Real estate vs mutual funds!

[adriano]

So tonight I went to dinner with a friend of mine and he had a woman with him that sells mutual funds. We were discussing mutual funds compared to real estate. She was trying to tell me that real estate doesn't perform as well as mutual funds. I told her I totally disagree . I gave her an example that I can only buy $100,000.00 of mutual funds with a $100k and I can buy a million dollars of real estate with $100k. She was telling me that mutual funds make you 12% on average every year. I told her I have a hard time believing that.
So when I got home tonight I decided to run some numbers on her assumption using my investment out of my pocket for what I put into my real estate portfolio .
So I bought my first multifamily in 2002 . Since then I have purchased 8 multifamily and 2 commercial buildings and I have only put about 280k out of my pocket and the rest I financed. So running her assumption my 280k making 12% every year compounded comes out to about 1.7 million over 17 years.
So my real estate portfolio is worth about 20 million today being conservative. So that is why I am a firm believer in real estate.
I tell everyone that I would buy real estate any day before mutual funds. This is to me the proof in the pudding .
That is just my situation . I am sure there are others in real estate that even have done more than that with that kind of money.
I say to everyone keep investing smartly and the properties will bring you to wealth and you will be able to quit your day job.

 

[Tina Myrvang]

100% Agree!!!!

Great read, thank you for sharing.

 

[Matt Crowley]

A few problems with your math:

- you can invest with pre-tax money into RRSPs... you can't do that with direct investments done personally or in a corporation so you are investing with 70 cent dollars into a mutual fund and don't owe taxes until withdrawl... bigger advantage the longer your time horizon is
- when you put $100k into a mutual fund, you have a claim to probably $200k - $300k of assets, exactly the same as if you bought a direct investment - so you are not capturing the look-through correctly here either
- you can't buy a million dollars of real estate with $100k... even as a personal residence, you need more down
- your friend is wrong about 12%... that is too high. Somewhere in the 6 - 9% range is more reasonable assumption. Most REITs have leverage closer to 50% whereas direct investments tend to be much higher...in your example you have 90% leverage, for example.
- 280k making 12% every year compounded comes out to $2 million of equity, not $1.7 million after 17 years
- if your portfolio is worth $20 million total asset value, then take that less the debt you have on the properties...if at 90% leverage you have $18 million of debt and you are at the same $2 million mark as with the 12% compounded return (ignoring distributions). Sounds like your real estate has done very well though.

My thoughts...
- RRSPs are a part of the puzzle for Canadians, not the whole picture
- Take advantage of legal tax deferral / minimization strategies
- There is no inherent difference between direct ownership real estate vs. mutual fund / stock real estate. You will get stronger management and own better assets when you buy into a large fund vs. direct investment - that is just the law of scale.
- There is no comparison on diversification for direct investment vs. mutual funds.
- There is evidence that stock market can offering better deals than direct investment... check out these guys (I have no interest / affiliation with them in any way)

https://www.visioncap.ca/resources/news-and-press

 

[Rickson9]

Readers should keep in mind that OPs post isn’t fact and is opinion/fake-news

As someone who has made 7 figures debt-free separately in both equities and real estate, both are pretty simple to use as a vehicle to financial freedom

Articles trying to show one is better than the other is typically written by a person with a bias for one or is looking to cater to a specific audience (eg. REIN)

The reality is that you can easily become financially free with either vehicle and the best one will be the one that suits the investor’s personality the closest

I would suggest reading everything about both equity and real estate investment, and decide for yourself

You do you and I’m going to keep doing me - investing in both

 

[Martin1968]

Readers should keep in mind that OPs post isn’t fact and is opinion/fake-news

As someone who has made 7 figures debt-free separately in both equities and real estate, both are pretty simple to use as a vehicle to financial freedom

Articles trying to show one is better than the other is typically written by a person with a bias for one or is looking to cater to a specific audience (eg. REIN)

The reality is that you can easily become financially free with either vehicle and the best one will be the one that suits the investor’s personality the closest

I would suggest reading everything about both equity and real estate investment, and decide for yourself

You do you and I’m going to keep doing me - investing in both

7 numbers including the decimal point.......right?

 

[Thomas Beyer]

12% yielding mutual funds don’t exist but neither do 12% cap rates for real estate.

Both asset classes have their merit and downside. Both asset classes can be levered, and both are volatile and interest rate sensitive, but real estate generally less volatile as it is less liquid and tougher to trade on a whim, rumour or market sentiment. RE can be levered a bit higher say 80% or even 90% on occasion vs stocks or mutual funds maybe 2/3 only, thus allowing far better ROI in an up market fully levered which is how I got started and built substantial networth from the late 90’s to 2014 or so. Leverage of course can be negative in down markets, like buying mutual fund of stocks on margin.

 

[adriano]

I am only speaking from my experience and yes I do have stocks in my portfolio. But for me without real estate I defeniately would not have gotten the growth or the stability I have gotten. Or passive cashflow. Like they say to each his own.

 

[Cory Sperle]

That is just my situation . I am sure there are others in real estate that even have done more than that with that kind of money.

From less than 300K to a 20M portfolio in multifamily/commercial in 17 years using your own capital is astonishing. I don't know any others with that level of success not using other people's money. This could only be done with incredible value add purchases and the right markets, well done!

 

[adriano]

Thanks Cory . Yes I bought a lot of properties that had big upsides over time. But also the market moves really helped as well. Really hard to find properties that have those kind of upsides now. I look at a lot of multifamily buildings but most are way over priced.

 

[Cverveda]

I can’t predict the future so I’ll only speak of the past. I’ve invested in RRSP mutual funds through an investment advisor (3 different ones over the past 35 years). We have had some good years and some really bad years but in the end I’m sitting close to zero gain on my investment. So the only real gain I’ve made is deferring tax. 10 years ago I decided I needed to do something different so I tried real estate. I’ve done well in real estate and now feel I am financially able to retire if I choose to. I’m still waiting for those mutual funds to do their part.
A side note worth mentioning is that real estate is more work. I’ve enjoyed it but you need to be involved. Maybe if I was as involved with my mutual funds there would have been a different result. (But I assumed that’s why I was paying an advisor)


Sent from my iPhone using myREINspace

 

[Thomas Beyer]

I can’t predict the future so I’ll only speak of the past. I’ve invested in RRSP mutual funds through an investment advisor (3 different ones over the past 35 years). We have had some good years and some really bad years but in the end I’m sitting close to zero gain on my investment. So the only real gain I’ve made is deferring tax. 10 years ago I decided I needed to do something different so I tried real estate. I’ve done well in real estate and now feel I am financially able to retire if I choose to. I’m still waiting for those mutual funds to do their part.
A side note worth mentioning is that real estate is more work. I’ve enjoyed it but you need to be involved. Maybe if I was as involved with my mutual funds there would have been a different result. (But I assumed that’s why I was paying an advisor)


Sent from my iPhone using myREINspace

Why not buy REITs that annually pay 5-8%, paying monthly or ETFs (with or without dividends) or index funds without an “advisor” in a self directed online trading account ?


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

 

[Cory Sperle]

Stealing a line from TB, retirement planning is mostly about the retirement of the planner in the form of fees.

 

[angelapeng]

Why not buy REITs that annually pay 5-8%, paying monthly or ETFs (with or without dividends) or index funds without an “advisor” in a self directed online trading account ?


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

Thomas,

Do you think at today's market situation, REIT is still a viable investment? The real estate market are all go downwards, except a few commercial markets. Looking at most residential markets, the yield is almost none existent, how does the REIT consistently pay for the 5-8% dividends?

 

[Thomas Beyer]

Why not buy REITs that annually pay 5-8%, paying monthly or ETFs (with or without dividends) or index funds without an “advisor” in a self directed online trading account ?


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

Thomas,

Do you think at today's market situation, REIT is still a viable investment? The real estate market are all go downwards, except a few commercial markets. Looking at most residential markets, the yield is almost none existent, how does the REIT consistently pay for the 5-8% dividends?

REITs are a proxy of the overall economy. Any business needs to be housed in real estate, be it an industrial park or a retail center or an office building or a hotel or an apartment building for tenants. If REITs tank then economy tanks and vice versa. Yes they trade like stocks and as such are somewhat more volatile than the actual assets within the REIT. That is why many pension funds own the whole building or the whole shopping center or the whole industrial park. Many REITs yield 6-8% annually, paid monthly. Look at AFFO to yield ratios. Many are sustainable payers as most REIT have only about 50% leverage and interest rates are and will remain low, in the high 2% to mid 3% range for at least two more decades.

Most can be bought on margin if you want to increase yield (albeit with higher volatility & risk).

You can beat REIT returns only in well managed well located levered privately held RE assets in good locations with upside. I have done that for 15+ years but find it increasingly more difficult in high priced tougher to mortgage ever more socialist ever higher taxed ever higher energy cost Canada. It still works well in the US in select cities with high GDP growth and in-migration.


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

 

[Cory Sperle]

You can beat REIT returns only in well managed well located levered privately held RE assets in good locations with upside. I have done that for 15+ years but find it increasingly more difficult in high priced tougher to mortgage ever more socialist ever higher taxes ever higher energy cost Canada.

Great share. Yes it makes more sense to buy levered REITs these days than it does to buy sub 5 cap crappy commercial assets.

 

[Thomas Beyer]

Great share. Yes it makes more sense to buy levered REITs these days than it does to buy sub 5 cap crappy commercial assets.

Yet people still buy them. Why is that, Cory?

Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

 

[angelapeng]

REITs are a proxy of the overall economy. Any business needs to be housed in real estate, be it an industrial park or a retail center or an office building or a hotel or an apartment building for tenants. If REITs tank then economy tanks and vice versa. Yes they trade like stocks and as such are somewhat more volatile than the actual assets within the REIT. That is why many pension funds own the whole building or the whole shopping center or the whole industrial park. Many REITs yield 6-8% annually, paid monthly. Look at AFFO to yield ratios. Many are sustainable payers as most REIT have only about 50% leverage and interest rates are and will remain low, in the high 2% to mid 3% range for at least two more decades.

Most can be bought on margin if you want to increase yield (albeit with higher volatility & risk).

You can beat REIT returns only in well managed well located levered privately held RE assets in good locations with upside. I have done that for 15+ years but find it increasingly more difficult in high priced tougher to mortgage ever more socialist ever higher taxed ever higher energy cost Canada. It still works well in the US in select cities with high GDP growth and in-migration.


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

Thanks, Thomas, for your reply and explanation. Therefore, are you saying that Canadian REITs (publicly traded) are less attractive than the US REITs? I am researching alternative investment opportunities other than physical property investments, but found it challenging to focus on the areas. REIT is still focused on real estate, would like to have some investments not positively correlated for diversification purpose.

 

[Thomas Beyer]

REITs are a proxy of the overall economy. Any business needs to be housed in real estate, be it an industrial park or a retail center or an office building or a hotel or an apartment building for tenants. If REITs tank then economy tanks and vice versa. Yes they trade like stocks and as such are somewhat more volatile than the actual assets within the REIT. That is why many pension funds own the whole building or the whole shopping center or the whole industrial park. Many REITs yield 6-8% annually, paid monthly. Look at AFFO to yield ratios. Many are sustainable payers as most REIT have only about 50% leverage and interest rates are and will remain low, in the high 2% to mid 3% range for at least two more decades.

Most can be bought on margin if you want to increase yield (albeit with higher volatility & risk).

You can beat REIT returns only in well managed well located levered privately held RE assets in good locations with upside. I have done that for 15+ years but find it increasingly more difficult in high priced tougher to mortgage ever more socialist ever higher taxed ever higher energy cost Canada. It still works well in the US in select cities with high GDP growth and in-migration.


Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

Thanks, Thomas, for your reply and explanation. Therefore, are you saying that Canadian REITs (publicly traded) are less attractive than the US REITs? I am researching alternative investment opportunities other than physical property investments, but found it challenging to focus on the areas. REIT is still focused on real estate, would like to have some investments not positively correlated for diversification purpose.

US REIT universe ten time bigger than Canada and more specialized, say hotels only, or only large city office buildings or only NE or even mobile home parks - unlike Canada. Not a specialist in US REITs as far too many.

Thomas Beyer, Asset Manager, Investor, Author, Father, Mentor www.prestprop.com

==> Check out our latest RRSP or TFSA eligible two year investment with a 40%+ yield target at www.investoliver.ca

 

[MarcKoran]

Personally, I believe it is not a question of "The Stock Market" versus "Real Estate". I enjoy investment diversification. I want to participate in the rise of the Stock Market over time and I want to participate in the leveraged power of Real Estate Investing.

With the Stock Market, and tools like TFSA's, RESP's, and RRSP's, we are all bound to have some investments in the Stock Market that give us preferential tax treatment. Personally, I've tried a little bit of everything, but I ultimately cam to a few conclusions:

I cannot beat the stock market consistently.
I cannot find someone that can beat the stock market consistently.
Massive Gains come from the effect of compounding too profits.
Massive Losses come from the effect of compounding of high fees.
The stock market will grow over the long term.
When some parts of the stock market go up, other parts go down.

So, I invest in low cost ETF's. You can read more on my shameless plug for my blog:
Save More for Retirement by Paying Less Fees.
I also talk about a small primer on Commercial Real Estate that can be used when comparing investments:
Discover How to Turn $1 into $15 with Commercial Real Estate

I try to post weekly,

Marc
@facebook @instagram

 

[Matt Crowley]

Caution that ETF strategy / robo-advisor only works well in trending markets and liquidity falls apart when you want to exit the position. In oscillating markets, ETF strategys will likely underperform.