2009-2019 real estate versus passive stock fund performance

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Submitted by Coronita on December 20, 2019 - 1:14am

It's close to the end of the year, and I'm doing a reflection of my personal finances. Growing up, I always remember hearing my parents always talk about how the stock market returns were better than real estate returns, how buying rental properties were a PITA, how capital gains from stock market and index funds were much better for them than real estate. And for them, that probably was the case.

But I'm looking at my own portfolio, and I'm not so sure about that.

From one of my passive Vanguard account that for practical purposes was money just parked there with a small percentage of drip investing, the average rate of return from 2009 to 2019 was about 7.1%. The initial balance basically doubled in about 10 years. This was a mixture of large cap,mid cap,small cap, international index funds from vanguard and and some bonds and short term cash.

vanguardvanguard

During this period, I also bought a condo in San Diego for roughly $130k and it sold for about $300k 9 years later, less 10% in commission and fees, or $270k net. So capital gains alone was about $140k during 9 years. In addition, the property generated roughly $60k net rent income during those 9 years. So that initial $130k investment generated an additional $200k, roughly.

Plus, there were many more tax advantages for the rental property. Most of the rental income and capital gains was deferred and reinvested without much of a tax burden. Contrast that with the index fund basket, where any sort of reinvestment would subject the sold amount to capital gains taxes.

I think my parents were wrong. Real estate produced better results, at least for me. That, or I went too conservative for my passive index fund basket mix (damnit, oh well can't do much about it now). One thing though, the index fund basket, was more or less autopilot, no intervention needed. Managing the property, was slightly more hands on. Plus the real estate windfall from the Great Recession is probably that 1 hit, one time lifetime event. I doubt it can be repeated for a long time. So I don't know.

10 years goes by really fast. Life is short.

Submitted by Coronita on December 20, 2019 - 1:35am.

The other sucky part is this. If the average rate of return for the vanguard acount was 5.1%, the gain would have been roughly $143k, instead of $222k. And to reach $222k would have taken closer to 14 years instead of 10. That sucks. Maybe me wonder how much better things might have been if I had been slightly more aggressive. Invest well, my friends.

Submitted by Hobie on December 20, 2019 - 5:08am.

Nice analysis flu! This kind of discussion/analysis should be part of every high school students coursework. Real world investing and financial decision making. Heck, they only touched on this in my college classes ... and I was a business major.

As you are aware, lots of people can not deal with the landlord part of the real estate investing so RE is not for everyone... ok maybe a REIT ;)

Submitted by Coronita on December 20, 2019 - 8:51am.

Hobie wrote:
Nice analysis flu! This kind of discussion/analysis should be part of every high school students coursework. Real world investing and financial decision making. Heck, they only touched on this in my college classes ... and I was a business major.

As you are aware, lots of people can not deal with the landlord part of the real estate investing so RE is not for everyone... ok maybe a REIT ;)

I agree. But at the same time, I also think the financial/money management industry have been perpetuating a lie. The stock market isn't that great for the non lazy. and also 401k/IRAs are tax magnet that probably well disciplined people dont need. See my other thread.

The other thing is, what will the next 10 years look like?
It's not cash, that's definite losing proposition. For real estate, at least in SD, appreciation will probably be flat. So you'll need to primarily count on cash flow. Maybe stock will be the best option for the next 10 years? Don't know.

Submitted by svelte on December 21, 2019 - 10:18am.

flu wrote:

10 years goes by really fast. Life is short.

That's why I keep my life really simple. More time for things I enjoy.

Also a reason I'm not a landlord - I watched my dad do it and it was such a time sink and frustration in his life. I know here in SoCal that is how you can really build wealth, but I cherish my free time.

Also, the real estate route is promising here in SoCal, but in most of the rest of the country it is not nearly as financially beneficial.

I agree with Hobie who stated they should have a LOT more on financial planning in high school. I've also always thought they should have a course on preparing for work life also: interviewing, resumes, proper workplace behavior.

Those types of topics would truly prepare one for adult life.

Submitted by Coronita on December 21, 2019 - 1:21pm.

svelte wrote:
flu wrote:

10 years goes by really fast. Life is short.

That's why I keep my life really simple. More time for things I enjoy.

Also a reason I'm not a landlord - I watched my dad do it and it was such a time sink and frustration in his life. I know here in SoCal that is how you can really build wealth, but I cherish my free time.

Also, the real estate route is promising here in SoCal, but in most of the rest of the country it is not nearly as financially beneficial.

I agree with Hobie who stated they should have a LOT more on financial planning in high school. I've also always thought they should have a course on preparing for work life also: interviewing, resumes, proper workplace behavior.

Those types of topics would truly prepare one for adult life.

I can totally understand how this could be the case. I think I am learning that depending on the type of property and clientele, it could drastically affect the pain in the ass factor. Mira Mesa condos are a slam dunk to rent. Elsewhere, not so much.

Submitted by Rich Toscano on December 22, 2019 - 10:42am.

flu wrote:
Plus the real estate windfall from the Great Recession is probably that 1 hit, one time lifetime event.

This. You bought in the midst of a severe crash (good job) and your returns were boosted accordingly. That can't be extrapolated.

With that said, you are right to be suspicious of the "stocks return more than real estate" thing. This is a pretty common belief, but it's based on an apples to oranges comparison. It's true that housing prices (not just talking SD here, I mean overall residential RE) have only tended to keep up with inflation over time, but that's only looking at the price return.

To compare with stocks you have to look at total return, which includes income from owning the property (or if you live there, the "income" you get from not paying rent). Once this is included, RE returns have been comparable to stocks over time.

For doubters or those interested, data here: https://www.frbsf.org/economic-research/...

Submitted by an on December 22, 2019 - 10:52pm.

flu wrote:
Mira Mesa condos are a slam dunk to rent. Elsewhere, not so much.
I dunno, MM condo is the biggest PITA for me.

Submitted by Coronita on December 23, 2019 - 1:03am.

AN wrote:
flu wrote:
Mira Mesa condos are a slam dunk to rent. Elsewhere, not so much.
I dunno, MM condo is the biggest PITA for me.

Well that's because I intentionally sent you the pain in the ass tenants so you would capitulate and sell your condo to me with a discount. You know how cutthroat I can be! Just kidding.

Submitted by Coronita on December 23, 2019 - 2:20am.

Just another observation.....

While all my domestic index funds (S&P500, mid cap, small cap) are all at or near record high , the one noticeable index that has been a dog and has been my international stock market index funds , which are not even close to all time highs. Are US companies earnings prospectives *that* much better than their foreign peers? I think not, but apparently a lot of people do?

For example, just comparing VFIAX (S&P500 Admiral shares) versus
VTIAX (total international Admiral shares)

vtiax has fallen behind.

Maybe moving forward , nudge allocation towards international indexed and reduce allocation on domestic indexes.???? I don't know.

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