Stocks vs. Real Estate...Anybody done the math?

I am all about doing the right thing for my clients and the Real Estate vs. Portfolio investment comes up quite often.

While the best stock indexes generate 10-12% on a compound basis over time...the average real estate market only produces about 5%.

The stock market is easy to figure out. However, has anybody done the math and figured out the true return on real estate considering the high amount leverage that real estate allows, the rental income and the tax benefits of the losses?

I am all about a diversified portfolio so I feel that real estate should be at least a part of everybody's. However, real estate has its headaches.

If anybody has a clue here, after helping me with this, please differentiate the figures on a residential vs. commercial basis.

Thanks!!!

Kenneth Besada
Associate Financial Planner
Mogul Wealth Management, Inc.
ken.besada@gmail.com

Real estate is all about the possibilities and the game, not just the numbers. The guys I know who are in Real Estate get a rush from the deal, and dream about what might happen in the future. I should mention that I personally avoid Real Estate: I just don't have the personality for it.

Whether Commercial or Residential, RE is a tough game! You have to have good vision, excellent cost management skills, great negotiating skills, and very thick skin!

Lots of people make money in Real Estate, but RE is where lots of rich people go to lose money - Mostly celebreties, trust-fund kids, and bored millionaires. I've worked for two out of three in this category and seen some serious money thrown away! But there's always the possibility of good things in the future, especially in commercial RE: You could land that tenant, close that long-term lease, find the perfect buyer......

It's quite exciting! but I didn't answer your question did I?

Well, have a great week! and thanks for reading this dribble! This subject brings up many fond memories, so thanks for posting the question!

A lot of real estate out there has “earnings” - it’s called rent. While real estate prices can fluctuate in the short run, in the long run, property prices are significantly driven by rental values. If you look at the “Price-to-earnings” ratio of your property, you can learn about your home’s true “intrinsic” value

As a good real estate investment rule of thumb, net rents in real estate (by “net,” I mean after expenses) have averaged about 1% above Treasury bonds. The Treasury bond is at 5.15% as I write, so we might guess that the nationwide average net rent is 6.15%.

If that “1% above Treasuries” rule is correct, that means the “fair” value for a home now, based on net rental earnings, should be a price-to-earnings ratio of 16. Where I live, that means the big gains in real estate so far have just brought us up to FAIR value now - there’s still plenty of room to run before things get overpriced.

One thing I would add. RE is in most people's investment portfolio. Thier home. In fact this makes up a large percentage of most portfolios - sometimes 100%.
Keep this in mind if your goal is true diversification.