offset this. In Calgary over the last 33 years, the property appreciation was 8.1% per year, while the average Canadian property appreciated at a rate of 6.4%.



The Basic Real Estate Scenario, run over a 5 year period, with an initial Loan-to-Value ratio of 75% and a mortgage rate of 2.25% resulted in a 23% return for the Calgary property and 25% for the average Canadian property. It should be noted that these are total returns combining both return on time and capital invested.



For the Finder of a 50/50 JV, the return on capital is infinite, since no capital was provided. For the passive investor, the annual compound rate return was 14% in Calgary and 15%* for the average Canadian Property. This compares to an annual S&P500 return of 11.9% for a stock market investor.



These numbers show why it is so difficult for starting JV investors to attract capital from passive investors other than friends and immediate family. Finder investors with an extensive successful and consistent track record are more likely to attract investment capital.



*These numbers were corrected for a calculation mistake in the original posting.

 

[Jeffrey2144]

Hi Guys,

You both offer great insight and I enjoy the posts. However, I am forced to question your calculations.

Godfried - In your last example you state that the "Real Estate Canada Market long term appreciation" is 6.60% and your LTV is 75% which equates to 10% ROI (based on a 50/50 JV split).

When I do the math I see the purchase of a $100,000 house as follows:
75% LTV = $25,000 down payment (initial investment)
6.6% Appreciation x $100K = $6,600 gain
$6,600/$25,000 = 26.4% ROI or 13.2% based on a 50/50 JV split

Is this not correct?

And, what about positive cash flow & mortgage pay down? These two items will easily add another 5-10% to your ROI.

Plus, I have to think most investors are using 20% down (the "new" conventional mortgage amount) instead of 25% which pushes the return to 33% instead of 26.4% (of course not including the other goodies I just mentioned).

Now, if I really wanted to push this then I could also say that if you were to average this investment out over a 25 year term (I won`t even bother with the 80 years) then your rental rates will be nearly 3 times Year 1 rates plus your mortgage would be greatly reduced (if not eliminated altogether) which is going to drive your cash-on-cash return beyond 100%. Your equity appreciation will also be greater than 100% for a simple 200% (annual) ROI in the later years.

Please... correct me if I am wrong (and I know you will) but I just don`t see the S&P 500 offering me these kinds of returns over the long-haul.

 

[gwasser]

QUOTE (jvarcoe @ Apr 6 2010, 10:50 PM)
Hi Guys,



You both offer great insight and I enjoy the posts. However, I am forced to question your calculations.



Godfried - In your last example you state that the "Real Estate Canada Market long term appreciation" is 6.60% and your LTV is 75% which equates to ......later years.



Please... correct me if I am wrong (and I know you will) but I just don't see the S&P 500 offering me these kinds of returns over the long-haul.




Hi Jeff,



This was for a 5 year period not one year and it included real estate commissions. Also, you report your numbers as straight interest not as a compound rate of return which is how the stockmarket return is reported. But I did make a mistake in my spreadsheet when calulating the profits which I corrected. The Calgary passive JV investor's return is: 14% the Average Canadian passive JV investor's return is 15%. Here is the APOD for the fifth year:



Effective Rent $18,143.02 (includes vacancy and bad debt charge)

Operating Expenses: $7704.93

NOI: $10438.09



Purchase Price: $160,000

Down Payment: $40,000

Legal $1000

Interest Rate: 2.25%

Remaining Armort: 31 yrs

Annual Mortgage Payments: $4949.1

Mortgage Paydown in yr 5: $2498.96



Net Cash Flow: $5488,99

Net Cash Flow plus Mortgage Paydown: 7987.96

Estimated Annual Appriciation: 6%

Current Market Value: $214,116.09



Return on investment minus real estate commissions: $50,680.57

Compound Rate of return on investment: 18%

Cap rate: 6.5%



Total profit: $79,943.87



Finder Profit: 50%: $45,404.36 Compound Rate of Return: infinite



Passive JV investor 50%: $45,404.36 - Compound Rate of Return: 15%



Thanks for your comments.

 

[Rickson9]

No offense, but what is the point of this thread? It is impossible to convince a real estate die-hard that stocks are viable and vice versa.

And those with experience with both asset classes don`t really care about the differences.

Can`t we all just get along?

 

[Smitty]

QUOTE (Rickson9 @ Apr 7 2010, 08:48 AM)
No offense, but what is the point of this thread? It is impossible to convince a real estate die-hard that stocks are viable and vice versa.



And those with experience with both asset classes don't really care about the differences.



Can't we all just get along?




Rickson9:



The point Gwasser is trying to make is NOT trying to convince anyone of anything. I take the thread to mean that, sometimes as real estate investors we get a little smug - and complacent - in comparing the stock maket to real estate investing.



You know what they say: "There are lies, damned lies, and then there's statistics". Real estate investors are particulalrly good at cherry picking to make the stock market look extraordinarily bad.



I was pm'ing Godfried about we haven't even begun to compare really leveraged instruments like options, which can make the returns on real estate look like peanuts, for about the same amount of risk (maybe 3 to 4 people here on MyREINSpace will actually believe that, but there ya go...)



As for your comment about getting along, again, its not about some sort of trumped up "fight". Its about apples to apples comparisons. And Thomas made a good point about time too.



I hear what you're saying about investors in general though: talking to a die hard real estate investor about the stock market is like convincing Glen Beck Obama was born in the US and he actually isn't a card carrying communist.

And I know alot of traders who wouldn't even think of buying real estate.



Its all about your knowledge, comfort level, what you understand, and your focus.



Smitty

 

[Thomas Beyer]

QUOTE (Rickson9 @ Apr 7 2010, 08:48 AM)
No offense, but what is the point of this thread? ..


the point is to look at FACTS .. unemotionally .. as each asset class has investment value .. and since real estate is far more time consuming than clicking on a screen to buy a stock or index fund the return has to be greater ! The question is: how much greater to compensate for time invested .. and perhaps risk due to leverage !

 

[Pheenix]

QUOTE (Rickson9 @ Apr 7 2010, 10:48 AM) No offense, but what is the point of this thread? It is impossible to convince a real estate die-hard that stocks are viable and vice versa.

And those with experience with both asset classes don`t really care about the differences.

Can`t we all just get along?

Hi
I agree about everyone getting along, but I would not class this type of discussion as an `argument` but rather as an educational session.

REIN is very much about education and information exchange. Many people joining REIN are not real-estate savy when they start, they may also find other investments foreign. However, they learn, and grow. Godfried is, I suggest, only offering some insights into other investment perspectives that are in keeping with the generousity of spirit reflected in the pure real estate threads.

Real estate is familiar to almost everyone at some level and therefore often an easier place to start as well. As they gain experience, confidence and funds they may want to look at some alternate forms of investing.

As a RE portfolio grows the need for contingencies and reserves often grow as well, revolving lines (HELOC at the personal level) notwithstanding. Whether long term, or short, there is often cash available in excess of immediate operational needs. Wouldn`t you want to give some thought as how to maximize the use of those funds too.

It may be best to pay down debt, but it is not always easy to re-borrow, especially at the same rate, in a increasing rate environment.

Other advantages that Godfried did not dwell on are liquidity and severability. Stock I can sell at the push of a button, if I see a better opportunity, or too much risk. I can also sell a few `market investments` to rebalance my assets if I choose. Hard to sell real estate within seconds of making the decision, and I haven`t seen any one sell 10% of a property (let alone requiring a lawyer to do it) because they have too many livingrooms verus the number of bedrooms, or they think the next price move is down and they expect to buy it back lower next week, or month.

Do you want some rudimentary education from someone who has been successful with the same basic investment bias (real estate) as you have, or from someone trying to convince you to `dump that junk and buy mine`, (and yes to keep the dual meaning it may be bonds!)? If you get really serious about market investing you will move to other foums and educational venues anyways, or at least, as well.

All in all, it is not about either/or, but about getting informed so it can be both, if you want.

 

[Pheenix]

QUOTE (Smitty @ Apr 7 2010, 11:13 AM) Rickson9:

You know what they say: "There are lies, damned lies, and then there`s statistics". Real estate investors are particulalrly good at cherry picking to make the stock market look extraordinarily bad.

I was pm`ing Godfried about we haven`t even begun to compare really leveraged instruments like options, which can make the returns on real estate look like peanuts, for about the same amount of risk (maybe 3 to 4 people here on MyREINSpace will actually believe that, but there ya go...)

As for your comment about getting along, again, its not about some sort of trumped up "fight". Its about apples to apples comparisons. And Thomas made a good point about time too.

I

Smitty

Not sure if you are touting fruit futures (apples, oranges, and cherries) or peanuts.

I`m one who is still concerned that my only option is finishing out of the money in this arena.

 

[Jeffrey2144]

QUOTE I agree about everyone getting along, but I would not class this type of discussion as an `argument` but rather as an educational session.

I couldn`t agree more... if I wanted an argument I would`ve asked my wife if she could take out the garbage for a change.

When great minds speak, I listen (that`s why I read the post in the first place). However, if I think I`m missing something then I`ll ask.

Godfried - Thank you for enlightening me with your response I sincerely appreciate it. I was not considering the RE commission over a 5-year term. I can also see by your detailed example that you were using a specific transaction. And, although my quick #`s are still a little different than yours what 2.6% between friends. Just kidding!!!

Thanks for your time and I have not missed your point with respect to the "value of your time" and how it fits into your ROI.

 

[retiredby50]

Please allow me to throw a different perspective into the hat here. That of someone who`s level of sophistication is nowhere near Thomas or Godfried.

Godfried you`d mentioned in your -"the path to becoming rich is already known"-these words:

"When all is said and done, with investing you want to keep things simple. If you don`t understand how an investment works don`t use it."

BINGO! I agree, and I have always felt that with investing in paper products that I was over my head before I even wrote the cheque. (there`s likely a lot of head nodding going on in the room right now) I`ve read and tried to truly understand what happens to my money when I give it to the "Vegas Stock Exchange," but I just don`t get it.

By contrast, even my 12 year old understands the concept of owning a house and renting it to someone who needs it.


It seems to me that real estate is a place where an average person of average intelligence and sophistication can MAKE money to live on, and the stock market is a place one can park their money once they already HAVE it(though personally I still wouldn`t park it there because, as I`ve stated, I don`t get it).

Maybe if investing in the stock market could be done so the average person could understand it, systemize it, create solid, life sustaining monthly cashflow in good times AND bad, and then leverage existing stocks to buy more to build wealth, Don would be running an organisation called the Stock Market Investment Network?

Cheerios
Keith

 

[gwasser]

QUOTE (retiredby50 @ Apr 8 2010, 10:14 AM)
Please allow me to throw a different perspective into the hat here. That of someone who's level of sophistication is nowhere near Thomas or Godfried.





Godfried you'd mentioned in your -"the path to becoming rich is already known"-these words:



"When all is said and done, with investing you want to keep things simple. If you don't understand how an investment works don't use it."



BINGO! I agree, and I have always felt that with investing in paper products that I was over my head before I even wrote the cheque. (there's likely a lot of head nodding going on in the room right now) I've read and tried to truly understand what happens to my money when I give it to the "Vegas Stock Exchange," but I just don't get it.



Maybe if investing in the stock market could be done so the average person could understand it, systemize it, create solid, life sustaining monthly cashflow in good times AND bad, and then leverage existing stocks to buy more to build wealth, Don would be running an organisation called the Stock Market Investment Network?



Cheerios

Keith




Thanks for the input from all of you.

I did this comparison so as to get a better understanding how real estate and other investment classes compare in terms of financial performance. It finally dawned on me, that many such comparisons are not correct and that the above results get closer to reality.



When dealing with real estate, a major issue is the division of strict investment returns versus returns on the work you do. As said before, investing in my opinion represents the return on your money, i.e. your money works for you.



Real estate investing has two components of income: return on the money invested, but also compensation for the work done, whether this is done by a rental manager, a renovator or by the real estate 'investor'.



To truly compare investment returns you should look at what a passive JV makes, because he/she is the only true investor dealing with return on money invested. So here, one can compare with the performance of other investment classes.



When looking at 'normal investment returns', Return on Investment is not often used; a better basis for comparison is the 'time value of money calculation' and the there from derived compound rate if return, yes the same one used for many GIC investments.



The other issue when comparing investment returns is risk/reward. Stock market returns are looked upon by many successful investors as long term investments. Jeremy Siegel is a big proponent of this. But many others as well. Over the long term (last 200 years), after inflation stocks returned 6.5 to 7% and including inflation around 11.2%. In terms of risk, I came across the following, very interesting statistic:



Time (horizon) of investment and the probability of Loss in the Stock Market (W.J. Bernstein)



Time horizon Probability of Loss

One hour 49.58%

One Day 48.80%

One Week 47.36%

One Month 44.51%

One Year 30.85%

Ten Years 0.59%

100 Years 0%



Stock markets are obviously volatile hence many perceive it riskier. But over the long term, as you can see it is one of the most profitable ways of investing and yes, returns of the last decade on average were poor, but the table above shows that it might have been even a loss. This does not make these poor investments. And I can tell you that my stock market returns over the last ten years were a lot higher than I ever made in real estate.



When investing in stocks, your liability is restricted to the money invested. Even a passive JV investor, using leverage, can lose a lot more than the money invested. On top of that, there are operational risks. The 'finder' may turn out not to be very experienced; JV investors may have a fallout and/or the JV collapses, the rental market turns sour. Then there are liabilities, environmental liabilities, safety liabilities. Do I have to go on?



So the risk, even for a passive JV investor is considerably higher than investing in the stock market. Hence the returns need to be better to compensate for that. The expectation by some budding JV investors here on this forum, that a not-guaranteed return of 8.8% should be adequate is, in my opinion' ludicrous. But a friend or relative may go for it because he/she knows the budding investor personally and is full of trust and love. But a true investor would likely not go for that.



I calculated using a typical two bedroom apartment in Calgary with low cap rates and high appreciation that the passive JV investor may walk away with a 14% return. And by massaging the numbers using a higher cap rate and less appreciation more typical for Canadian properties on average, the compounded return would be 15%.



This is definitely better than 11.2% for the stock market. However, when adding in the higher risk level and the liquidity of the investment, I gather that most investors would be reluctant to do a JV unless the 'finder' has a lot of real estate experience.



As to only investing in the real estate because the investor feels that he/she is not knowledgeable in the stock market that is completely justified. But... such an investor accepts the higher risk levels of not being diversified.



Someone only investing in Alberta Real Estate would count on the fortunes of the oil industry and maybe a few other local industries. Calgary's economy seems to be more diversified than 10 or 20 years ago. But, I would not count on it.



Investing is all about risk management and asset allocation. In other words: "not putting all your eggs in one basket". Having said that, a number of investors (Bill Gates) have become very rich sticking with a very undiversified portfolio.

 

[EdRenkema]

Still having trouble doing a quoted reply in FF.I don`t get Godfried`s point about not being diversified. To me the risk of buying stocks when I don`t know what I`m doing is far greater than buying a type of property that I know and in an area that I understand.
I look at RE investments as a business and treat it as such. Anyone that is self employed or owns a business understands that often the business is an extension of themself and as such represents one`s own sense of value and quality. I`m not against buying stocks and the last one I bought was $4500 of Nortel in 03 or 04 currently valued at approximately $4.05 and yes I did get the decimal in the correct spot (the term `dead cat bounce` comes to mind).
I hear Shoppers Drug Mart is a good buy right now and it pays a 5% dividend but do I really know what I`d doing? - Nope.

A true investment will make a profit whether it goes up in value or not.
A speculation has to go up in value to make a profit.
Doesn`t matter if its paper assets or RE.

 

[gwasser]

QUOTE (EdRenkema @ Apr 9 2010, 10:46 AM) Still having trouble doing a quoted reply in FF.I don`t get Godfried`s point about not being diversified. To me the risk of buying stocks when I don`t know what I`m doing is far greater than buying a type of property that I know and in an area that I understand.
I look at RE investments as a business and treat it as such. Anyone that is self employed or owns a business understands that often the business is an extension of themself and as such represents one`s own sense of value and quality. I`m not against buying stocks and the last one I bought was $4500 of Nortel in 03 or 04 currently valued at approximately $4.05 and yes I did get the decimal in the correct spot (the term `dead cat bounce` comes to mind).
I hear Shoppers Drug Mart is a good buy right now and it pays a 5% dividend but do I really know what I`d doing? - Nope.

A true investment will make a profit whether it goes up in value or not.
A speculation has to go up in value to make a profit.
Doesn`t matter if its paper assets or RE.

Hi Ed,

Did you read Dan Eisenhauer`s or MonteDobson`s posts on real estate losses? So based on your definition these are no investments?

Regarding your Nortel investment yes that was speculation and you paid for that. However, buying shares in the Royal Bank for a good price and forecasting its earnings, dividends and appreciation is just as much an investment as `buying real estate for a good price, forecasting NOI, cash flow and appreciation` is.

However, when you run a REIN type of real estate business, where you also spend time managing and administering the place, replacing toilets etc. Then you are not investing. You are running a business and you have now two forms of income: compensation for your work and return on investment (the money you put into your business). So when you say you make 22% ROI this comprises of compensation for your work and compensation on investment. If you were a passive JV investor and you did not work on the JV property, then again you are strictly an investor.

Regarding diversification. Yes if you do not understand stock market investing it is wise to stay away from it. However, at the same time you limit yourself to real estate and thus if real estate goes bad, e.g. in the U.S. right now, your entire portfolio goes bad. You expose yourself to a higher risk than someone who invests in both or in additional other investment asset classes.

Hope this clarifies.

 

[Thomas Beyer]

QUOTE (gwasser @ Apr 8 2010, 11:51 AM) ...

Time (horizon) of investment and the probability of Loss in the Stock Market (W.J. Bernstein)

Time horizon Probability of Loss
One hour 49.58%
One Day 48.80%
One Week 47.36%
One Month 44.51%
One Year 30.85%
Ten Years 0.59%
100 Years 0%
...
brilliant ..

similar though for real estate !

 

[EdRenkema]

Unfortunately I cannot quote a reply in FF...Investors who bought in the US and were not over leveraged and had cash flow have been on a buying frenzy the past year. Its no different when the stock market tanks, Warren Buffet made some large aquisitions last year.
I`m not debating which is better, just indicating which is better for me. My first RE aquisition was a complete disaster, I was left owing a $30K personal debt on a property worth 40% less than when I bought it, BTW everyone got paid.
All the dream killers want to tell me I`m doing the wrong thing, when I say investing they instantly think - Stock Market, because that is the status quo.
Real Estate? - you will have tenants bad tenants that will ruin you! - guaranteed. Ha, OK that is a risk but a manageable risk and I love proving them wrong.
I can`t remember who but someone posted earlier in this thread how RE is something that a simple person can do by following a few basic principals and that really struck a chord with me.
Plus RE is something tangible, that probly means even more to me.
Thats not to say one cannot be creative with RE.
BTW can you help someone buy their own home or repair their damaged credit via the stock market?
Maybe you can, I`d like to hear how.

 

[housingrental]

Hi Ed " BTW can you help someone buy their own home or repair their damaged credit via the stock market?
Maybe you can, I`d like to hear how. " Yes. Make enough gains from investments to pay off debt owing to improve credit :0
Leverage available through buying on margin and options. Much easier to loose money in a short amount of time though

 

[RCrein]

QUOTE (gwasser @ Apr 9 2010, 02:48 PM) when you run a REIN type of real estate business, where you also spend time managing and administering the place, replacing toilets etc. Then you are not investing. You are running a business and you have now two forms of income: compensation for your work and return on investment (the money you put into your business). So when you say you make 22% ROI this comprises of compensation for your work and compensation on investment. If you were a passive JV investor and you did not work on the JV property, then again you are strictly an investor.
I think this is a valuable point to keep in mind. There must be two streams of income for income properties. The first covers your effort to manage the property and should be covered by expenses for Property Management, Repairs and Maintenance and perhaps Snow Removal and Grass Cutting. These expenses are not included when calculating ROI which is the second stream of income that compensates for the use of your capital. So it would seem that if expenses are properly incuded in the property analysis that the ROI is the investment return and can be readily compared to stock market returns.
QUOTE (gwasser @ Apr 9 2010, 02:48 PM) Regarding diversification. Yes if you do not understand stock market investing it is wise to stay away from it. However, at the same time you limit yourself to real estate and thus if real estate goes bad, e.g. in the U.S. right now, your entire portfolio goes bad. You expose yourself to a higher risk than someone who invests in both or in additional other investment asset classes.
I`m not sure that investors entire real estate portfolios in the states have gone bad. Some have, more are at risk, but many can carry on. If they bought under an approach similar to the one REIN uses I would think they should still be ok. Even if the current market value of the properties has taken a major hit, properties that cash flow still make money. Have residential income properties taken the same drop as single family homes? I don`t know. If they bought based on cask flow, they should be able to sell based of income still. I suppose commercial buildings are taking a hit on incomes though. If investors are not highly leveraged, they can absorb increased interest rates and vacancies to a fair degree.

The "investors" who got hurt the most were speculators and one could argue that most stock market investments are highly speculative. I am not comfortable with the suggestion of buying stocks just for the sake of diversification. Any economic challenge for real estate portfolios would tend to affect the markets as well.

Anyway just some thoughts for consideration. Regards all.

 

[housingrental]

Not necessairly
Many purchase cash flow positive properties with minimal margin of safety... especially post 2004...Rental rates can drop and vacanacies can happen... so those in distressed markets that have properties that lost value can only also be burning through cash from operations from what were once cash flow positivie...
QUOTE (RCrein @ Apr 10 2010, 11:45 PM) I think this is a valuable point to keep in mind. There must be two streams of income for income properties. The first covers your effort to manage the property and should be covered by expenses for Property Management, Repairs and Maintenance and perhaps Snow Removal and Grass Cutting. These expenses are not included when calculating ROI which is the second stream of income that compensates for the use of your capital. So it would seem that if expenses are properly incuded in the property analysis that the ROI is the investment return and can be readily compared to stock market returns.

I`m not sure that investors entire real estate portfolios in the states have gone bad. Some have, more are at risk, but many can carry on. If they bought under an approach similar to the one REIN uses I would think they should still be ok. Even if the current market value of the properties has taken a major hit, properties that cash flow still make money. Have residential income properties taken the same drop as single family homes? I don`t know. If they bought based on cask flow, they should be able to sell based of income still. I suppose commercial buildings are taking a hit on incomes though. If investors are not highly leveraged, they can absorb increased interest rates and vacancies to a fair degree.

The "investors" who got hurt the most were speculators and one could argue that most stock market investments are highly speculative. I am not comfortable with the suggestion of buying stocks just for the sake of diversification. Any economic challenge for real estate portfolios would tend to affect the markets as well.

Anyway just some thoughts for consideration. Regards all.