Long-term returns from real estate

[Mr._johngalt]

It's relatively easy to lose money in the stock market compared to real estate, IMO.

Very well put. Agree, obviously.

JG

 

[Mr._johngalt]

... and for many - I am afraid - there will only be one RE purchase.

Check this link:

http://www.eagletribune.com/siteSearch/apstorysection/local_story_316064704

What were these people (realtors, mortgage originator, lenders, lawyers, and buyer) thinking?!? $9/hr at a laundry mat and she gets a $300k mortgage!

Irrational exuberance?

JG

 

[mathjak107]

Very well put. Agree, obviously.

JG

thats what you think, just wait for even a 10% slide as it wipes out tens of thousands of leveraged dollars. anyone who bought recently in our area for investment and put down say 10% on a 400,000 dollar home can watch 40,000 plus closing costs plus taxes and insurance evaporate right before their eyes unless they intend to foot the bill and hold a loosing investment for a few years.


yeah you can rent it but thats at a lose too based on rents vs purchase price and costs

 

[Delawaredave]

What little I've been able to read on broad real estate returns suggests a long term real return somewhere between stocks and bonds. But that average wasn't really available before REIT mutual funds.

Bernstein had returns of RE (8%) inbetween bonds (6%) and stocks (11%). But the standard deviation of returns for RE was much lower than stocks (couldn't find numbers).

So I think:
- RE properties are like individual stocks (returns widely distributed)
- REITs are like mutual funds
- Overall, equities return more, but have higher deviation of returns.

As a kid, my father had a bunch of rental properties - I always remember answering the phone - tennants calling about one thing or another - Dad leaves dinner table early to go fix something - he'd mumble on his way out the door, "put your money in stocks".....

So my RE allocation has always been through REITs and property groups.

Tennants can't call REIT investors......and I finish my dinner every day....

 

[Mr._johngalt]

thats what you think, just wait for even a 10% slide as it wipes out tens of thousands of leveraged dollars. anyone who bought recently in our area for investment and put down say 10% on a 400,000 dollar home can watch 40,000 plus closing costs plus taxes and insurance evaporate right before their eyes unless they intend to foot the bill and hold a loosing investment for a few years.


yeah you can rent it but thats at a lose too based on rents vs purchase price and costs

But you are taking an example of someone who did something stupid, or
uninformed, or just had back luck. The key is your "in our area". May be
true "in your area" but not applicable to anywhere else. I am hoping you will see the logic here.

JG

 

[mathjak107]

you are right we are only seeing a 10% slide in our area right now, i believe the report last week said the national average was 13% and the hot areas far worse. yeah there are pockets of areas where things havent risen so much so they havent fallen so much but overall unless your in the midwest or so i think its the same story everywhere.

 

[wabmester]

As a kid, my father had a bunch of rental properties - I always remember answering the phone - tennants calling about one thing or another - Dad leaves dinner table early to go fix something - he'd mumble on his way out the door, "put your money in stocks".....

Good point. I love the returns from real estate. But I hate the tennants. Hate the property taxes. And hate the transaction costs.

 

[Brat]

I picked up this real estate (home) link from FundAlarm:


http://www.safehaven.com/article-6329.htm

 

[jazz4cash]

WoW!.......that was depressing.

 

[Mr._johngalt]

WoW!.......that was depressing.

Everyone has an opinion.

JG

 

[califdreamer]

I picked up this real estate (home) link from FundAlarm:


http://www.safehaven.com/article-6329.htm

This information is consistent with a lot of what I've heard for the last year-and-a-half or so from a number of prognosticators.

My best guess is, here in once-hot San Diego, peak-to-trough declines in home values will be around 20%. The stats that relate home values to income, inflation, etc. indicate a 35-40% correction would be necessary to get things back to normal. The safehaven.com article mentions some things that may moderate the fall and I agree that employment rates that are holding up well, interest rates that aren't going up as dramatically as many had speculated and near-term falling/flattening of energy costs will soften the blow. Then there's price "stickiness" from homeowners waiting out the storm and sellers pulling their home off the market (a trend that newspapers are reporting in So Cal).

I'm thinking most of the damage will take place in '07 and '08. I do see the possibility of smaller price declines taking place over a longer period of years, sort of a long flattening of the market.

I still hear a lot of talk about a pick-up again in Spring/Summer '07. I just don't see it.

 

[mathjak107]

so much for not loosing money in real estate. ill take my stocks thank you...and dont get me wrong we still own alot of real estate in our central park location but for me the gains in our stocks overwhelmed the gains in even the most prime real estate in manhattan. making the big money in real estate is a professional game. developers, tax liens, fixer uppers, forclosures. thats where big money is. just waiting for the property to escalate gets you a return thats not worth the risk long term . trying to rent it today results in a big negative cash flow in most areas. of course the downside risk as we are seeing now can be huge.

i know back in the 80,s we were all shocked when real estate went down here in new york city . it was un-heard of. my investment co-op plunged from the 73,000 or so i just bought it at down to 54,000 before the smoke cleared.and that didnt include my closing costs. will rogers once said buy land they arent making anymore of it.

boy was he wrong, up went battery park city on the tip of manhattan on land fill. a whole freakin development on ground which was once water.

 

[mathjak107]

remember too that although reits did great reits are not the same as owning real estate directly. they are stocks first and a play on real estate 2nd.

while if i was buying a business today i may pay 1 or 2x earnings at best , the same companies trading publicly trade for rediculious amounts , 8-50x earnings is possible. same is true of reits, they own property which may have doubled yet they trade at prices 10 or 20x that value .

 

[Mr._johngalt]

This is an update from my little corner of the world. I wrote previously in some detail about what I could see for sale right here in my neighborhood
(on or near the water). I am familiar with three homes (been through all of
them). 2 on the water and one off. One has been rehabbed, one is a fixer-upper and one is brand new. All three (3) have now been on the market for about a year and sit unsold. Now, I think it's because the prices are
too high and were to start with, as opposed to a general slowdown.
OTOH, I could be wrong. Time will tell.

JG

 

[Mr._johngalt]

remember too that although reits did great reits are not the same as owning real estate directly. they are stocks first and a play on real estate 2nd.

while if i was buying a business today i may pay 1 or 2x earnings at best , .

That (1 or 2X times earnings) is too restrictive to be a tool IMHO. For example,
you can find lots of businesses that are good deals while showing no
earnings at all. Smaller (family owned) businesses frequently show
losses consistently as the "family" is basically living off them as opposed
to building a balance sheet. I will go further. In a very small business
(say under $1,000,000 sales), the earnings really mean little or nothing
in terms of setting the price or in predicting the future viability.

I do agree with your thoughts about REITs vs, direct RE ownership.

JG

 

[mathjak107]

well i know id never go above 3 thats for sure

 

[Mr._johngalt]

well i know id never go above 3 thats for sure

Oh, sure you would. What if the owner(s) had all 3 daughters on the payroll and they didn't do squat? The earnings are artificially depressed.
Now, say they are still showing big numbers (solid - proven) and you can add back the daughter's wages and benefits on top of the nice
profits already built in? Or, maybe everyone in the family drives
a Lexus (like C-T) totally covered by the business? You have to analyze
that stuff. One more thing. It's almost always a bad idea to buy the
stock of a small family owned corporation. I have done it, but usually better to buy the assets.

JG

 

[rmark]

Whch daughter is the best looking?

 

[califdreamer]

Hey, even though I posted earlier about how I believe house prices are going down and will continue to do so in San Diego, I didn't mean to badmouth RE as an investment vehicle. The signals were plain to see a year and a half ago that it wasn't time to buy a house here for investment purposes. My investments in multi-units outside of CA have been doing extremely well. I think you can do well in general by buying multi-unit residential and not necessarily in your back yard.

I'm always a little amused when financial articles talk about stock price increases beating out real estate price increases. Uhh, but when you put 25% down on your RE investment you're using leverage to multiply your actual return. Apples to oranges you might say? Why can't you put 25% down on stock purchases? Because it is considered too risky.

 

[mathjak107]

Thats the irony, long term for me stocks beat by a wide margin all our real estate but im still to chicken to buy on margin

 

[kcowan]

Hey, even though I posted earlier about how I believe house prices are going down and will continue to do so in San Diego, I didn't mean to badmouth RE as an investment vehicle...

There is no need for us to do it. Let Gary Shilling do it for us:

Existing home prices in September fell 2.2% from a year earlier, the biggest drop in the 38 years of National Association of Realtors data. That matched the August decline and was the first back-to-back fall since 1995.

:

40% of new house sales in September are not owner-occupied

Over half of existing homes for sale are vacant

Past patterns suggest a two-year gap between the decline in house sales and the collapse in prices. But given the huge amount of speculation this time, the gap may be shorter, 1 1/2 years in our judgment. Since sales peaked in mid-2005, the big slide in prices might well commence roughly at the end of this year.

The Federal Reserve estimates that last year, they took $719 billion out of their abodes and spent half of it on goods and services. That's 4.1% of consumer outlays...

Many choice quotes there. He predicts that the big drop will start at year end. Most optimistic outlook is that it might be delayed to 4Q07.

 

[macdaddy]

Prices for waterfront in my neck of the woods (MD) have held steady, but sales numbers are down. Nobody wants to budge.

 

[tryan]

Lot's of nice pictures in Shillings report ... but I think his prediction of steep declines in 07 is ahead of it's time. A RE run up that took 12 years to create can't bottom-out in 2 years; too little liquidity in RE.

My guess - if this bottom follows previous - is it'll take 5-6 years. Assuming it already started, that means 2010-2011. Think deep recession too.

 

[Mr._johngalt]

Whch daughter is the best looking?

She's the one you keep on, unless you are married and wimpy.
Then you keep the ugly one.
Now that I think about it, this
identical situation cropped up many times back when I was
working. I know a couple of guys personally who make me wonder what their wives are thinking when I see their secretaries. And, they are both
in 2-person offices. I used to hire on looks way back when. Preferred
someone easy on the eyes, especially in my workaholic period when I spent more time with my staff than my wife. Good looks will help you in most any venue I suppose. New thread?

JG

 

[Hydroman]

Buy and hold or playing the fix-up/flip game is not the best way to make money in real estate. The best of way is doing your research and investing in property that has immediate opportunty for change of use. By change of use I mean subdividing or rezoning for a higher and better use.