Sleep at Home, but invest in Stock Market

[intercst]

http://tinyurl.com/8alzh

When Marti and Ray Jacobs sold the five-bedroom colonial house in Harrington Park, N.J., where they had lived since 1970, they made what looked like a typically impressive profit. They had paid $110,000 to have the house built and sold it in July for $900,000.

But the truth is that much of the gain came from simple price inflation, the same force that has made a gallon of milk more expensive today than it was three decades ago. The Jacobses also invested tens of thousands of dollars in a new master bathroom, with marble floors, a Jacuzzi bathtub and vanity cabinets.

Add it all up, and they ended up making an inflation-adjusted profit of less than 10 percent over the 35 years.

That return does not come close to the gains of the stock market over the same period. The Standard & Poor's 500-stock index has increased almost 200 percent since 1970, even after accounting for inflation.

</snip>

And that's in an area with extraordinary real estate returns.

intercst

 

[modhatter]

Good article. But I disagree in one respect. When it is your home that has gained so much value that you have been paying on forever and putting money into it along the way - what they say is probobly true. However if you leveraged your purchases say with $20,000 down on a $100,000 property and bought five properties. And at the end of this five year real estate Bull Market those five homes are now worth $350,000, you just made a whole lot of money on a $100,000 investment, and someone else was paying your mortgage and taxes for you all the while. That's tough to beat in the stock market.

 

[Danny]

Add it all up, and they ended up making an inflation-adjusted profit of less than 10 percent over the 35 years.

I might have missed it but was paying rent taken into account...

I owned and invested and it worked out well enough financially and was nice not to have a landlord...

 

[tryan]

To say it another way ... If market rents were pulled out of the stock returns then we'ld have an apples to apples comparison (I wonder who comes out ahead?!?!).

Omitting the benefit of having a roof over your head is comparing apples to oranges.

Comparing rentals to stocks will always be apples to oranges because of the w*rk/headaches involved. It's either in your blood or it isn't.

For example, I went out of town last weekend (unreachable by cell); came home to 9 frantic messages - 2 from the fire dept. Apparently the tenant "smelled something" and called the fire dept at 10pm. Taking no chances, the fire dept kills the power and the gas ... leaving a single mother with 2 babys in the dark - no fridge or AC - for 2 days and nights. I arrive at the unit see a rat nest of extension cords in the room with the "smell" ... unplug them and turn everything back on. No problem since. Point being, how does one compare incidents like this to something like stock volitility. ..To each, his own.

 

[Arif]

If we're comparing stocks to rentals it's like comparing any other asset class. The rate of return that I require for the rental/flip headache is FAR higher than the return I require in stocks. Just like you wouldn't expect treasury bonds to match the returns of the S&P.

BTW- I don't think 10.8% is that bad of a return. Is there another investment that let's you sleep over and use the toilet anytime you want with that rate of return?

 

[maddythebeagle]

Interesting article. I find it odd that they will pick this couple for comparison since they put a lot of "extra" stuff like a 100k remodel of their bedroom? I think the point is a good one, but as always these financial articles always like to add a bit of sensationalism.

An important part of my FIRE plan is having the mortgage paid off to free up cash flow.

 

[amt]

BTW- I don't think 10.8% is that bad of a return. Is there another investment that let's you sleep over and use the toilet anytime you want with that rate of return?

They are saying that as 10% inflation adjusted return for the entire 35-year period;  not an annual rate.  Annual rate will be someting like 0.28%.

 

[Arif]

They are saying that as 10% inflation adjusted return for the entire 35-year period; not an annual rate. Annual rate will be someting like 0.28%

I calculated that return assuming they put 22k down and made 800k (also assuming 100k in remodelling) 35 years later. Unless they were rich enough to pay cash then yeah it would be 10% total return. I don't think they paid cash for their house 35 years ago though.

 

[Andre1969]

Just plugging the numbers into an inflation calculator, $110K in 1970 comes out to $554,170 in 2005 dollars. So if they're selling for $900K, once you account for inflation, they've made a 62% profit. But then, once you factor in mortage interest payments, the remodeling, property taxes, etc over all those years, they really haven't made jack squat.

Still, it gave them a roof over their heads for 35 years, a tax write-off along the way, and they have something to show for it, versus just throwing away 35 years of money in rent.

 

[amt]

I calculated that return assuming they put 22k down and made 800k (also assuming 100k in remodelling)  35 years later. Unless they were rich enough to pay cash then yeah it would be 10% total return. I don't think they paid cash for their house 35 years ago though.

People often say that the return on housing is higher because they only made 5, 10 or 20% down, so their beginning investment is low, leading to higher return rate.  One point to keep in mind is that one's risk is higher with that leverage.  Someone could pay "50% down" for stocks with margin money for near-double the return rate ("24% minus half of margin interest rate" return?).  The margin interest payment  should be deductible, shouldn't it?  The risk of leveraging in housing should not be ignored.  Sure, there's return for it, but only at the expense of the risk.

 

[renferme]

So where did Marti and Ray move ?
If they moved to an area of the country with a modest cost of living, bought a 200,000 dollar home, they'd have $700,000 to live on.
4% of 700,000 = $28,000 per year, not too bad ! !

 

[Andre1969]

Yeah, but I think the article said they moved into an apartment where they're paying $4K per month! Now I don't know their whole life story, but that move strikes me as none too slick!

 

[maddythebeagle]

I dont think they would be happy in a modest home after the marble?

 

[azanon]

real estate has not passed stocks in the long term yet (such as 1970-now).

Was there someone here that though otherwise?

Stocks are the best passive long-term investment bar none. always have been, always will be.

 

[Danny]

real estate has not passed stocks in the long term yet (such as 1970-now).

Was there someone here that though otherwise?

Stocks are the best passive long-term investment bar none. always have been, always will be.

Has been in the past. But is Past Prologue to the Future Now? This is the question I've got rolling around in my mind about this stock market...

 

[Arif]

real estate has not passed stocks in the long term yet (such as 1970-now).

Was there someone here that though otherwise?

Stocks are the best passive long-term investment bar none. always have been, always will be.

Are you talking homes that you reside in or rental property? My rentals and flips have FAR outpaced any stock index that you care to measure it against. After saying that I've never had a stock call me in the middle of the night that the heat shut off and it's 30 degrees in the house. More risk= more reward.

 

[moghopper]

After saying that I've never had a stock call me in the middle of the night that the heat shut off and it's 30 degrees in the house.  More risk= more reward.

It isn't about risk or reward there, is it? You've clearly shown that your RE holdings are not a "passive" investment - and in addition, you've inferred that there is some "work" component involved. Therefore, some part of your return is payment for the work done to your properties.

 

[justin]

The cost to own a larger house as an investment that you live in is pretty large. I figure between extra homeowner's insurance, property taxes, maintenance, cleaning, and utilities on a larger house, you're looking at a carrying cost of 3-5% of the value of the house. That doesn't include the mortgage or opportunity cost of the money used to purchase a larger house. I guess I'm saying the same thing the article said.

You do get the benefit of living in a larger/nicer house however.