No. of Recommendations: 26
Wish there could be a comparison with the real estate returns over a long period too though it would be a challenge to find a good marker for that.
Real estate is a productive asset, but the returns are worse than what you would get from taking the rental yield and assuming capital gains a percent above inflation. If one assumes rental yields averaging 4% that we have a real long term return of about 5% per year. At first this appears not far below the real returns from common stock of 7% or so.
The trouble, sometimes not cited enough, or admitted by the property investor, is the effect of repairs and upgrades. In practice to maintain just the going rental yields, the bathrooms and kitchen are renovated once every 20 years or so. Or you let the cracks builds and style go out of date and the rental yield sinks.
All in all the costs consume around 2% of the property value annually as a heuristic (the costs are a little inconspicuous as it doesn’t hit every year but you can have a good run and then have to do a massive re-work or even demolition after 50 years or so, or the property re-priced to assume such cost ahead).
So now you are down to real returns of about 3% after subtracting the 2% depreciation charge (renovations and repairs).
Council bills and other taxation (not capital gains) costs in excess of the near zero running costs on stocks.. I won’t account for this bur you really have to subtract a little more again for this.
You can try to increase this 3% return with leverage (use of a mortage), but historically this isn’t as good as it seems because the (rental yield after costs), plus (nominal capital gains), need to be higher than the (lending rate) in order for the leveraging to actual provide a benefit. Mortgages are now take because either the buyer cannot afford the quote, or they don’t want to pay the quote because they have better uses for the capital (such as stock investing).
Even as recently as the 1950s, homes were viewed as a place to live and if you told someone you were buying a house to try to resell it at a higher price, the response would be: “Well, I'll be hornswoggled! Are ya crazy? That's a wild-eyed guess if I ever heard one, and I reckon you're bold as brass for slingin' it out there! But, dagnabbit, I ain't got a hankerin' it'll pan out for ya, partner.”
Times have changed, with the massive increase in availability of leveraging making homes far more expensive. The change to then and now has lowered the rental yields, so capital gains will be necessarily lower than the past - and likely about inflation, with real returns after costs and taxes only a percent or two above inflation.
On the other hand, many like to renovate their own house (or build) which produces value, and possibly passion, so there are always abundance nuances - but the baseline investment comparison with stocks is far less competitive than it can at first appear when just adding rent income and capital gains, and comparing that to stock index total returns.
- Manlobbi
