I've written a pretty detailed post about analyzing whether it's better to invest in stocks or real estate. Check it out if you're wondering where to put your money. I tried to be unbiased in my analysis, but due to my experience investing in both asset classes for over a decade, I came to the conclusion that real estate is my preferred choice to building wealth.
Once acquired, real estate is pretty straightforward. Maximize rent, minimize expenses, let inflation take its course, and keep tenant turnover to a minimum. You are the King or Queen of your asset.
Stocks, on the other hand, require constant re-balancing, trust in management, trust in a fund manager if you buy an active fund, and careful analysis of competitive forces that may hurt your investment.
Think about how many great companies have disappeared over the years. This is why I recommend keeping most of your equity investments in low-cost index funds and focus on asset allocation instead.
One commenter pointed out the reason why I prefer real estate is because I was lucky to have bought in San Francisco in 2003. In this post, I'd like to address his beliefs and see if we can all just get lucky with our investments. After all, it's always better to be lucky than good!
GETTING LUCKY WITH REAL ESTATE
Jeremy writes,
While I appreciate real estate vs. stock investment arguments since I enjoy both sides of the argument, your story isn’t a very realistic example. You bought low in San Francisco, and that turned out to be a booming real estate market. It’s far from the norm – look at the flip-side and see how many people are under water on their homes.
You basically *got lucky.* The market could’ve tanked and you’d be paying $2,400/mo + property taxes + maintenance + depreciation whereas you could’ve just paid $2,000/mo for a place to live/rent and come out far ahead of where you are now. I think it’s an unfortunate example to use because I’m reading the comments on here and all of these people seem to think it’s completely feasible to buy a place for 580k, rent it for 3.4k/mo, and then sell it for 30% more later on. There’s a reason why every major city is absolutely saturated with foreclosed rental properties, and it’s not because the profits on them are booming.
What you’re saying is akin to me talking about my stock experiences – I purchased into Tesla when it was ~$40/share and sold it when it was a bit over $210/share. Is that a good example for why stocks are better than real estate? Not really, just happened to be a fortuitous experience for me.
Overall, I’ve averaged about 12% yearly returns in the stock market, so nowhere near my Tesla experience, but fairly good for a completely passive approach to investing. I’m very interested in trying out some real estate investing, but I’m not hedging my bets on whatever market I invest in to turn out like San Fran did.
COMMENT COMMENTARY On A Lucky Real Estate Investment
1) Other people are always getting lucky.
Getting told you're lucky basically discredits any work or analysis you've put into making your investment. I remember being extremely excited, yet hesitant about putting a $580,500 offer for my condo back in 2003. I just turned 26 and was hoarding cash like a mad man because working in finance gave me daily heart burn, especially after the dotcom bust.
Getting into work at 5:30am was also killing my social life. And buying property meant committing to 5:30am start times for at least another five years (never buy property if you don't plan to own it for at least five years)! All I wanted to do was move back to Hawaii and bum around with the savings I had accumulated.
If you're like Jeremy and have never bought property before, then it's hard to understand that mixed emotion of fear and excitement of taking on so much debt while parting with so much cash at the same time. If you've never done something, why is it that you feel you know better?
Real estate is a very concentrated asset class. Spending a couple thousand dollars purchasing a stock is much less frightening than dropping $120,000 on a $580,000 property while taking on a $460,000 mortgage.
2) You've got to create your own luck.
All of us are lucky to some degree. To not recognize our good fortune in a world full of suffering would be selfishly ignorant. I spent a day touring the De-Militarized Zone (DMZ) at the North Korea and South Korea border, and I'm completely humbled and saddened by what transpired after the Korean War.
Appreciate what we have folks! Plenty of people don't even have electricity, let alone internet access. We've talked in depth about money guilt in the past, and I think it's good exercise to continue talking about money guilt as we embrace our luck to keep ourselves balanced.
If we want more, then we've got to take on risk. Keeping all your money in a savings account will never bring you outsized returns. Holding on to a safe, but boring job will never give you the fulfillment you're seeking. I
t's hard to have an exciting life if you don't take any leaps of faith. The fear in our mind is often much worse than reality. Remember, we come from a default setting of good fortune by living in a developed country!
3) Our experiences shape our beliefs.
The reason why I love reading blogs way more than news sites is because I want to read about other people's experiences. I don't want to just read the news, I want to read an interpretation of the news by an experienced author.
My experience with my first property has so far turned out fine. Yes, there were some concerning times with the financial crisis and pesky neighbors, but for the most part, I'm glad I took some risk to buy in 2003 than not.
My experience in the stock market was much more visceral because I not only invested in equities, but I also dedicated a career to equities. The turbulence was tremendous!
But I will say though that getting rich through luck feels better over time. Initially, you might feel some guilty. But then you'll realize how other people got lucky getting much richer than you! You'll also remember all the unlucky breaks you had in your life as well.
My Lucky San Francisco Condo Purchase In 2003
When I purchased my property in June, 2003, the S&P 500 was at 990. Just three years prior the S&P 500 peaked at 1,498 for a 35% drop. Investing was not as easy as now, where everything seems to just go straight up. The S&P 500 is now ~200% higher than in 2003.
The condo was purchased for $580,500 and comps have the value somewhere around $1,250,000 to $1,350,000. I wouldn't sell it for under $1 million because it is a prime 2/2, Pacific Heights condo over looking an $11 million renovated park with parking. But let's use a $1.2 million sales price to calculate a more conservative 107% return since 2003.
A 107% property return is a 50% lag compared to a 160% return in the S&P 500. The thing is, I enjoyed the return so much better due to the stickiness of the rent and much less volatility. Meanwhile, if one were to calculate a cash-on-cash return of a $116,000 down payment, then the returns would be closer to 400% if I didn't continuously pay down principal over the years.
I'm just comparing the equity amount in this particular property to what I have in my 401k, which I've maxed out every year since 2000. The property equity is at $1 million since I paid off my mortgage this year. Meanwhile, my 401K, which is now a rollover IRA is only around $420,000.
There's something to be said about consistently paying down principal, earning rental income to pay down principal, and letting inflation take its course. To me, owning this property over the past 12 years was a much better experience because it felt automatic.
4) Make some predictions and act.
There's no use pontificating all day long if you never take action on your beliefs. I currently believe San Francisco is still one of the world's cheapest international cities. There's no other coastal big city that I know of where you can buy panoramic ocean view properties for under $1,000/sqft. It is my belief that San Francisco will continue to get “discovered” by international buyers who want to diversify their capital – Chinese buyers in particular.
Given my beliefs, I decided to take several hundred thousand dollars from an expiring CD in 2014 and look for panoramic ocean view properties in Golden Gate Heights for a couple months. It would have been much easier, and much less risky to roll the CD proceeds into another long-term CD.
I found two properties that I bid on. One was a dream property that went for a whopping $600,000 over ask (50%), which I lost. Discouraged, I kept on looking until I found my current place, a fixer with ugly wall paper, green carpets, linoleum floors, and a tiny 36 sqft bathroom downstairs. Nobody wanted to take the project on, which is why I was able to buy it for under asking.
Taking on a fixer takes a tremendous amount of courage because you've got to then take action to create value. Spending $120,000 to fix the place up is not luck. It's a consistent test of faith every time you cut a $10,000+ check to a contractor!
So far, the SF market has not fallen off a cliff with some comps in 2019 trading now at $1,100 – $1,400/sqft for similar views compared to under $800 / sqft in 2014. Let's see if the luck continues.
5) Manage your net worth as you see fit.
Buying another property with debt in June 2014 made me uncomfortable. If investing in something gives you zero fear, then there probably isn't much of a return at all. I decided that by taking on this new mortgage, I would pay off my higher interest rate mortgage I took on in 2003 by the end of 2015.
Over the next 12 months, I aggressively paid down another $100,000 in principal from cash flow after paying down $150,000+ in principal from a mortgage arbitrage. Now the mortgage is completely paid off. Paying off a mortgage early takes a lot of discipline because there's constant temptation to use the money for instant gratification.
Managing your assets and liabilities is extremely important to sustaining wealth because our lives are always changing. There are too many incidences where someone is over-leveraged, and ends up in financial ruin when a downturn hits. Don't let the bull market convince you that you're suddenly an investing genius.
LUCKY INVESTMENTS ALL AROUND
As for getting lucky investing in San Francisco, well that's obvious. But before buying in San Francisco, I could have bought anywhere in the country, just like I could have bought any stock.
I could have bought a 2/2, 1,500 square foot condo on 22nd near Madison Park in Manhattan with two balconies and a view of the Chrysler building in 2001 for $799,000, but I didn't! That property has to be worth over $2 million today. Damn it! Now that would have been really lucky. Let’s be honest, outsized wealth is mostly due to luck.
New Lucky Home Purchase In 2023
In addition, I decided to take a huge leap of faith and buy a forever home in October 2023 when mortgage rates were at its peak. I decided to sell some stocks and bonds to pay cash for this home. What transpired was feeling tremendously uncomfortable given hours now cash poor.
At the time, I didn’t know I was buying near the bottom of the real estate market. But I half a year later, it’s becoming clear that third quarter 2023 was the bottom of the latest cycle.
Then on March 15, 2024, the National Association of Realtors settled it’s price fixing lawsuit for $418 million. As a result, real estate commissions should immediately come down by one to 4%. Long-term, real estate commissions may come down 5 to 6% total, with the vast majority of the gains accruing to home owners. It’s like I got an immediate one to 4% boost in the value of my forever home. Now that’s lucky!
The main thing that prevents people from buying is generally the down payment. Was having the down payment to buy in SF luck? I guess. But don't tell my younger self that because he'd get pissed at anybody who thinks studying for 6-8 hours every day in college while living frugally in a studio with another fella after graduation in order to save 50%+ of his income for years was luck.
Let's forget about my lucky break of seeing $750,000 in equity over a 16 year time period. I just visited an old friend in Kuala Lumpur, Malaysia, whom I thought was just middle class.
Massive Lucky Investment In Kuala Lumpur, Malaysia Real Estate
Her parents owned a couple, one story houses joined together in the center of KL since the 1970s. Neither house was anything special. One house was for grandma and her in-laws, and the other house was for her parents, her sister, and her.
I thought I was just going to crash in one of the rooms while visiting. Instead, I arrived at her new 6,300 square foot mansion with 15 foot high ceilings, swimming pool, and five car parking! What the heck happened in the 24 years since we last saw each other?
Well, the property her parents purchased in 1970 for 30,000 ringgit ($8,333) was sold to a Taiwanese developer for 30 million ringgit ($8,333,333)! After 44 years, now that's what I call getting really, REALLY lucky! The GDP per capita in Kuala Lumpur is only about $17,000. So the $8.33 million sale is more like a $23 million sale in the US.
Check out the picture where her property use to stand. Tall building to the left, across, and to the right. Damn, why didn't my parents buy land around her area back in 1987-1990 when we were there? We'd be so damn lucky, I wouldn't have had to kill myself in the finance world for 13 years. I could work 40 hours a week and complain why it's so hard to get ahead. But without 13 years of constant hustle, FinancialSamurai.com might never have been born!
HOPE YOU ARE ALL LUCKY IN 10 YEARS
I've rarely met anybody who has invested in the stock market or real estate market who has regretted their purchase 10 years ago, let alone 44 years ago. Meanwhile, the vast majority of people who have regret are those who didn't buy and hold anything 10 years ago. The larger your regret, the more bitter you will be about other people's lucky breaks.
My preference is for investments that don't give me a heart attack. Real estate is stickier on the way down because rents are usually the same for at least 12 months due to the standard one year lease agreement. When the markets are going up, you can raise the rent, and track your property's value online based on comparable sales.
If you can keep your calm when stocks are cratering and just continue to dollar cost average, then stocks are great due to the ease of maintenance and liquidity. I just think at the margin, based on my experience, real estate has been a more rewarding investment.
I hope we are all lucky in 10 years with the investments we make today. In 10 years, those who didn't take any risks today will call us lucky. And our response will be, “You're absolutely right!“
To Recap: Buy Real Estate If
1) Buy property if you think you are lucky enough to aggressively save for a down payment, feel comfortable taking on debt, and holding for at least five years. It's important to have the lucky courage to make a concentrated investment in one asset. You can dollar-cost average into real estate with Fundrise, my favorite private real estate platform. The minimum is only $10.
If your property turns into a rental, then you also need to have the luck to find good tenants and resolve problems as they rise. Your average real estate tracks the average annual inflation rate over the long term. Let's hope you get lucky and logically buy in an area that should see years of job creation. If so, your cash-on-cash returns could easily be in the double digits thanks to leverage.
Buy Stocks If…
2) Buy stocks if you are lucky enough to hold for the long term and not freak out whenever there's a downturn. You must be lucky researching the company's financials, participating with management on conference calls to make sure they are acting in shareholder's best interest, and pressing your bets when you think there is opportunity. Or you can just invest in an index fund, or let a professional try and outperform. Stocks have returned anywhere from 6-9% historically.
3) Allocate your money efficiently. Whatever you do, at least mobilize your cash. Stocks have the lowest hurdle. If you can't be bothered with actively managing your money, then invest with a low cost algorithmic advisory like Empower. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
Buy Both Real Estate And Stocks If…
You believe in upside for both real estate and stocks and want to diversify your overall portfolio. If you don't have the downpayment to buy a property or don't want to tie up your liquidity in physical real estate, take a look at real estate crowdsourcing. Real estate is a key component of a diversified portfolio.
Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Sign up and take a look at all the residential and commercial investment opportunities around the country.
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible.
Create your own luck. You'll be happy you did 10 years from now.
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI! I plan to get lucky investing in AI today.
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum.
In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
About the Author:
Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income, most recently helped by real estate crowdfunding.
He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.
I have a real estate riddle that I am unable to solve and am seeking help from those able to make sense.
I have 3 home mortgages, one of which I live in. The two remaining homes, both rented, are as follows:
House 1: $70,000. Mortgage at 6%, 20 yrs remaining, monthly payment at $650. House is on one acre on a main road that used to he country but is becoming developed and should go up in value . Rented at $400.00 a month. Bought in 2006 as investment and is now appraised around $30,000. Ugh…
House 2: $155,000 mortgage at 5%, 20 yrs remaining, monthly payment at $950. Rented at $750 a month. Bought in 2005 but my family (3 kids under 6 yrs old) outgrew. Appraised around $115,000. Again, ugh…
My options, as I see them are:
Sell both at a loss, where I would probably have to pay down the mortgages by a total of $70,000. To simply walk away.
Keep renting and increase rents until market rebounds, or, I keep on trucking as a landlord amd keep the homes fpr 20 yrs, with my tenants paying most pf the mortgages.
Pay off mortgages totally, ala Dave Ramsey, and stay landlord.
Being self employed and having debt reduces my ability to refinance, unfortunaly. I also must fund all of my own retirement and most of the calculators I use point to my IRA doing much better if I do not aggressively pay off mortgages early.
Any help would be appreciated!
Thanks,
Erik
[…] after speaking to over 100 passengers, I’m reminded that life is not so straight forward. There’s so much luck involved with getting ahead. It’s hard to get a true idea of how lucky we are without hearing other people’s […]
I would rather invest in something that would be much more stable as far as investments. Real estate carriers a lot of baggage and requires large amounts of money upfront. I recently started reading this great e book that gave expert advice on silver investments and was free, http://www.silverinvestorguide.com
Perhaps I’ve not delved far enough back into the archives, but I’m amazed that in this debate over stocks vs. real estate that you’ve only examined the passive side of stocks as opposed to the trading side, where you can make a lot more money. Yea, the stock market can make on average 8% a year, but that is if you ride it all the way up and down. If you go long during a bull market and short during a bear market you can beat the average easily if you have enough discipline to set up a system and execute it. You certainly don’t need to worry about a company flaming out if you’re not planning on holding onto it for years.
At least that is my strategy. Save money, trade to make enough to pay off student loans and other debts, then once those are paid off, keep slamming profits into downpayments on rental properties.
lol. essentially real estate good cuz of leverage. the upside is great as he explains it. the downside is even better. consider you buy a house at 100k and you put 5% down so 5k, now market tanks 30%. so now its worth 70k, but you owe 95k. so u default, live rent free for a year before they evict you. then once they do evict you, now they own an undervalued property. real estate is like an amazing call option. in short, borrow a ton of money, everything u can, and try ur best to never put anything down.
[…] There is simply NO LUCK to hustling to find tenants. It’s hard work that is constantly filled with disappointment. There were no fewer than eight hopeful tenants I thought would be perfect for my house who ended up finding another place. It’s hard to not take rejection personally, especially if it’s a property you’ve personally enjoyed for many years. It’s just business. Remind yourself it’s a numbers game. […]
[…] periods of time, and I’ve seen massive fortunes made in multiple ways. If you want to “get lucky,” then you might as well go where there’s opportunity. Because twiddling your thumbs in […]
I made a 250 percent return on a stock over a three week period a couple months ago. There was skill and luck involved…just like in anything else in life. Wall Street Playboys nails it with number 2: I made that much in a short period because I have a high tolerance for risk and I thought the reward validated it.
Sam,
I’m mostly in agreement with Jeremy. You are lucky. And it is important to recognize that. You were in the right place and at the right time. You made decisions which happened to work out.
You’re always very bullish on San Francisco and it is a nice city. I just think it is unrealistic to tell every kid with a computer science degree to come out to the Bay Area for a $100,000/year software job and life will be paradise. The reality is just quite different.
What are your thoughts on why wouldn’t a kid with a CS degree come to SF for a solid job? I’m seeing it with my own eyes and the opportunities are enormous right now with massive amounts of VC funding and record profits in the tech/internet space.
Go where the money is. It’s very easy to move around this great country of ours.
There are great paying jobs every where for computer people. There is no need to move to San Francisco.
My thoughts about the stocks vs real estate. Real estate as an investment is expensive. Very high carry costs! Complicated, illiquid, and a higher risk than the stock market.
But…. The advantages are leverage (mortgages, HELOCs, etc.), government support (tax deductions, VA loans, various grants, and a very long etc. list), automated savings (by paying mortgage down), emotionally positive for people (a sense of community, the ownership concept, better overall lifestyle, etc.), and maybe a sense of stability.
I think purchasing a place to live is normally a good investment (everyone must live somewhere). I think becoming a landlord is much more complicated and may not be a positive experience for most folks (but if you can make it work with a positive cash flow, it is an optimum situation).
I think investing in index funds (or maybe the “SPY” ETF) would be a far less stressful and easy way to build longterm wealth (especially in a 401k). Brainless and automatic is the way to go.
If you invest in stocks in the long run, it will be tough to beat 8% annualized over a long period of time. Assuming you do a 60/40 stock/bond portfolio today, you are looking at 6% maybe over 30 yrs (based upon historical analysis). After inflation, you are lucky to get 4%. That is ok for a lot of people and if your savings rate (pre-tax) is over 30% and you save for 30 years this should get you to a comfortable retirement number.
With real estate, though, if structured properly, it is fairly easy to obtain 10% returns over long periods of time and if you get involved in value-add properties, could easily break 12% or up to 15% IRR. Unless you are earning an extremely high income ($1m+), this is the only way to get really wealthy for the average person. Yes, it takes a lot of work.
Hi Sam,
I am not planning to buy at the moment. I am just curious whether rents have kept up with appreciation and it seems like it did. You mean you have consistently raised rent 10% every year for the past 11 years. Impressive! More importantly, how easily are these properties rented out? Ease of renting out is very important. It is no use having high rental yield but you are suffering 6 months vacancy in a year or 2. Generally, from your experience, are the vacancies high or how long does it take for a unit to be rented out? What is the longest you have to wait?
Thanks
I’ve had over 120 consecutive months with zero vacancy for this one property I started renting out in 2005, a 95% occupancy for 9 years on another property, and a 100% occupancy on my newest rental which just started in June 2014.
I’ll have a post on how to reduce vacancy rates to as close to 0% as possible.
The rent for this one property started off at $2,100, and is now $4,000. So yes, that’s about a 100% increase in rent vs. a 100% increase in property price over the past 11 years.
What’s your current property portfolio like and where are you looking to purchase? Sounds like you have a bearish bias at the moment?
Hi Sam,
I would like to know what was the rental yield when you bought the property in 2003 and what is the rental yield now? Assuming that your property is valued at $1,200,000 now, how much roughly are the monthly installments (if one were to buy now and finance 80%) and how much is the rental per month? Is it very easy to rent out your property?
I agree with you generally that real estate is a better bet compared to stocks mainly because of leverage and forced savings.
Thanks for so many quality posts.
Hi Constante,
Just did the calculation and the gross rental yield is around 4.5% – 5.3% a year with the rent back in 2003, and the rent now in 2015. In other words, not too high at all. This is common in expensive cities all around the world. Valuations based on income are very high due to a strong domestic and international demand curve. I’ve raised rent to keep up with the market -10% for the past 11 years.
But if you can beat the 10-year bond yield and see strong capital appreciation over the years that outperforms inflation, then it’s worth it.
You planning on buying property? Where are you thinking of buying?
I really enjoy reading FS each week. You mentioned that you like to read other blogs as opposed to reading the news. What are some of your go to blogs?
Let’s see, I like Retire by 40, Budgets Are Sexy, Sparkline, the Motif blog, Untemplater, Daily Capital, and lots of bloggers who comment on here where you can click their name to check out their work!
“I’ve rarely met anybody who has invested in the stock market or real estate market who
regretted their purchase 10 years ago”
Well, now you can meet one of those people. I bought in a suburb of Detroit in 2004 with the goal to live in the house for a few years and then rent it out. Since that time, my property value has dropped over 60% from its original value. It’s now at only about a 50% drop. What I’ve put into maintenance the last few years is probably the same as the value of the house. I get a decent rent, but I still lose money every year because the interest rate on my mortgage is so high, and I have no chance of refinancing due to how much the house is underwater, and I can’t qualify for a loan adjustment because it is in a recourse state and I make too much money. Worst decision of my life. The only lucky part is that I bought the house for under $100k, so I’m not financial ruined by it, but I am screwed by being responsible and making the payments. I should have just foreclosed before I moved out to Denver.
Speaking of which, I have a house out in Denver and it has gone up 23% since we bought it. That was also incredibly lucky. I did do quite a bit more research for this house, but we got lucky in the sense that we bought when houses were getting only a few offers, not dozens like they are now.
So as far as you premise goes, I agree you can influence the decision somewhat, but much of real estate is are you lucky to live in a market that is doing/going to do well, or in the case of somewhere like Detroit, did you happen to buy during the crash, rather than before it. If you were to take my Detroit area house and move it out to Denver, it would easily be worth 10x a much.
Thanks for sharing. I’d like to look on the bright side though. You got lucky buying a Detroit house for less than $100,000! Even if you lose 100%, it’s at most $100,000. Imagine the folks like me who bought vacation properties before the bust that were in the $700,000+ range. Ouch!
Well that is where luck definitely comes in. The low cost is lucky I suppose, but for someone who is interested in reducing hours of myself and my wife after the kids are a bit older, a negative cash-flowing rental does not help. I do know plenty of people who were wiped out due to the housing crash in Detroit metro area, who were in much nicer neighborhoods than my rental is. I mean my parent’s house is bigger and in a wealthier area than my house in Denver, yet my house in Denver is worth 60% more than theirs. That is completely luck.
Where you were born and into what type of family is mostly luck. I would add for most people, where you live now is also luck, as it is pretty hard for most people to move away from their extended family. So unless you have a large portfolio of houses in your particular area purchased over a boom and bust cycle or have bought houses outside of where you live, then I would say most of anyone’s real estate gains are based primarily upon luck, not skill.
I’ll give you another example. The people I know who are doing well with rentals in the Detroit area picked up theirs at the very bottom of the market. To do that, you had to have the money to do that at the right time. I was actively wanting to do that type of investing at that time period, but I didn’t have the money to do it. Now that I have the money, the opportunity is now gone. Unless you had been sitting on hundreds of thousands in cash for a long period of time, and had been looking hard at the Detroit market, then making a ton in the Detroit market was more fortuitous luck than any real skill other than having the willingness to pull the trigger. So while I agree somewhat with the premise of creating your own luck, at the end of the day, so much of real estate investing is down to chance for those without deep pockets.
Very true about needing the money. I wish I was more liquid in 2012/2013, but I had just left a stable job of 11 years to work on my online endeavors. I was in NO MOOD to take on debt then. Instead, I tried selling my house despite my gut instincts to hold on for 28 days on the market. Luckily, I got some low ball offers in 2012 and I pulled it.
If I sold my house in 2012, I’d be KICKING MYSELF! It’s funny having a blog, b/c I’ve recorded all my journey:
* Should I Sell Property Now That Facebook Is Public (3/19/2012)?
* Should I Sell Property And Simplify Life (10/28/2013 – Still thinking of selling!)?
* Pay Down Debt Or Leverage Up To Buy More Property? (4/8/2014)
Thank goodness for luck! I will never sell for as long as possible. The spread between rent and cost is sufficiently huge now that I don’t care.
Great article. I would also choose property over the stock market, but that’s probably because I got lucky as well. In 2008 I started telling people an area I wanted to buy in because of a proposed train stop. Years later, in 2010, after saving up enough cash for a downpayment, I was lined up to buy a short sale condo for 179k that ended up taking a year of my life and never closing. After this failure, I kept chugging along to 2012 when I made offers on 5 properties in this area. I eventually got an offer accepted on a 2 family where the inspection pointed out a tilting foundation, no heat on the third floor and things much worse than that. Eventually closed for 550k and the place is now worth around 950k. When the train stop arrives in 2017 it will be worth around 1.2 mill, condo’d out will be more like 900k and 700k for the 2 units. When I was looking at properties, my friends told me I was crazy to take on that much debt. Now, they call me lucky. I believe we give ourselves the opportunity to be lucky through planning, mindset and vision. I truly believe that if I didn’t buy at the perfect time, I would find many other ways to excel and be “lucky” yet again.
P.s. The short sale condo is now worth 550k
I like your confidence that your property will be worth 1.2 million in two years! What city is this?
On the flip side, do you think the people who sold to you now think they are unlucky?
Somerville, ma. Union square. Great question.. They bought for 340k in 2001 and sold for 550k in 2012 so I think they did just fine. When the greenline arrives we will either condo it out and sell into a 1031 exchange to then buy a few equally profitable properties or hold onto it for it’s own generous cash flow. Although Boston is in the same bubble you are, I can still find properties for 100k down in appreciating areas profiting $1500/month. My luck might be less cash positive in San Fran it sounds like.
* When referring to stocks here, I am referring to passive, low cost index investing with a 20-30 year time frame
Stocks:
Pros –
– Much better historic returns
– Easy, no maintenance
– Liquid
– Possible dividends
– Only way to take advantage of most tax friendly retirement vehicles
Cons –
– Passive investor
– No way to add value
Real Estate:
Pros –
– You have to live somewhere (at least for first home)
– Add legitimate value with tangible benefits (rec room, new kitchen, pool etc.)
– Tax friendly deductions
– Government subsidized leverage (30 year loan cannot exist without govt. backing)
– Rental income
– Tax free appreciation
– Owning multiple rental properties can turn into a business rather than passive investor
Cons –
– Maintenance, maintenance, maintenance….oh, and did I mention MAINTENANCE!
– Historic returns on par with inflation (no ALPHA!)
– Illiquid
– So many fees (escrow, title, prop. taxes, broker!)
Final Verdict:
Buy your first home if numbers make sense. But, unless you plan on becoming a developer or large property manager, buy stocks rather than a few rental properties (not worth the hassle).
Sounds good to me for you. I buy homes to live in it first, then for income, then for capital appreciation b/c I never plan to sell.
Depending on how I look at it, I have been lucky and unlucky. I can sit and complain about the unlucky breaks, or appreciate the lucky breaks I have received.
Born 1982, Graduated college in 2004
* Unlucky: Graduated college in 2004 with comp sci degree. Tech boom was over
* Lucky: Didnt graduate in 2008, so I had a job throughout financial crisis
* Lucky: Got to lock in student loan interest rate at 2.8% . A few years later, my brother locked in at 6%
* Unlucky: Missed housing price increase in early-mid 2000’s, as I was establishing myself
* Unlucky: Bought a house in Nov 2007 (the statistical peak of housing bubble). Sold 5 years later for a 20% loss
* Lucky: Bought a more expensive house in 2012 (bottom of housing market). Up about 15% thus far
* Lucky: Locked in 30 year interest rate at 3.3%
* Lucky: When the financial crisis hit, I had only 4 years of investments. The past couple years has been a great time for me to grow my investments
LOVE IT! GREAT way to look at things. I’ve definitely been unlucky before too. If I joined the work force one year earlier in 1998, I think I woulda made a killing in 1999 in stocks. But who knows, maybe I would have lost it all in 2000.
I got unlucky buying my vacation property for a couple hundred grand too much. But, I’m lucky to have got a free loan mod down from 5.875% to 4.25% from BoA. I plan to hold onto it forever.
There’s an easy way to evaluate stocks versus real estate and I didn’t see any comments about evaluating real states true “cap” Rate. If you calculate the true Rate which is actual income less total expenses except interest that rate is your percentage yield on your investment. View this as your safe return the upside in terms of appreciation is the gravy that can create spectacular returns in the right markets The combination of these two components of return greatly exceed the typical indexed stock return in some lucky markets, in other markets the caprate represents A reasonable safe investment return with minimal appreciation.
The key point to remember is that appreciation is really speculation only count on the caprate as your return. if mortgage rates (fixed)are significantly lower than the cap rate then finance the property, otherwise you shouldbe paying cash. By the way if the cap rate is significantly lower than 30 year interest rates you should really be reconsidering whether this property is a good investment
Appreciation is always gravy, but A LOT of property buyers buy for appreciation in already expensive cities. The cap rates become secondary, which can lead to bubbles and busts as we know.
My cap rate has always been above the risk free rate of return, with the underlying expectation to have some gravy in SF given I think it’s so under valued compared to other major cities in the world.
Sam,
You are so right- it’s better to be lucky than good.
And your friends in KL are incredibly lucky. It’s a “Last of the Mohicans” kind of story. They bought in 1970, just after the horrible race riots of 1969, and two years before the city was incorporated in 1972. They then just happened to have two large plots in the area where downtown KL developed years later. And they took a long time to sell, waiting 18 years after the Asian Crisis. I’m sure they were not pleased in 1998 after the value of their property took a huge haircut but by waiting it out and being one of the last to sell they extracted maximum value. In fact, one may ask- why did they sell now if they know it will keep going up?
It would be like someone buying a large Apple Orchard in Santa Clara in the late 1950’s and then waiting through all the development booms of the 60’s, 80’s and 00’s until now to sell this for a huge fortune.
Another benefit is that in Asia there is no annual property tax, so you can hold the property without paying tax to the government each year. If that were in the USA and assessed at $8M, the annual property tax bill would be $80K, nothing to sneeze at.
Put it this way, a 1000X return is 10 doublings, over a 40 year period or about once every 4 years. That’s an 18% compounded annual return for 40 years, something that is up there with Buffett who is very skilled at allocating capital and among the best in the world. All this in a passive asset that they enjoyed appreciating while watching the durians grow and fall down. It really sounds too good to be true, right? Well the definition of extremely lucky.
While I agree that the average person can do very well by buying and holding appreciating assets, this case is really exceptional. That being said, I’m totally happy for your friends. They should have bought even more back in 1970 :-)
-Mike
Indeed! And I so, so wish my parents bought some similar property there in 1988, pre boom. That’s right.. the Asian Crisis was vicious. Good on them for holding on for 18 years later! Shit, people don’t know or remember how bad the 1997 Asian Financial Crisis was.
I don’t think I’ll be making it to Bangkok. Here at Pulau Redang and off to Cambodia on Mon, June 1 then probably go back via Taipei. But still, no flights booked yet! :)
I started investing when I was in Graduate School. I took a risk by taking out the maximum student loans and then on top of that utilized margin to double down on Apple stock with it was $300 dollars a share (2010) (or after split $42/share to compare to today’s price) and owned $120,000 in Apple stock. I chickened out and sold early on for a $10,000 gain. If I had held on until today, would be worth almost $380,000…… and that would be only 5 years of holding…. Lesson learned.
To me the main issue is leverage. Would I rather have a mortgage or buy on margin… To me, I feel much more comfortable with a mortgage than I do with an equivalent amount invested with a margin account.
I have a rental property that was originally my primary residence. I purchased it in 2005. If I sold it today, it’d still be for a loss. However, I’ve been renting it out for the last 6 years and have never felt uncomfortable owning it. The first couple years of renting, it was cash flow negative, but with principal pay down considered, it was basically breakeven. Today, I am cash flow positive with it.
My mindset when real estate crashed was that I’d just ride it out. It’s not a loss until its realized and unlike a margin account, it’s entirely my choice to realize it.
So, while I have a poor performing real estate asset (capital gains-wise), if I had a stock perform the same way on margin, I would have been in a lot more trouble.
That’s the thing. So many publicly traded companies I know have disappeared. At least with real estate, there’s a physical asset that has insurance in case there is some disaster.
Yes, buying in Detroit over the past several decades might not have been a great move, but at least the houses are still around.
Would be interested to know how real estate did in the San Francisco Bay area from 1955 to 1985. I saw those paragon statistics a couple weeks ago with the one that Sam included in this post. There was also a chart from them showing the interest rates going from 15% down to 3% from 1985 to 2015. If interest rates ever do start to rise again to more normal levels it will be interesting to see what asset class will outperform for the next 20 years?
Good thing we’ve got this post:
How To Profit In A Rising Interest Rate Environment!
I think interest rates stay low for the rest of our lives. Bold statement, but I don’t expect to live for more than 40 more years. If I’m wrong, I’ve got plans to adapt!
Hey Sam-
Do you consider an index like IYR to be “stock” or “real estate”. I think purchasing and owning actual property can have great returns – especially with leverage involved (put down 100k on 500k property, end up selling it for 600k, essentially doubling your money). However, I do think that the time associated with purchasing, maintaining and renting property should be considered. Purchasing a rental property could easily take 80 hours of work. Once purchased, paying the mortgage, finding tenants, and maintaining the property could take another 40 hours of work in a given year (largely depends on if you do any labor yourself or hire people). I am not a land lord but invest in real estate stocks. Curious to get your thoughts on that fills the real estate asset class.
Best,
David
Hi David,
I’d consider those index funds more stock than real estate. Different tax/leverage/hard asset/utility/return profiles. Maybe think about it as 70% stock/230% RE for those index funds.
You need to work hard and have some luck sprinkled in. This life is full of ebbs and flows and if you work hard and grind it out you should continue to rise.
With respect to Sam’s real estate purchase while the appreciation is nice let’s not lose sight of the fact he worked his ass off and sacrificed to pay the property down and make it cash flow positive. Even if his property had not appreciated he has a paid off asset that pays him money every month. That in of itself is something to be proud of.
I get nauseated by the peanut gallery who has a high monthly burn rate and negative net worth who chalk people’s success up to luck. This happens at all leveks of the income sphere btw. Imagine how much further ahead you would be if you drove a Honda instead of a Benz, forwent a 15k tropical vacation and did a road trip (for just one year), maxed out your 401k and only took on a mortgage you could pay off reasonably in 10 years.
Everyone has to make different sacrifices at different levels to get ahead. if you haven’t made legitimate sacrifices yuou should think twice before calling somebody elses good fortune, luck.
The “real” price of your 2003 real estate acquisition is probably closer to between 800k and 900k. It’ll be interesting to see if SF real estate market ever crashes. I think it sort of has to. Perhaps a private equity market crash will cause a SF real estate crash at some point.
As for luck, if a person is able to do something for a long period of time it’s not luck. Perhaps, it’s a proven formula. Unfortunately, the majority isn’t able to follow such a formula.
What goes up must come down :). Probably not in our lifetimes though.
SF real estate did crash, by about 15% during the worst financial crisis of our lifetimes.
God grant me the luck to buy during the next one!