re: Stocks vs Real Estate to generate wealth and passive income

Going to likely need to buy cheap houses then. Everyone has different ideas, but that’s not really the market I would want to interact with, personally.

Big fan of REI

I'd like to think I have a pretty decent job, so this is just a side gig for me.

Outside of my 401k, I don't dabble in the Stock Market at all. I'd like to change that in ~3 years.

What I do:

-I take a loan out on my 401k for the down payment.
-I do NOT buy fixer uppers. Turn key only, as I don't have time to fix up a property, much less deal with contractors.
-The month leading up to closing, I give it to my property manager to go ahead and put it on the market. Get a jump on it, so I don't have any vacancy.
-Once closed, I immediately move in a QUALIFIED tenant.
-I make sure the tenant's rent covers the mortgage, insurance, taxes.
-The cash flow goes directly towards paying back my 401k loan.
-401k is paid back within a year, and I have a cash flowing rental property "without using any of my liquid money".

I've done this quite a few times. The first time, I had to hold my breath because the cash flow was paying back the 401k loan, and I wasn't setting ANY aside to cover cap ex $. I was fortunate nothing happened. Now the cash flow builds and is growing to cover any cap ex or vacancies.

That account is building, and I want to have $10k per property set aside for cap ex/vacancies/any problems that may arise, and once I have $10k per property in the account, the extra cash flow will start automatically paying down the principal of the property with the highest interest rate.

Goal is to have a handful of paid off properties. I realize I'm losing out on the leverage by paying these off, but at the same time, less properties=less roof repair, less AC repair, etc..

I think that is a pretty useful tool, but I am just skeptical about the assumptions.

This is showing real estate purchases of $400k with $18k in improvements and then a sales price 3 years later of $517k. Maybe you guys are good at finding these gems but I just don't see this much appreciation with my clients that are in real estate investments.

What are yals thoughts on things like no radar real estate turn keys? are those numbers they mention usually accurate?

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In another post you mention stocks will "almost always outpace real estate over the long term". This just isn't true. ETA: I would be hesitant to speak in such absolutes that either are better than the other. There are positives and negatives of both. I don't think such an "absolute" statement is really possible.

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Math says otherwise but I didn't speak in absolutes. I said "almost". I also specifically mentioned real estate has a place in a well balanced portfolio.

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Your example also ignores leverage. I don't think anybody is saying you're going to buy a $50,000 house cash and recoup your investment in five years. More likely, you'll buy it with 20% down ($10,000) and cash flow $2,000 annually to recoup your investment in 5 years.

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You can use leverage with stock investments also so you are creating an unbalanced comparison. Also, the bankers I know don't lend on commercial real estate like personal residence (especially with a new investor). Meaning you are going to need more than 20% down unless you have a large deposit account or a good relationship with the bank.

I've said from the beginning there is a place for real estate. As you alluded to, I am suspicious when there are people promising huge returns and can't miss investment opportunities. Any portfolio should be well balanced and designed to meet the individual's objectives.

I should add I am a CPA, not an investment adviser so I have no vested interest in people investing one way or the other.

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Please quote/link the math that supports this because I doubt it would even be possible to prove. I definitely lean toward real estate more in my own investments because I know significantly more about it than stocks. I definitely think there is room for both and most people should stick to stocks for a variety of reasons (more broad investments, liquidity, investing costs, etc.). I just find it hard to believe anyone could prove "stocks almost always outpace real estate over the long term" using an apples-to-apples comparison.

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I have to be honest, this isn't really a hill I'm willing to die on and I was just trying to help out the OP. I've said multiple times there is a place for both and only kept replying because one poster got his feelings hurt and started throwing out crazy return rates and acting like real estate is the only investment that makes sense.

Most of my evidence is anecdotal as I have clients heavy in each and also with an even mix. The long term players in the stock market almost always have better returns than the real estate investors. Also saw a lot of very smart professionals get wiped out in 2008-2010 because they were too leveraged in real estate. Not saying another crisis like that is coming, but people should remember what caused it.

I mentioned stocks usually out gain real estate, but also small cap usually out gains large cap. The smart money gathers some capital and puts it in private equity funds.

But since you asked, I googled "better returns in stock market or real estate over long term?". First few articles that came up:

Forbes article

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It is--in the short term. U.S. real estate sale prices increased more than 56% from the beginning of 1999 to the end of 2004, as tracked by the Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development. The S&P 500 index dipped nearly 6% during that same period. But if you take a longer view--say 25 years--you'll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.

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Investopedia

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Reliable data on the value of real estate in the U.S. is murky before the 1920s. One inflation-adjusted value index between 1928 and 2012 placed the annual rate of appreciation for real estate prices at just 0.2%. The peak for real estate growth occurred between 2001 and 2005. The inflation-adjusted appreciation on the Dow Jones Industrial Average (DJIA) over the same 84-year period was 1.6% per year. Compounded over time, that difference resulted in a fivefold greater performance for the stock market. There aren't many investors with an 84-year investment horizon, though. Take a different time period: the 38 years between 1975 and 2013. A $100 investment in the average home in 1975 - as tracked by the House Price Index from the Federal Housing Finance Agency (FHFA) - would have grown to about $500 by 2013. A similar $100 investment in the S&P 500 over that time frame would have grown to approximately $1,600.

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The Balance Article

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More than 100 years of research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world. Nothing, in terms of other asset classes, beats business ownership (remember — when you buy a stock, you are just buying a piece of a business).

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Financial Samarai article

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Higher rate of return. Stocks have historically returned ~7-9% a year compared to 2-4% for real estate over the past 60 years. You can also go on margin to boost your returns, however, I don’t recommend this strategy given your brokerage account will force you to liquidate holdings to come up with cash when things go the other way. Your bank can’t force you to come up with cash or move out so long as you are paying your mortgage.

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Full disclosure, there were also articles with numbers about real estate having better returns. It is very hard to compare because stock prices are readily available while real estate is generally a private transaction (not counting data from REIT's). I also realize some of these are looking strickly at real estate appreciation and not CoC returns but I already did the CoC comparison in a previous post.

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I should've expanded what I quoted in your original post. You mentioned you were skeptical people could recoup their investment in 5 years since $50,000 houses didn't rent for $1,000. It becomes "easier" to believe when you consider that they're leveraging and just recouping their downpayment, not necessarily the entire value of the house on a 100% cash basis. When you add in principal paydown it is even more reasonable.

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I should also clarify that while you can use leverage in stocks, I would never recommend it. I think you have to be extremely lucky to recoup investment in 5 years and leveraging makes it more difficult because now you have interest expense. To recoup in 5 years I think you have to minimal vacancy and no significant repairs or maintenance and I just don't think that is realistic.

Again, there is a place for both in a well balanced portfolio and I am not trying to convince anyone to invest their money in a way that doesn't support their objectives.

Chimera Investment REIT (CIM) pays a 10.5% dividend.

Not a gimmick. 50 cents per share up from .48 cents a few years going now.
Riskier than Procter&Gamble, but high reward.
Throw 10k at it for an extra $1,050 in passive yearly income.

The stock itself is pretty steady too.

sorry for not reading this whole thread..

my experience with RE was i'd net ~10% of my total investment front rent each year.
i'd keep 50% of total rent from my tenants...
this is after all expenses in coastal texas (land of high property taxas, high commercial insurance costs and seemingly having to replace A/C units nonestop)

this is obviously not counting gains from flipping properties or price appreciation.


stocks...
i'm conservative (very rarely use leverage)
i plan for 5% (the 4-5% mostly guaranteed from dividends)
real world that number has been 22-24% yearly from also selling via calls (at medium term highs) and acquiring via selling puts

i'm not actually counting gains from price appreciation (those are "extra"..not something i can plan)

i like stocks because of the liquidity
(however, i have a RE deal been held up this moment because i have $$$ sitting in chip stocks..which were getting battered during this china trade war thing)

There’s positives to owning both I think. I like to max out as much as I can in ira and 401K, but also stock away as much as possible to buy rental units too. Diversification.

The key is like you said, don’t rely on making any money off them in near term. If you’re ok with that I think it can really work out. I own four units currently and net about 1500 a month total, and that’s after paying an extra 600 towards principal so I don’t pay on any mortgages for longer than 15 years. They’re mortgages for 30 though in case shite ever hits the fan. So far I have always made the extra payments though. But that 1500 net stays in the real estate account. shite happens and I like to think that the tenants are paying for all the broken appliances and new ac units etc. It feels better paying it out of my rental account than my personal checking account. And if it ever gets high enough to pay a lump sum on one of mortgages I will. All long term for me. And they’ll be paid off before I retire so at that point it will be supplemental income for me. At that I can sell them for a lump sum if/when needed.

But like I said I wouldn’t want to just rely on them so I invest as much in stocks as possible too. I would like to buy 2-4 more units total. I don’t buy until I have at least a 25% downpayment though.

My rule is they are all in same area and close to me. That way it’s easier to manage for me. If I relied on the income for personal use as part of my cash flow it wouldn’t be as desirable. For me at least. Good luck