Real estate investing can be lonely. Very few financial conferences or commentators even talk about real estate … much less endorse it as a wealth building vehicle.
So real estate investors huddle together in obscure corners of the financial community … quietly making money and muttering about the trials and tribulations of tenants, toilets and 1031 tax-deferred exchanges.
But recently, mainstream financial headlines seem to be painting a rosier picture of real estate …
Several news outlets published articles referencing this Bankrate.com article and survey which says Americans prefer real estate over cash, stocks, gold and bonds …
The article says …
“… for the third consecutive year real estate is the favorite way to invest money not needed for at least a decade …”
“… home prices have gone gangbusters recently, climbing back above their record pre-crisis levels … according to CoreLogic.”
Click Bait and Switch
But then the balance of the article is essentially dedicated to telling readers why the survey respondents are wrong for preferring real estate over stocks …
“Still, ‘it’s a rather poor investment,’ says [a] RBC Wealth Management financial advisor. ‘It’s highly illiquid, and markets aren’t always rational.’”
“One study … found that housing only returned 1.3 percent per year after inflation from 1900 to 2011, while stocks tended to perform more than four times better.”
As you might guess, RBC Wealth Management deals in paper assets.
Their trite critiques of investment real estate reveal a lack of understanding at best … and a dishonest bias at worst.
Let’s break it down. Because whether you’re raising private capital to invest in real estate …
… or just trying to convince your spouse or in-laws real estate is a viable alternative to stocks, bonds and mutual funds …
… it’s important to be able to rebut the financial fake news bias against real estate.
Liquidity – LOL
The flip side of liquidity is volatility. When traders can move in and out of an asset quickly, it makes the asset price volatile. So liquidity isn’t automatically a good thing.
The survey asked about money “not needed for at least a decade” … so liquidity isn’t what investors are looking for when they buy real estate.
Besides … to say housing is “illiquid” is inaccurate.
“Illiquid” means “not easily converted into cash” and “of a market with few participants and a low volume of activity”.
Sure, you can’t day trade houses … but we see that as a plus. It keeps prices more stable.
And when you can usually sell a house at a fair market price in about two months, that’s hardly “illiquid”. Drop the price, and you’ll sell it faster.
Market Rationality – ROFL
A paper asset promoter saying real estate “markets aren’t always rational” … are you KIDDING??? That seems a LOT like the pot calling the kettle black.
Way back in the 90’s before the dot-com stock crash, Alan Greenspan famously accused stock market participants of “irrational exuberance”.
Of course, a few years later the stock market crashed … and scared investors flocked TO real estate in the early 2000’s.
With the stock market at nose-bleed levels today, we’re guessing that’s why people are preferring real estate over stocks again.
Only Returned 1.3 Percent – LMAO
The idea that “housing only returned 1.3 percent per year after inflation” is so off the mark it borders on absurd.
The argument is the PRICE of a home in 1900, adjusted for inflation to 2011, only grew on an annual basis of 1.3 percent …
… and that during that same period, stocks grew by “about four times that.”
This argument assumes the only financial benefit of real estate ownership is price appreciation, which is a false premise.
We won’t bore you with all the math, but you should grab a calculator and do it all so you can quickly blow-up this ridiculous idea that stocks beat real estate over the long haul.
Here it is in simple terms …
Leverage
When you put 25 percent down, you own property at 4:1 leverage. So 1.3 percent appreciation is a 5.2 percent equity growth rate.
Right there, you’re even with “about four times that”. But wait! There’s more …
Cash Flow
Also missing from the comparison of stocks versus real estate is the rental income.
Even if you’re before tax positive cash flow is only two percent, with 4:1 leverage, your cash-on-cash rate is 8 percent.
Amortization
A 30-year fully amortized loan at 5 percent reduces the loan balance (i.e., builds up equity) at a rate of over 2.6 percent per year.
Add 4:1 leverage, and you’re growing equity at over 13% per year. Now you’re destroying stocks.
We’ll skip tax benefits, which make it even BETTER, and let you tally the total. Any ONE of the three beats “four times that” all by itself. Together … it’s a wipe out.
People Aren’t Stupid
Main Street investors have common sense … and at this stage of the information age, they’re able to research and fact check quickly.
They know stock prices are being propped up by cheap money and corporate buybacks … and with the Fed raising interest rates, the party might be ending soon.
The Bankrate.com survey reinforced what our anecdotal conversations tell us … Main Street investors are nervous about the stock market.
Their preference for cash over stocks for a ten year hold says a lot. Main Street is looking for safety and surety.
And Main Street investors like real estate. They understand real estate. They TRUST real estate.
But it’s not just Americans seeking financial safety in real estate. Foreign buyers just purchased a record amount of U.S. houses.
Real estate is where people park money for long term wealth development and preservation.
Go with the Flow …
Even though home ownership in the U.S. remains at decade lows, it’s actually a boon for real estate investors. Less homeowners means more renters.
For flippers and syndicators, real estate is highly regarded and in demand. Money wants to be in real estate … so there’s a big opportunity helping it get there.
And while anything can happen, it seems the appeal of real estate isn’t abating any time soon.
Until next time … good investing!
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