Do I need to be talked off the RE ledge?

[OldShooter]

Yes, but the # of homes you reference as a % of the total is a stupidly small fraction, a number of them (if not most) still actually did increase in nominal value over 20 years believe it or not (obviously slower than the rest of the country, and most of them have cap rates at or over 10%, meaning you made 200% in income over 20 years from rents, more than covering the cost of the property in that time just from rents even if the property declined. Very different than a 2% cap rate property in SF that is nearly entirely reliant on appreciation. ...

A couple of things: First, I don't think the OP is skeptical that money can be made in real estate, so this line of argument is not too relevant.

Second, I think a form of the Efficient Market Hypothesis applies here. Real estate is relatively easy to leverage, has a pretty good value growth track record, and in the big picture is not high risk, but it has serious negatives too. For example poor liquidity, high transaction costs, vulnerability to economic and regulatory problems, etc. But the biggest (speaking as a 25 year landlord) is the management hassle. These factors combine to get you prices with fairly attractive cap rates. That's what it takes to attract buyers. IOW I don't think there is any magic here; RE prices reflect all the negatives and all the positives, with netting out to the market demanding a pretty good rate of return due to the negatives. For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

 

[Magus]

A couple of things: First, I don't think the OP is skeptical that money can be made in real estate, so this line of argument is not too relevant.

Second, I think a form of the Efficient Market Hypothesis applies here. Real estate is relatively easy to leverage, has a pretty good value growth track record, and in the big picture is not high risk, but it has serious negatives too. For example poor liquidity, high transaction costs, vulnerability to economic and regulatory problems, etc. But the biggest (speaking as a 25 year landlord) is the management hassle. These factors combine to get you prices with fairly attractive cap rates. That's what it takes to attract buyers. IOW I don't think there is any magic here; RE prices reflect all the negatives and all the positives, with netting out to the market demanding a pretty good rate of return due to the negatives. For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

Agreed to a large degree, but with technology and trends, a lot of that has or is changing (hassle is lower to find quality tenants, collect rents, to sell you can get down to 4% costs now vs 6%+, time to sell is much lower, etc), especially with institutional money for the first time in our country's history getting involved in RRE.

15-20 years ago think about how difficult it would be for a mom and pop to 1) accurately gauge how much to charge rent +-5% to market (check newspaper ads, let it set vacant for ages, etc) 2) market that property for rent 3) be able to screen tenants for credit and background 4) collect rent.

Today, I can get 50+ applicants on Zillow (+Trulia, Hotpads,etc) for free or close to it in a single day via email, quickly access potential tenants credit history and background history in a click as well as income details and job history, know within about $100/month what I should charge for rent for it to rent fairly quickly and can collect rent electronically or by check. I have a reasonable idea what my property is worth at any moment and can easily check recently sold properties to get an even better idea if needed. Friction in rentals and residential real estate is rapidly going away.

Simply put, running rentals today is just not nearly as difficult as it used to be. Put in some basic simple guard rails for renters like I do (700+ credit score and minimum 2.75x income to rent and target 3.5x) and your odds of issues drops further.

 

[clifp]

For the OP, I would suggest that enduring the negatives is not worth gaining the opportunity to make money that he does not need.

Fair enough, that's why we have a discussion forum, Magus and I disagree.

I picked up this line from the OP's first post.

My career was intense and I was always on the road so I never got into the RE game. But now I have time to study and think about getting a SFH rental out of state. I would definitely hire a manager if I did that because I don’t really want to be a landlord on call.

This was exactly why I never got into real estate when I was working. I find RE investing interesting since I'm in the investing as a hobby crowd. I used to pick individual stocks, but that ended when after years modestly beating the indexes, I've trailed the indexes the last few years, and with even value stock expensive, I couldn't find any stocks that screamed bargains.

There is a good chance my prediction of a 50-75% drop in stocks and bonds will happen after I'm dead, and using real estate in LCOL states as a diversification strategy will have been pointless. But, I won't regret the time I've spent on it.

 

[youbet]

a number of them (if not most) still actually did increase in nominal value over 20 years
.

Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

 

[BGH1]

We bought 4 rentals 6 years ago, passively managed with a property manager, and managed the property manager activities as other have said.

We had some decent tenants, and one terrible tenant. We sold all 4 this past year, and it was the best investment ever, the market went crazy, my best half wanted to simplify, and the timing was perfect.

It’s not for everybody, just like timeshares, but for us a very positive experience overall.

 

[Winemaker]

Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

Rentals are locally priced using a blend of construction/replacement costs and the local rent multiplier, similar to a P/E ratio.

For example, to buy a SFH/duplex in the nearest town would run no more than $100,000. To rebuild my duplex, it would run $205,000, to use LRM, $1375*12*LRM( I'm using 8)=$132,000. Another method is rent=1% of purchase price; in my case $1375 ===$137,500.

 

[ERD50]

... I don't have the exact % in front of me, but less than 10% of the S&P 500 companies from 1955 are still around today as an example. ...

But this is totally irrelevant to the discussion.

We are not talking about investing in individual stocks and taking specific stock risk, We are talking about investing in a broad index (hundreds or thousands) of stocks. Those broad indexes have done well over the long run, and that accounts for the companies that went under.

When you invest in specific properties, instead of hundreds/thousands in a REIT, you are taking some specific risk. This is apples-oranges to an index investor.

-ERD50

 

[youbet]

Rentals are locally priced using a blend of construction/replacement costs and the local rent multiplier, similar to a P/E ratio.

For example, to buy a SFH/duplex in the nearest town would run no more than $100,000. To rebuild my duplex, it would run $205,000, to use LRM, $1375*12*LRM( I'm using 8)=$132,000. Another method is rent=1% of purchase price; in my case $1375 ===$137,500.

Can’t see how that relates to my example. What is the local rent multiplier when there is an extremely high vacancy rate and extremely low possibility of ever finding a tenant?

 

[Magus]

But this is totally irrelevant to the discussion.

We are not talking about investing in individual stocks and taking specific stock risk, We are talking about investing in a broad index (hundreds or thousands) of stocks. Those broad indexes have done well over the long run, and that accounts for the companies that went under.

When you invest in specific properties, instead of hundreds/thousands in a REIT, you are taking some specific risk. This is apples-oranges to an index investor.

-ERD50

Not all stock investors invest in broad indexes, just not like all landlords buy a single property without any diversification of type or geographically. So I would disagree with your statement both ways. Right now I can drop $10k into 150 different residential properties across the country on Fundrise.com if you are so inclined for diversification. But either way, I again reiterate nearly ALL housing goes up over 20 years (plus cap rates are WAY higher than stock dividend yields so you are far less reliant on appreciation). The same is not true for stocks.

 

[Magus]

Actually, that isn’t true. Not sure where your numbers are coming from, so I’ll just back out of this discussion.

I checked several po-dunk towns of < 5000 pop between Greensboro or Charlotte and Charleston/HHI in the backwaters in the Carolinas and Zillow has had the prices ~double in the last year and more than double over the last 20 years. /Shrug Add in a 10% rental cap rate annually and you've done very well on rentals in those markets.

Commercial real estate is another story.

 

[OldShooter]

... nearly ALL housing goes up over 20 years (plus cap rates are WAY higher than stock dividend yields so you are far less reliant on appreciation). The same is not true for stocks.

Actually (if true) that is prima facie evidence that real estate has significant negatives. If it did not, the market would not demand high returns. Stock market returns are lower because the negatives are less.

TANSTAAFL

 

[ERD50]

Not all stock investors invest in broad indexes, just not like all landlords buy a single property without any diversification of type or geographically. So I would disagree with your statement both ways. Right now I can drop $10k into 150 different residential properties across the country on Fundrise.com if you are so inclined for diversification. But either way, I again reiterate nearly ALL housing goes up over 20 years (plus cap rates are WAY higher than stock dividend yields so you are far less reliant on appreciation). The same is not true for stocks.

Still irrelevant.

The relevant question is, will your 150 properties provide a better risk adjusted return (after fees/costs) than a broad index stock fund. The "Not all stock investors invest in broad indexes," is a red herring. I'm talking about what one can do with good choices that are easily available to all, not what "some people do".

What's the difference between Fundrise.com and a REIT?

The first recc REIT I came up with was Vanguard VNQ, and it under-performed VTI (total stock index). VNQ had a lower total return and a higher volatility - lose-lose:


Portfolio - Initial -- Final -- CAGR - Stdev
VTI------- $100,000 $622,462 - 11.18% 15.03%
VNQ-REIT-- $100,000 $493,731 -- 9.70% 22.09%

https://tinyurl.com/ydg82y4q << short link to portfoliovisualizer.com

-ERD50

 

[Magus]

Actually (if true) that is prima facie evidence that real estate has significant negatives. If it did not, the market would not demand high returns. Stock market returns are lower because the negatives are less.

TANSTAAFL

Not sure I'd agree with that statement entirely since > 85% of the residential housing market is primary residence, whose primary purposes is not as an investment. This is actually what adds to residential pricing stability. Home prices are usually tied to growth in nominal income and to a lesser extent, mortgage rates. Given that nominal income nearly always goes up due to increase in the money supply and modest inflation, housing prices tend to follow.

In the last couple years, investment purchases are now up to about 20% of the market and you have seen cap rates decrease. If that continues to expand, I would expand cap rates to continue to decrease.

 

[Winemaker]

Can’t see how that relates to my example. What is the local rent multiplier when there is an extremely high vacancy rate and extremely low possibility of ever finding a tenant?

I guess the point I was trying to make is that a experienced RE investor does not go into a investment unless they know how much they're going to make up front before they purchase. While one leaves some wiggle room for unexpected expenses. The same is for a bond, held for duration or maturity.

When one does their due diligence, one determines the LRM by using comparables in that area. An extremely high vacancy rate , though rare, might be predicted if one buys a property where there is only one employer, located near a geological anomaly, poor ingress and egress, etc.. I see properties locally, regionally, geographically all the time that are for sale , that I would NEVER buy or live there, but people are buying them, and living in them all the time. One must determine that value, just like buying a stock or bond for that matter.

 

[OldShooter]

Not sure I'd agree with that statement entirely since > 85% of the residential housing market is primary residence, whose primary purposes is not as an investment. This is actually what adds to residential pricing stability. Home prices are usually tied to growth in nominal income and to a lesser extent, mortgage rates. Given that nominal income nearly always goes up due to increase in the money supply and modest inflation, housing prices tend to follow.

In the last couple years, investment purchases are now up to about 20% of the market and you have seen cap rates decrease. If that continues to expand, I would expand cap rates to continue to decrease.

You may be right or you may be wrong, but I don't have to know how the watch works to know what time it is. Higher returns come with higher risks or other undesirable aspects. If Economics has only one rule, that is it.

I looked at fundrise.com. I wouldn't even walk down the same side of the street as a deal like that one. It is staggeringly replete with potential agency problems and, probably not regulated to any useful degree.

 

[Magus]

Still irrelevant.

The relevant question is, will your 150 properties provide a better risk adjusted return (after fees/costs) than a broad index stock fund. The "Not all stock investors invest in broad indexes," is a red herring. I'm talking about what one can do with good choices that are easily available to all, not what "some people do".

What's the difference between Fundrise.com and a REIT?

The first recc REIT I came up with was Vanguard VNQ, and it under-performed VTI (total stock index). VNQ had a lower total return and a higher volatility - lose-lose:


Portfolio - Initial -- Final -- CAGR - Stdev
VTI------- $100,000 $622,462 - 11.18% 15.03%
VNQ-REIT-- $100,000 $493,731 -- 9.70% 22.09%

https://tinyurl.com/ydg82y4q << short link to portfoliovisualizer.com

-ERD50

RRE is readily becoming easily available to all through sites like Fundrise and I'd argue for most folks on here, a diversified RRE portfolio is easily possible.

There are huge difference between Fundrise, etc and VNQ. The four largest ones in my view are as follows:

• First, VNQ is overwhelmingly commercial real estate, with almost no residential real estate. Fundrise and others are overwhelmingly residential real estate. Commercial real estate is significantly more tied to the overall economy whereas housing is not. Commercial real estate is significantly more volatile in prices than housing.
• Second, VNQ is overwhelmingly tied to HCOL, super metro markets like NYC, Chicago and SF. Fundrise and others invests in all US markets for real estate and actually focuses on the much higher number of cities called "18 hour cities" but not exclusively (also invests in small towns and urban cores, but minority of holdings)
• Third, like all stocks, they are a combination of both earnings and the multiple of earnings, which craters when the stock market goes south. Private transactions in real estate are much more stable, which is what valuations of private REITs are based on. This was extremely evident for example in the hotel industry in 2020, which saw hotel REITs drop 80-90% in value while private market transactions saw a range of -20% (full service hotels in urban cores) to +10% in values (economy extended stay hotels in suburban markets).
• Fourth, you have a much, much wider selection of investments to choose from on these private RE sites than you do in public REITs. Public REITs are a stupidly small fraction of the broader RE market. The entire US stock market is ~$50 trillion, of which REITs are about 3%. Of that 3%, less than 5% in RRE or related (apartments). Meanwhile, the residential real estate value in the US is over $40 trillion (vs less than 0.1T in public markets) alone and commercial RE is approximately $20B in the US (vs < $1.5T in public markets). In short, public REITs are not doing a great job of actually representing a typical investment in RE, especially in residential
  

.

 

[Magus]

You may be right or you may be wrong, but I don't have to know how the watch works to know what time it is. Higher returns come with higher risks or other undesirable aspects. If Economics has only one rule, that is it.

I looked at fundrise.com. I wouldn't even walk down the same side of the street as a deal like that one. It is staggeringly replete with potential agency problems and, probably not regulated to any useful degree.

No difference than agency issues with mgmt in public companies (and in some companies the BoD). Trust me! I've been very near the top for three of them and were considered some of the better ones in that department. They (sites like Fundrise) have massively increased their transparency over the 13 years they've existed and will likely continue to do so. As more sites like them and Crowdstreet and others come in board, I do expect additional regulation to come into play. Financial Samurai (Sam Dogen) has over $800k invested into those two sites FWIW.

And again, when over 80% of the housing market isn't tied to commercial reasons, its valuations will not match the same as public stocks, which are 100% tied to commercial reasons. And many of the problems inherent in residential real estate, as I showed on an earlier reply, 50+x easier today than it was even 20 years ago.

 

[ERD50]

RRE is readily becoming easily available to all through sites like Fundrise and I'd argue for most folks on here, a diversified RRE portfolio is easily possible.

There are huge difference between Fundrise, etc and VNQ. The four largest ones in my view are as follows: ...

Thanks for that explanation. And yet:

https://fundrise.com/track-record

Fundrise (all clients) Public REITs (all U.S. REITs) - Public stocks (S&P 500)2
2021 - 22.99% -- 39.88% 28.71%
2020 -- 7.31% -- -5.86% 18.40%
2019 -- 9.16% -- 28.07% 31.49%
2018 -- 8.81% -- -4.10% -4.38%
2017 - 10.63% - --9.27% 21.83%

Fundrise clients have under-performed the stock market in 4 of 5 years. And compound gains of 73% vs 133% for the stock investor:


1.1063 × 1.0881 × 1.0916 × 1.0731 × 1.2299
≈ 1.7342641

1.2183 × (1 − 0.0438) × 1.3149 × 1.184 × 1.2871
≈ 2.3343163

edit add: I think we can knock off another 0.05% for the market, they apparently used the pure index rather than an actual ETF like SPY (ER of 0.0945%)


(1+(.0945/100))^5 = (1 + (0.0945 ∕ 100))^5 ≈ 1.0047339


-ERD50

 

[OldShooter]

No difference than agency issues with mgmt in public companies (and in some companies the BoD). Trust me! I've been very near the top for three of them and were considered some of the better ones in that department. They (sites like Fundrise) have massively increased their transparency over the 13 years they've existed and will likely continue to do so. As more sites like them and Crowdstreet and others come in board, I do expect additional regulation to come into play. Financial Samurai (Sam Dogen) has over $800k invested into those two sites FWIW.

As you like. I have no idea who Sam Dogan is, but apparently you think he is a big deal and $800K is big money. Theranos had a pretty impressive board,too.

And again, when over 80% of the housing market isn't tied to commercial reasons, its valuations will not match the same as public stocks, which are 100% tied to commercial reasons. And many of the problems inherent in residential real estate, as I showed on an earlier reply, 50+x easier today than it was even 20 years ago.

You continue to deliberately ignore or miss my point. The market's determination is that RE is some combination of riskier and more hassle, hence the higher returns. If you think the market's opinion is wrong, you'd better be buying aggressively. As Nassim Taleb asks: "Don't tell me what you think. Show me your portfolio."

 

[Magus]

Thanks for that explanation. And yet:

https://fundrise.com/track-record

Fundrise (all clients) Public REITs (all U.S. REITs) - Public stocks (S&P 500)2
2021 - 22.99% -- 39.88% 28.71%
2020 -- 7.31% -- -5.86% 18.40%
2019 -- 9.16% -- 28.07% 31.49%
2018 -- 8.81% -- -4.10% -4.38%
2017 - 10.63% - --9.27% 21.83%

Fundrise clients have under-performed the stock market in 4 of 5 years. And compound gains of 73% vs 133% for the stock investor:


1.1063 × 1.0881 × 1.0916 × 1.0731 × 1.2299
≈ 1.7342641

1.2183 × (1 − 0.0438) × 1.3149 × 1.184 × 1.2871
≈ 2.3343163

edit add: I think we can knock off another 0.05% for the market, they apparently used the pure index rather than an actual ETF like SPY (ER of 0.0945%)


(1+(.0945/100))^5 = (1 + (0.0945 ∕ 100))^5 ≈ 1.0047339


-ERD50

Three things

1) The average Fundrise investor has about 30% of their Fundrise portfolio in real estate debt instruments so you'd need to compare the other two with bond index funds as 30% of returns and 70% in the ones you compare to, which will massively change the equation.
2) You'll notice zero years of negative return with Fundrise and significantly more stable returns in general - which is exactly why a lot of folks going into retirement LOVE residential real estate. Your risk is lower in RRE than stocks when you don't have as much time to recover.
3) Stocks have been in a huge bull market for a long time. Where fundrise will shine is when the bull market turns into a huge downturn. Compare their returns in 1H20 vs market for example.

 

[Magus]

As you like. I have no idea who Sam Dogan is, but apparently you think he is a big deal and $800K is big money. Theranos had a pretty impressive board,too.

You continue to deliberately ignore or miss my point. The market's determination is that RE is some combination of riskier and more hassle, hence the higher returns. If you think the market's opinion is wrong, you'd better be buying aggressively. As Nassim Taleb asks: "Don't tell me what you think. Show me your portfolio."

Financial Samurai is one of the most popular personal finance/FIRE sites on the globe and has been for over a decade.

The market is not determining the RE is riskier or the volatility of returns would be significantly higher than with stocks. Higher the risk the higher the volatility. Residential Real estate is the opposite since 80-90% is linked to housing and not commercial application. As ERD posted just below this, the returns from Fundrise were significantly more stable than other investment types (in a bull market) and would even more so in a bear market. The long term housing market in the US is insanely stable and rents are even more stable with only 2 brief short and small blips.

Since 1963 (furthest back Fed Reserve data goes), housing has averaged (unleveraged) a 5.7% increase per year, with a max of 22% and a min of -6% and a standard deviation of 5.6%. US stock market has averaged 9.6% increase per year with a standard deviation of ~25% with a low of worse than 30% drop and highest returns over 35%. The significantly higher volatility implies significantly more risk for stocks than housing.

 

[ERD50]

Three things

1) The average Fundrise investor has about 30% of their Fundrise portfolio in real estate debt instruments so you'd need to compare the other two with bond index funds as 30% of returns and 70% in the ones you compare to, which will massively change the equation.
2) You'll notice zero years of negative return with Fundrise and significantly more stable returns in general - which is exactly why a lot of folks going into retirement LOVE residential real estate. Your risk is lower in RRE than stocks when you don't have as much time to recover.
3) Stocks have been in a huge bull market for a long time. Where fundrise will shine is when the bull market turns into a huge downturn. Compare their returns in 1H20 vs market for example.

Well, 70/30 does not "massively change the equation."


Portf Initial _Final __ CAGR _ Stdev
VFINX $100,000 $236,413 18.44% 15.26%
70/30 $100,000 $201,166 14.74% 11.51%

It's still up 101% vs 73% for fundrise. And std_dev is down as expected.

The rest is conjecture or maybe cherry-picking (but that's hard to avoid with such a short history). Maybe it will play out as you say, maybe not. But you do seem to trend toward overstating things (as shown above, not a "massive" change), so I take that into account.

-ERD50

 

[OldShooter]

@ERD50, IMO you are wasting your time trying to deal with @Magus. This is an individual who has some kind of need to have the last word and he will frantically dig and offer new "facts" and speculative predictions for as long as you keep rattling his/her cage. I think the OP has long since left the room.

 

[Magus]

@ERD50, IMO you are wasting your time trying to deal with @Magus. This is an individual who has some kind of need to have the last word and he will frantically dig and offer new "facts" and speculative predictions for as long as you keep rattling his/her cage. I think the OP has long since left the room.

LOL says the guy that keeps posting over and over again himself. Pot, kettle, black. The fact is there is significantly less information for the average investor on residential real estate (which is a $40T market in the US) than stocks ($50T) so I hope some folks will diversify outside of just equities and bonds. Far too many folks like you really do not do the avg person any favors by making them less diversified as they enter retirement.

 

[Magus]

Well, 70/30 does not "massively change the equation."


Portf Initial _Final __ CAGR _ Stdev
VFINX $100,000 $236,413 18.44% 15.26%
70/30 $100,000 $201,166 14.74% 11.51%

It's still up 101% vs 73% for fundrise. And std_dev is down as expected.

The rest is conjecture or maybe cherry-picking (but that's hard to avoid with such a short history). Maybe it will play out as you say, maybe not. But you do seem to trend toward overstating things (as shown above, not a "massive" change), so I take that into account.

-ERD50

That's a pretty big change in return in the peak bull market where stocks should outperform, and would make it massively outperform its VNQ index. And that's still more than 2x the standard deviation of real estate over 5 years in a bull market - The standard deviation for stock equities over a longer period of time is 25% vs 5% for real estate (~20% for large cap and >30% for small caps).

Regardless, for myself, fundrise is not my preferred vehicle for RRE. My preferred vehicle for RRE is direct ownership. I currently own 9 rental properties and am under contract to buy another and have ~18x more equity in my rentals than I do in Fundrise (and I have 12x more equity in stocks and 2x in bonds than I do fundrise). I brought up fundrise as an easy option for folks who don't want to own and manage their own rentals and/or want more geographic exposure and an example of what that market is turning into for investments for average joe. My own RE portfolio has averaged significantly higher returns over the last 5-6 years than the stock market, well more than double thanks to leverage.