Real Estate Investing Returns vs. Traditional Investing: Fun With Math

Investing is a fascinating topic for me. I like simple math. So here is a little something I figured out in a few minutes regarding traditional investing (stocks, bonds, whatever) versus real estate investing.

Traditional Investing

Let’s start with a $10,000 liquid savings account. We’ll buy some stocks, not counting any fees, and we’ll add $200/mo. to that balance. Every month.

And we are going to say that we have an 8% return each and every year. (Yes, I know some years will be higher, some lower. I wasn’t born yesterday.)

After 30 years you should have approximately $398,698. Hey, that’s pretty good! I’d take it. Unless…

Real Estate Investing

Let’s take the same $10,000 and leverage it into a $200,000 duplex. Now the cash flow on this will be negative so we’ll contribute that same $200/mo. we used earlier to help it break even. Just to be fair I’d hate to throw in the other advantages of real estate investing like depreciation. But we will use principle reduction and appreciation.

So after 30 years the mortgage will be paid off (by the tenants!!!!) and we’ll use an annual appreciation rate of 4%. That sound more than about right.

Where are we after 30 years? Right around $650,000. Doh!