Housing: The Best Investment In History (On Paper)
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- Опубликовано: 21 июн 2018
- After my series on investing in a home came out, the comments were flooded with lots of real estate lovers from Toronto and Vancouver who've turned their home into a great investment. I knew I had to address their comments in another video about why they are right - housing is the best investment in history! But there are some important factors to consider as to why this is only true on paper.
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Referenced in this video:
The Case For Renting A Home Part 1 | Common Sense Investing - • The Case For Renting A...
The Case For Renting A Home Part 2 - • The Case For Renting A...
The Rate of Return on Everything, 1870-2015 - www.frbsf.org/economic-resear...
Housing: The Best Investment in History (On Paper) - www.pwlcapital.com/resources/...
Credit Suisse Global Investment Returns Yearbook 2018 - www.credit-suisse.com/media/a...
Real Estate Betas and the Implications for Asset Allocation - joi.iijournals.com/content/27/...
#realestate #investing #investingcanada
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Is real estate your favourite investment? Tell me why here.
Ben Felix euqueroaermanentre opalistlice3temstankyoi
Jupiter Eye very interesting perspective. The real challenge is for your to repeat your success from here.
All good points. When you refer to the market changing all of the time, I think you are referring to market efficiency. The market prices should adjust based on all of the types of information that you pint out. I do not know how efficient the real estate markets are, but you still have to wonder who is on the other side of each transaction. What do you know that they don't? Is your information better, or are they taking advantage of you?
I do not worry at all about AI analysis in real estate. Same as the stock market. Winning as an investor does not require absolute skill/knowledge/predictive power. It requires *relative* skill/knowledge/predictive power. If you are the only person with AI analytics to make decisions then maybe you have an advantage. As soon as anyone else has the same thing, you are back to square 1. Your relative skill is 0 and you will only win if you get lucky.
AI Developer here. Welp by 'AI' I am a mathematical modeler that is employed to model speech, vision, and time series. I also am versed in probability theory, statistics, and other forms of data modeling and have used these skills to create models that run in enterprise software. Lately a lot of these models are being classified as AI so...yeah....
Sites like redfin and zillow are open about their use of mathematical models in pricing real estate. In many cases these models are regressions of known prices and real estate sales, as well as predictions based on growing data sources. If you have ever browsed one of their interactive maps, you may have seen these prices. However, if you have any experience with house selling, you will know that these prices are not so accurate.
There is a reason. Housing markets are not the most efficient. While you can model trends, you do so with a large degree of uncertainty. Furthermore, while real estate backed financial products are sold on financial exchanges, actual real estate is not (at least not to my knowledge). This limits the available of data to a computer based model. Can a computer, for example, understand the emotions of a prospective buyer and/or seller in the moments leading up to a deal? Can a computer develop a relationship with a client, and/or network of clients, that allow them to obtain prices that are under or over market value? Certainly computers and AI can be a part of the process, but it is such a tall order for them to completely automate the process that I think it will take some time.
It should be stated. There is a long debate about what exactly AI is. There is a saying, "The question of whether computers can think is like the question of whether submarines can swim.". In my experience, the kind of computations a computer can perform are vastly different than what computers are capable of. Case in point. It is nothing for a computer to do simple addition and division of large numaners, but humans find this impossible. So, while we can imagine that computers could think and perform computation in a manner similiar to humans, that is mostly a fantasy...for now. And I think that we are so much better that this is the case
Also, as Ben pointed out, AI development and implementation also incurs costs. Try as you may. You may never escape the market.
@@BenFelixCSI I entirely agree with your comment. Jupiter Eye's return is outstanding for that period. However real estate has some other risks: it can be illiquid (oversupply) with weak demand. One significant risk you touched on a little but makes a big big difference on your return is interest rates. Higher interest rates mean less return and potential cash coverage problems. Diversification across markets is probably even more important in real estate than equities. Equities are more liquid than real estate. The difference in the analogy in comparing real estate investing to equity investment is that the real estate investing is leverage investing (i.e. mortgage) and the equity investment is not unless using margin/borrowing to buy. Any time you use leverage your gains & losses are bigger and there is greater risk.
Please keep making videos. There is so much misinformation on personal finance and investing on RUclips and the web in general. You are a beacon of truth and light in a sea of darkness. I tell everyone I know about your videos. Keep up the good work.
Thank you, Mark! I really appreciate your comment. Thanks for telling your friends about the videos!
I’ve enjoyed your videos thus far but this is a bit misleading. Rental income requires finding good deals where the projected rent is between 1.5-2% of the Home’s ARV. Ignoring this figure will of course give you negative results.
@Steven Staley Indeed, it is critical in real estate to find foreclosed deals or from people who need cash quickly to achieve over-market price, which is impossible to do in stocks.
I’m a lawyer whose practice includes evictions and real estate law. Real estate investment requires a lot more work than most people think. Unless you value your time at zero, you should consider the cost of your time in managing and maintaining the property in evaluating the rate of return.
And many states (like MA) make evictions almost impossible-you basically provide free housing and must pay the taxes and utilities while your tenant is suing you-paid for by the government (your taxes). If you plan to invest, investigate everything
Even if you value your time at minimum wage (since you could work at McDonald’s instead of spending heaps of time to buy, maintain and manage a rental property), that eats into the expected returns.
This is the main reason I have no interest in being a landlord in any form. Some of my friends boast about the potential returns one would expect to see from renting out a property, but all I think about is the headache of having to manage it.
I prefer simplicity. And index funds give me that. Thanks John Bogle!
@@juukame exactly what i have been thinking. Thanks
@@juukame your time is probably valuable. I got into real estate when I made 34k a year, my time was better spent managing
Hi Ben, just want to say I love your videos. They're very informative and easy to understand. I learned a lot. I'm looking forward to watch more.
Again ... great video. Don’t stop making this videos - thorough with sources. I’m always looking forward to them.
Good to know you enjoy the videos, kbeestube!
After adjustment for inflation as well as cost of ownership, my house in Dallas, TX, which I owned for 27 years, generated an Internal Rate of Return of 5.1 percent. I could have done better with a total market index fund.
I live in an active adult - retirement - community in central Texas. I have been here for 13 years. If I were to sell my house today, according to the real estate folks, I would have a nominal gain of $77,654. After adjustment for inflation, plus selling expenses, the real gain would be $29,124. After factoring in the cost of ownership, i.e. property taxes, HOA dues, maintenance, etc., I would have a real loss of $43,444.
The real estate people never tell homeowners the true cost of home ownership because most of them don’t know it. And most homeowners don’t either.
You're a good man Paul. Thanks
Sad part it's most people can't do the math to figure it out
This is such a great follow-up to your previous videos Ben.
Thanks Carlos!
Just another person saying I am enjoying your videos, Thank you! They are extremely eye opening and I am learning alot, Thanks again!
Thanks!
Extremely valuable information! Keep up the good work! 👍
Thanks!
Added this video to my favorites, so good. It puts in perspective a lot of the discourse regarding buying real estate as investment
Love your videos brother, keep up the great work!!!
Thank you, Daniel!
I put most of my money in index funds, thanks to your advice! Thanks!
Thanks for the video Ben
Great video. I just started watching your videos and will be sharing with my friends who always disagree with me on things like real estate. "Real estate always goes up...I can sell this house for X in 5 years."(Always a BS justification to buy too much house.)
I hope your investment in making RUclips videos pays off for you.
Great video I totally agree. One thing that people often don't think about is how much time is required to self manage a rental property. From buying your property to the time you spend to find your first tenants you are looking at 40 to 60 hours of work. Compared to opening an account and buying a diversified portfolio of index funds which you can do in 2 hours. Like Warren Buffett said the best investment is investing in yourself. I prefer to use the time I save to improve my skills and increase my business.
Another point is the stress level of owning a rental property.
I'm a property manager, some of my clients hired me because they were self managing their rental property and they ended with bad tenants.
They hired me to get rid of their bad tenants.
The bottom line is I'm a property manager and I will never invest in rental properties unless I can buy a large apartment building.
Your videos are fantastic. Great points on real-estate. The one thing i'd also consider though, is that real-estate is generally considerably leveraged, which plays a big part of the annualized return. Real estate also provides a perception of it being less risk, in the sense that you don't necessarily see prices fluctuations on a daily basis, unlike the stock market, where the panic button is often an arms length away.
It's not just the perception of risk - you can get margin called pretty easily with stocks. With real estate, you're fine so long as you can make payments. Even if your DSCR is as law as 1.50, a 30% drop in income will STILL let you make your loan payments!
Great explanation. Stepping away from the empirical data you presented so well, I think just looking at the current market should make people think twice about investing in real estate.
We're currently in one of the biggest bull markets in history preceded by a huge crash caused by issues with lending practices. The problems which caused 2008 are still here but people seem to have short memory. Pair that with record low interest rates which are bound to rise (and already have in some places) I think that people rushing to buy real estate right now are doing so from bandwagon mentality, rather than it actually being a sound investment. More so applies to individual investors rather than institutions.
Straight facts. Keep up the good work.
Absolutely agree with the analysis
Great video as always 👍. Plus i confirm the numbers are similar on my own property (inflation-adjusted price appreciation and annual management cost).
Great explanation Thanks 👍👍
Thanks Mr. Felix great info. I love realstate, rentals.. i must say knowing construction has kept maintenance cost down.. it has worked for me for 20 years. Again thanks.
Thanks Guillermo. I agree if you can do your own work, the overall cost of maintenance declines. That statement does however depend on the opportunity cost of your time.
You can also invest in real estate funds that will ensure enough diversity. And we're starting to see tokenisation of real estate.
Great video as always!
Thanks ZenoxDemin!
Love the video Ben ! I'm in this situation at the moment deciding whether i keep our second property and rent it out or sell it and invest the money , I wasn't sure of what is the better option for us but your video made things clearer for us. Thanks for all the videos Ben they''ve been a great help for us.
Excellent! Comments like this make creating these videos feel very much worthwhile.
If it is helping you on your daily cash flow then I would say keep it until such time the market price would mature enough to be sellable depending whether you'll have another basket to invest in.
Thanks for your in depth analysis !
Just wondering if you could put up some “example solution ” video for people missed the 2019 market up run ... it’s a MAJOR issue since most people influenced investors wit their so call “ defensive “ tactics this year... Wht a pity
Nope real estate is not my favourite type of investment. But owning a home is both financially and emotionally my favourite way of living.
Finally evidence-based information. My faith in RUclips is restored. Ben keep going!
Real estate also requires you to learn the game (and sometimes/often lose money too in the process) With index fund, you just pick one that Buffet tells you and forget about it.
thank you for your time and effort. i am living in ottawa and a few friends of mine invested in real estate... with so many things to do (fixing, maintaining, complaints, etc). Better to be a handy man to such chores. i only invest in TESLA stock, much easier...
I like these videos, because they reinforce my desire to not want to do anything else other than continuing to keep it simple with index funds in my portfolio :)
Same! We are brothers from different mothers.
Interesting video. Do you have a video on how leverage affects this? As real estate is something that people tend to be comfortable leveraging into as opposed to stocks where most people tend to just put spare cash.
The illiquidity of real estate hides the risk because you can't realize a loss until sale or default, while with margin you see exactly how far things must fall to lose. It's a slow burn high-risk versus immediate risk
Does the research include multi-family apartments and developing countries? Thanks for the well-researched video!
Thanks again for the great vid. What about a global index fund in real estate? Will this not counter the disadvantages you mentioned, e.g. the difficulty for a private person to realise a spread over more countries and doing the service management yourself?
REITs (as they are called in Canada - Real Estate Investment Trust) are a potentially good solution to the issues that I mentioned. The problem is that REITs tend to behave more like stocks than hard-asset real estate does, so the lower volatility and low correlation with stocks is lost with a REIT.
I like property, probably because that is what we have been though as kids to be a good foundation.
Well that may be true or not, I think the key here it just to have a balanced portfolio...
Not to much of one or the other to mitigate the risk...
That seems to be the underlying message I get from watching all your video's
Interesting points here Ben. Two counters. 1) Can't investors hire, for a fee, a company to handle the down and dirty tasks of owning real estate (maintenance, bad tenants); if these fees are low enough, could investors enjoy real estate's strong performance? 2) What about services like FundRise that essentially allow average Joe's to buy "fractional shares" of real estate projects that buy properties and rent it out. Any idea whether this, or some new financial product, will eventually give investors access to the strong performance of this asset class?
Love this guy.
Ben, what about Real Estate in general outside of housing? IE commercial, multifamily, etc. I'd also love to hear about direct real estate investing vs REITs. I've heard you talk about this in the context of housing, but not real estate overall.
I've heard the argument that real estate can be considered a good deleveraging hedge in the situation of a catastrophic event when everything else would be de or revalued. In this way you can still benefit from renting your property, despite the loss of equity in your home, since it can still be used as a productive asset. What are your views on this kind of scenario when the financial system would become impaired?
Hi Ben, can you do a video on REITs please? I'd love to get your insight.
Me too
Hi Patters and Charlotte - great idea! I will add that to my topic list as a follow up to this video.
@@BenFelixCSI Also, if you could make one comparing REITs vs Renting out Apartment buildings. I know, in theory REITs win in the infinite long run. But, I would like you tackle the sticky subject of comparing REITs to (House, multi-unit or Apartment rentals) considering the especially high PEs we're currently at.
I was just about to type this, then I saw you beat me to it!!
Me too..reit vs owning and renting out!
Nice video, what do you think about REITS?
Excellent!
Great video! Totally makes sense. However, on house, you can get great leverage thanks to the mortgage. If you are putting 20% down, you can get 5x leverage! Doesn't this benefit of big leverage outweight the drawbacks you mentioned?
Brilliant.
Hi Ben, great video, keep it coming.
If I were to nit-pick, your calculation assumes picking the average property with average rent, pretty much picking a house randomly in a population with the goods and the bads, but hasn't account for the dispersion in rents and prices. In reality, there are many factors that a property investor can have control over, but not available in shares For example, one can choose an area with higher rental yield, or increase its value by renovations or modification, or subdivide a block and build more properties, or buy commercial properties, or other various ways. I don't mean index funds and shares are bad, I personally own shares, ETFs and also properties. I just think sometime it's difficult to compare two different asset classes by only looking their average return but without mentioning on the variance in rent and price, control, value adding and leverage. Having said that, most of the property investors would simply buy, rent, hold and sell without getting too complicated. I would love to hear your thoughts.
Good points. I do think that we could make a similar argument for stocks though. An investor could seek out higher yields or more speculative stocks. This does not guarantee a better outcome. It would be similar for real estate. I agree that the ability to develop properties could have a substantial payoff, but there is a corresponding risk associated with it. In terms of increasing risk adjusted returns I think that many of the things that you mentioned are more of an illusion of control than they are actual increased control. You may have more flexibility to customize the asset, but you do not have more control over your outcome.
Thank you for the video. Sorry you have to deal with so many trolls online. It is sad how many miserable people there are in this world. Keep up the good work!
Thanks! The trolls aren't so bad. Most of them just need a hug.
@@BenFelixCSI I'd take a hug from Ben. But I might get hard.
In the US you get a lot of tax benefits from investing in rental property, which can make it worth it even if your direct returns are equal to or slightly below what you'd get from an aggressive equity portfolio.
Dealing with destructive tenants and lazy property management companies isn’t going worth my time & effort.
I love this guy's voice.
The white Barack Obama, some say
I reached a similar conclusion to this, but what tilted me to continue to pursue property investing anyway (along side stocks) is that the financial sector is biased in favour of housing with regard to leverage. If I want to use leverage to amplify my returns, it seems property investing is the only way banks are willing to allow me to so. While margin accounts exist, in NZ and Australia leverage to buy stocks is significantly more expensive. Also banks typically lend you less when you use stocks and bonds as collateral, and will typically lend more when you use housing as collateral.
Hello, just wondering about your numbers,
Did you remove inflation from your index fund option at minute 6:47? Just wondering if you are calculating a 9.29% rate of return from your index fund? Also just wondering why you decided to keep the monthly interest payment the same- doesn't rent go up by 1.5-2% each year compounding?
Sorry if this is nitpicking, great video otherwise. Really hits home to show that the rent vs buying vs investing are all so different from house to house on a small scale. Soooo many factors to housing that it can make your head spin.
The big advantage of a rental property is a psychological one: if u manage to get some cashflow or slightly negative cf and prices drop by 30% to 50% you need not panic and sit it out, but if you check your stocks in such dire times, try sittin tight ... most can't handle the stress, especially when it comes to money in the hundrets of thousands, while you are no millionaire...
I would like to request you do a talk on how real estate investing can reconcile with all the images that come up when you type in 'rotting houses.' Seems like someone should do something, but who and what?
Hi Ben,
I invest in the in RE in the Ottawa region, mostly on the Quebec side. I do agree that real estate isn’t as passive at index fun investing but I think the returns are there and make it worth it. I typically don’t invest in a property unless I know I can make at least a 10% return in cashflow alone ( after all expenses including repairs, vacancies and cap ex) when considering the mortgage being paid down the returns are in the +20% range. And then there’s appreciation which I don’t bank on. But I think we can all agree that over time it will appreciate.
Plus, there are many strategies... the BRRRR is a great one. Stands for buy, reno, rent, refinance and repeat. In some cases if you buy right you can renovate the property and refinance it to get your entire down payment back plus renovation costs and the property still cash flows. In this case you’re returns are astronomical!
You're right about all of this. The challenge, though, is that not everyone can do it. And I don't mean that not everyone has the skills (which are necessary), but not everyone can be a winner in every real estate transaction. When you buy a 10% cash flow property, someone has sold it to you for cheap. They lost on the trade. I think that this can be summed up as an unreliable outcome for the average investor, unless you are certain that you are the 'smart' one in the transaction. If it works, it works! It is certainly not risk-free though.
@@BenFelixCSI Thanks for the reply Ben. This is a very interesting way to look at it and I never thought of it that way - "When you buy a 10% cash flow property, someone has sold it to you for cheap. They lost on the trade" I guess it's similar to value investing where it takes some foot work to find the "under valued" stocks.
Anyways, RE is still by far my favourite investment. in 6 years I went from 0 to 10 doors and can now cover all of my living expenses with my rental income. I still have a wage so I am "recycling" my cash flow into index funds to diversify. I don't think I could be financially independent from index fund investing that quickly with my work income...
@@mattBelzile If you still owe those 10 doors, regardless of positive cash flow, are you really at the stage of independence?
Real estate offers several benefits that, if taken advantage of, can provide excess returns for an average investor over what could be achieved by index fund investing. Specific market and property knowledge, opportunities for adding value thru modification of the asset, and control over rents, features, tenant selection, etc. are advantages that can’t be matched in the much more efficient equities market.
Hey Ben, fan of your videos. Can you a similar calculation with a house strictly for airbnb which has a higher return then traditional renting. Compare this to index stocks please. Thanks
how many nights a month can BNB keep a home rented?
Airbnb won’t last forever. A lot of places are outlawing it.
Because rules have never been broken before.
I do love your point on this and the way you explain it is very easy to follow! What about the point of being able to leverage your money in real estate? If you have 1 million to invest into either real estate or stocks, lets say a 5% return on your money on both ends. With real estate you can turn that 1 million into 3 million from the bank!
It doesn’t seem that you have followed it then.
What your describing (multiplying your million) is why the returns for the global real estate average ever approach that of stocks. It’s already baked in to the analysis. He didn’t buy the property outright, he financed all but 20%.
Remember that real estate was only modeled as beating inflation by 1%. Stocks far out perform that. So how does the real estate come close overall? Because of the rent coupled with the multiplying factor you described.
I bought an apartment to live in in 2009 but decided two years later to move to another city to study. I have had the apartment rented out for the duration of the time since then and now I plan to sell it. I have been able to pay of 30% of the mortgage. I had a couple of years that I only payed the interest of the loan but now I instead pay of the loan with money I get from other sources.
The apartment is still valued the same as it was when I bought it even though the housing company has invested in more modern heating system for the apartments and better insulating windows. The rent prices in that area has not moved anywhere.
This apartment is in a small town that has only seen population decrease in the last ten years. The apartment is also a bit outside from the town center.
Just out of interest I checked how the prices have increased in Helsinki during the same period. The apartments had increased in value about 45-70%. The price of renting has also exploded during that time in Helsinki.
Property is my favourite BUT I recognise it's because that's my interest and my work. As my dad put it, "You don't want to be a landlord because landlords have to be able to fix toilets in the middle of the night!" (Yes it was a metaphor as well as a reality). Turns out that's what I'm good at. My partner and I are also good at renovating frugally for increased rent. The other big reason is that in my country there is no capital gains tax on long term investment property. (If you can call 5 years long term!) With no tax on the capital gain, no limit on taxable deductions for finance expenses, and tax credits for offsetting against personal income it's hard to beat property in New Zealand.
BUT for anyone without the hands-on ability or desire I say don't do it. The headaches and apparently endless costs will do you in.
Cassette Walkman my friend also loves real estate so it works out great for him. I’ve been thinking about getting into real estate but this video, plus the fact I don’t like fixing toilets, has convinced me otherwise. So thanks!
Landlording is stressful. The slight gain does not justify the HEALTH risk.
Ben is the man.
you forgot to mention that you also have to pay 3-5% to the agent when you sell your property. that's a lot of money.
royalmontpark I think he did when he mentioned “closing costs”. At least that’s how I understood it.
Was the return on real estate before or after expenses? Seems so much easier to just buy a total stock index fund and go live your life. Enjoyed the video.
Thanks Roy. The real estate return was capital appreciation + *net* rental yield, so after expenses. I agree with you on the stock index fund. If the historical real estate return had blown stocks out of the water it would be a different story, but it's been pretty close.
There is still arguably something like a net rental income when buying for yourself to live in - it can save on rent you may have otherwise have needed to spend. I think the term is imputed rent. There are other ways to live of course, such as with relatives.
I like my S&P 500 index fund, but everyone else in Australia thinks it’s better to buy a house.
Ah the Aussie property obsession!
@@AussieMoneyMan it's endemic in the Anglo sphere, unfortunately.
@@kotare86 The Sinosphere too. Cultural obsession.
With you 100%
The good thing is that what matters is whether you are right or not, not whether they are right or not. If you are right, you will be rewarded, and if you aren't at least it'll be your own fault.
I definitelty agree with your premise when looking at buying properties as pure investments, but when you’re paying x amount for rent regardless and it’s your primary residence, it’s hard to compete with that money going toward capital.
That is false. I explained why in my videos on renting.
Ben Felix Thanks for the reply. Do you have a link to those videos?
@@devonpeters5655 ruclips.net/video/UuAZ4M9f_sM/видео.html & ruclips.net/video/xprFz1CJu6E/видео.html
What I like about real este is that the rentals are more stable than the stock market returns. I may be wrong in this, but I have the idea that stock prices have future growth already charged at their prices but that's not the case with housing.
Because people buy houses for living there and not just as an investment. So houses in a zone that is not very well developed but it's going to get better in the future are priced lower than houses in zones already developed.
Your first vid was about buying vs renting your personal home. You've now pivoted the discussion to buying investment properties unrelated to your personal home. While this is an interesting topic, it is a very different topic than buying vs renting your personal home (which should be purchased unless you want to pay rent forever).
Yes. Those are two different videos. I agree.
The lower standard deviations are the KEY point. You can take out 70% LTV loans to double your expected returns without neccesarily increasing the risk you take on.
Agree with you entirely. It's common knowledge how important location is with regards property so buying in those high yielding areas is not really feasible for most investors together with the other issues you raise. However I do believe REITS can be a good diversifier without all the attendant heartache of managing your own properties. Your views?
REITs are fine as part of an overall portfolio. I don’t know if I would go much higher than market cap weight though.
WOW what a video :D
If you considered the vacancy aspect of the ownership, what about the crashs aspect of the stock?
Ben I have one more for you sorry to keep asking but what about commodities in a mutual fund of course thanks
The illusion of leverage will disappear if you look at risk adjusted return instead. ( Leverage magnified returns, but with a greater risk )
Outstanding videos!
successful real estate investor here. I really enjoy your videos and have learned so much from you. In this video however, i feel you are taking a less rational approach, which i hope you don't mind me saying. Ill try to explain. Using average home prices and general data is not a strong approach when discussing real estate investment from a landlords perspective. Landlords typically target cheaper houses, and successful real estate investors are able to buy houses at deep discounts compared to real values. furthermore, real estate allows for creative additions to the house that will increase the performance of the property at a very small price, such as adding a bedroom, to bring in more rent. Forcing appreciation by improving the asset or buying at discounts is the best tool of the investor. But assuming rents is the main target, every city is different and so are the suburbs within and sometimes street by street as well. My houses in Indianapolis have gross rents of 20% and net cashflows of 10-12% after all tasks are outsourced (have 7 houses there and all are in this range). Furthermore, they have severely increased in value since i bought them. My Norwegian and Australian properties have given me returns higher than that. The power in real estate is in the creative aspect that the asset class offers, unlike stocks that offers no influence for the investor. The downside is that it takes time to get good, and its more time consuming than stocks. Less skilled investors can screw up more easily as more responsibly is on them. Just my two cents. love your work and dedication so hope this inspires you to take a new look at real estate or challenge your own approach here at least.
Hey Morgan.... love to talk to you about your success and approach. I have listened to most of Ben and literally hundreds of hours of podcasts getting educated to have my boys financially successful with real estate and investing. 6 solid rental properties and you are set. feel free to reach out at tom@tmsi.ca.
Was that 10-12% return on the deposit or over all value of the property. If it's on the value of the property that's absolutly incredible!
100k house 10-12k yearly income after costs.
Excellent comment. Real estate investor/agent myself. Just to add to your point, Ben disregards the ability to use unique financing methods (such as a seller carried second mortgage) to increase your cash on cash returns. Ben also makes no mention about flipping properties or owning properties in areas with positive monthly cashflow. The idea is to absolutely not pay the “market average” price lol
Great point about having more control, thanks Morgan
I guess you may need to spend time on that, which probably should be a salary and should better not be included as an investment return, to make thinks comparable.
Interesting how everyone defends their point of view to the death. Personally I do both, I own stocks but also have two investment properties for balance.
Is that balanced though? Isn't property highly correlated with the stock market generally?
Hey Ben,
@6:23
I wonder what the after-tax returns of both stocks and real estate look like given the favored tax treatment of real estate
(like offsetting rent with depreciation for income tax purpose and the 1031 exchange)
Agree, a lot of the benefits of RE are in the favorable tax strategies. However, it’s a very different type of investment. It’s an active investment that requires constant work and participation, versus the more sideline approach of opening up a Vanguard S&P 500 index fund account.
But the real estate returns are leverage, the 7% of 300K is not the same as 7% of 50K
Yes, but the same can be said with stocks. We can achieve a 1:8 leverage with futures, margins, or LEAPs with interest rates less than 3%. The biggest different between leveraging in stocks and real estates is risk exposure.
But leverage works both ways, it accelerates your losses to. If someone tells me I can increase my return by increasing my risk, that is usually not a good idea.
That's an important point. If I own leveraged real estate scattered across the US (through mortgages), is the risk higher or lower than a 100% unleveraged global equity ETF?
@@henryhomes It depends. If the bank can demand more collateral if house prices drop beyond your initial purchase price (you have negative equity in the property), then it is very risky. In that case a 100% unleveraged global ETF would be much safer as even if stocks drop significantly, nobody is forcing you to sell or put up more collateral... you just ride it out (or ideally buy more at lower prices). Generally anytime you bring debt into the equation your risk profile goes up (how much depends on the terms of the loan).
I wish you could be a guest on the “Bigger Pockets” podcast!
That would be interesting. Not sure how the conversation would go.
@@BenFelixCSI why not find out?
That would be awesome
And if it is a condo, it has extra maintenance costs! Therefore, I'm not into holding real state as investment (I'd sell as soon as possible). At least in my area, real estate does not have much appreciation going on (price is already steady high, for years)
I'm not sure I quite understood the % annual average return calculation you presented when comparing the two asset classes. I could be wrong, but you seemed to present the leveraged return on the index fund vs the leveraged return from real estate. Most people don't buy stocks and bonds with leverage, but they do with housing. Obviously, you could buy stocks with margin, but since stocks are more volatile than real estate, you could end up losing more than what the market drops proportionally. If you don't mind, can you please clarify if money leveraged in real estate can beat the stock market, provided the same investment over a 25 yr period (or 40 yr which is the average mortgage length)?
6:38 still even if the unit can't be rented year around the property has still increased in value. So its like you not only have the equivalent of dividends on this asset class but also capital gain appreciation
In a region of Italy we are having a lot of problems cause by floods. I cannot imagine the issue homeowners will have to face from now on. This mental load cuts off some of the benefits of real estate investments
How does Investing in AIF (RE) compared to Index funds, that would be a better comparison then would it not ?
Couldnt you borrow against and leverage your rental units.Rinse and repeat.Wouldn’t that be the main advantage?
While it is true that we are in a housing bubble, please bear in mind that in most cases investors only fork up 10 to 20 percent of the house value to enjoy the 7 percent return. If you do your math it is still viable if you go in at the bottom of a down trend. But stocks have the benefit of liquidation at a click of a mouse unlike a property, hence buy only when there is blood on the street or price drop by a big margin.
Leverage definitely cranks up expected returns, but it does also increase risk. No doubt a consistently leveraged real estate investor will beat stocks over the long-term, on average. But they may also lose all of their capital in a down turn.
@@wotchadave interesting, but you'll experience the same loss in equities?
When leverage is involved you can lose more than all of your capital
In my country everybody invests in the real estate market because the gross yield in Bucharest is around 6%. How much of margin of safety is enough to cover the idiosyncratic and concentration risks of investing in physical property? Another argument that I've heard is that real estate can be useful during a deleveraging as an income producing asset.
real estate market average vs stock average market is likely to be similar, and due to the reasons explained, including diversification and passive approach etf's are likely a better investment. However, if you're looking to outperform the market I think real estate is better to the average person. is as it is more likely that a average person has the skilset to do better on buying bellow market value real estate than stocks.
What would happen if you introduced housing that worked like a self-funding but non-profit public corporation on the market?
You made a lot of points about how buying real estate is full of headache, and how one property is very "undiversified." All of those would be overcome by buying a REIT, right? I'd love to see you analyze stocks vs a (hypothetical) REIT going far back in time.
Yes, I will do a video on REITs. It's coming up in the next few months.
Ben, you’ve likely seen this by now, but there are now financial products where you can buy fractions of actual homes as an investment! Comparing the risks of this to owning a REIT index fund leaves one wondering why such a product exists.
In one of your videos you said you didn't think you should own junk bond funds what about reit index funds and international bond funds thanks and great video
REITs are fine. I include them in small amounts in portfolios. New research suggests that they may not add much in terms of diversification.
International bond funds are fine but I think it's important for them to be currency hedged. Bonds are primarily a risk management asset class. Unhedged currency exposure can make bonds very volatile.
Ben Felix thanks keep up the great videos there very educational
Hey Ben, I was just wondering if you'd happen to have all the money to buy your investment property without financing (let's say the 378k including down payment + land transfer taxes + legal fees, etc) you wouldn't have as much of a monthly cost... you would then get that estimated 7.29% annual return right from the beginning. In this scenario, would you consider it is worth to dispose of this amount of money to buy a rental property as opposed to pursue the same return with index funds? Is this a good investment idea if you're only looking for passive income? Thanks and keep up the good work. I really like your channel.
Leverage actually makes the real estate investment more attractive. The more leverage the better. You are putting up less of your own money. From a cash flow perspective you might not be as well off due to mortgage payments but your total return would be expected to be better.
What about the benefits of debt leverage for the purchase of real estate? Does the comparison still hold up if we compare total returns on just the initial down payment scenario?
Just what I was wondering
would you recommend Canadian investors stick to Canadian ETFs such as vfv.to as opposed to it's us version voo?
It depends on the account type. In an RRSP you are better off with VOO because there is no foreign withholding tax. In a taxable account VFV is probably better because you won’t pay foreign exchange fees and the foreign withholding tax is recoverable. I have a video coming out on this soon.
Ben Felix I noticed on VOO vs VFV that the yield difference is the same amount the IRS would charge you so does that really matter then?
They are tracking slightly different indexes so that number could change. Over the long-term and with a large sum of money invested you are probably better off holding a US listed ETF of US stocks in your RRSP to avoid the withholding tax.
How do you make an apples to apples comparisson, when the ROIC is a lot higher from housing due to the debt financing? In Denmark, 80% of housing can be bought w. 0.5% bond issued financing, which makes a 50K investment an effective 250K buy.
Then ROIC with 7% would be 35% on the 50K?
I would only invest in real estate, a primary residence, after you are able to easily max your RRSP and TFSA every year since it your next available tax benefit in Canada but not at current prices.
I agree with this thinking.
That's my strategy as well.
Seems like a poor strategy to me. You have to pay to live somewhere and all the gain in a primary residence is tax-free and leveraged at the lowest possible cost with a long-term mortgage. Very few people are disciplined enough to invest the difference between costs of ownership and renting, if there are differences, and these differences tend to decline over time as rents rise.
ben is the goat
Any opinions on the current increases? I've read that some people believe this increase was caused by criminals laundering money in canada housing markets.
Just curious, did you forget to factor in education taxes in your Ottawa scenario?
If you buy some under valued properties with the average market rents, in this case, you will make more than the index fund.
If you buy some under valued stock, you will make more than index funds too.