I have discussed before the 4 benefits of owning residential investment property. And today I had a little fun with a stock broker from Kansas City that was, well gloating I think would be the term, on the fall of real estate as an investment vehicle.
Really?
I know I shouldn’t do these things, but I decided to have a little fun with him. Here is some simple math;
$100,000 invested in the stock market returning 10% a year (his number) will give you a $10,000 increase in your portfolio after one year. Not too bad, actually.
$100,000 invested in real estate, however, should net you around the $20,000 in the same period of time. Is that better? Let me explain.
Take the $100,000 cash and purchase $400,000 worth of real estate (4 $100,000 houses, 1 $400,000 apartment…really doesn’t matter) with a historical appreciation rate of 5%. That leads to a $20,000 increase in property value after one year.
Now you may want to say what if houses don’t appreciate 5% this year? Good question. But if you are holding for 6-8 years, does it matter for any one year what appreciation is? Remember, historical appreciation in Kansas City is 5% on average. Some years have been 10%-12%. Other years, like last year, were -2% to +3%. Heck, my zip code was 6.6% last year.
“Wait. We’re not done here yet,” I told him. “Remember, real estate yields four benefits; cash flow before taxes, principal reduction, depreciation and appreciation. We’ve only discussed one of the benefits!”
BBQ Capital | Kansas City Real Estate Investing 
Excellent argument for real estate as an investment. I work with investors in
Kenosha, WI and am always giving them the same
coaching and advice! Ralph Nudi Kenosha, WI
Just found your blog and am enjoying it…especially since I am Overland Park born and raised. I’m 27, heavy into stocks and looking closely at real estate. Just rented out a plaza condo right around break even cash flow (had to furnish it to get there though). One thing I wanted to note that is missing from your analysis: You leveraged your investment in real estate but ignored the fact that you could do the same in the stock market (margin rates slightly higher than mortgage rates though). Currently, laws dictate you can buy 4X your equity in stocks on margin…so you could buy $400,000 worth of Google if you wanted on your $100,000…although something tells me that would be slightly more volatile than a rental property (which compares more to the likes of a dividend paying stock like GE…or even better, a bond).
Welcome and thanks for reading. People often point out that I ignore leveraging your stock portfolio.
Yes, I know you can do it. Yes, I know several people that do it successfully. No, it’s just not the same thing.
As you point out there is volatility not only with the stock itself but the very margin rules. A house gives you a very defined set of circumstances that allow the lien holder to call a mortgage due. Stocks, not so much.
In no way do I promote not owning any stocks, bonds, index funds, whatever. But I do very much believe that for the rank’n’file middle class they will get farther faster with a known asset than playing the stock market.