If you are an investment adviser to private investors, you will know that one of the most common problems you face is to convince your clients to invest more in equities – especially if they are older.
Thanks for sharing that study. Your article is as educating as usual.
One more thought/question: I agree that investment advisors should focus their efforts on (generally speaking) getting the most for the client. What is the right way, when I really educated my client correctly and he or she is still not convinced? Is it the duty of the advisor to fullfill the ‚mistaken‘ plan, knowing up front that it’s probably not going to work out? Should we argue further at the risk of losing the client?
I am of the opinion that after having advised the client our duty is done. If she decides not to listen, that‘s on her. But often I feel very alone with this view (in opposition to some/many advisors giving the client whatever she wants to hear…).
Just eye-balling the expected return numbers above, that's is probably an unlevered real estate number? It's easier to borrow money on a real estate investment than it is to borrow money on equities, and to compare like-for-like, equities have embedded leverage through the debt on underlying corporate balance sheets. Real estate at similar leverage will likely get you comparable risk/return and non-financial folks are likely more familiar with a mortgage than they are with margin financing.
Klement, Tell me you aren’t ashamed of yourself. Real estate as an asset class is “normally” valued based on the buy/sell ratio normalized by years held. Excluding income and as the other commenter said, excluding leverage. Whereas the point of real estate is that it pays for itself. It pays its mortgage down to zero thus ultimately its cost was only the down payment, which itself can be zero (e.g., 20% seller financed). And it pays the owner continuously, so you can go buy more properties, or retire early. Plus it reduces your taxes potentially to below zero with depreciation. Selling it on the last day is not necessarily the entire value of the whole proposition. An investor buying a retirement income might reasonably not care at all about the selling price, so long as the thing keeps paying income forever during life. An indexing argument, TomVeatch.com/re, suggests 85% of wealth should be held in the form of real estate. The indexing argument has come to thoroughly dominate the stock market but is curiously (self-servingly) ignored in discussing the relative investment value of stocks and real estate. The stock flogging consultancy industry represents falsely and repeatedly (as you have done in this posting) that real estate as an investment is inferior to stocks. Which it is, only if you take out the income and the leverage and the depreciation. Which is stupid, or misleading, or criminally fraudulent. So please acknowledge that in this posting, which amounts to a one sided and false polemic against real estate, you have removed its important benefits from the argument, and misled your audience from seeing the important generalization, the truth itself: that which would direct their lifetime of effort and saving to their own greatest long term benefit, rather than to the benefit of the stock selling financial industry.
Or tell me why I am wrong. I’ve stated it strongly but I’d be happy to be wrong — I’d like to know it!
What about the costs of real estate - maintenance per year can be 1% p.a. long-term plus the rates, taxes too. Plus costs of disposal are significantly higher.
Not sure how one can compare equities to real-estate. Real-estate r.o.i. is greatly influenced by the investor's actions: choices in management, maintenance and development. Cannot be compared to passive equity investment.
You’re right because there is so much labor and difficulty in managing real estate. I have to go to the mailbox and pick up the envelopes and deposit the rent checks. See? I’m kidding. For normal folks who know how to call a plumber, and maintain their own homes, it’s not so hard to manage your own properties. If you can build or develop, so much the better. Yes you might have to interview property managers. This burden is small enough that enough people have found it and succeeded in it that real estate is STILL valued in the order of 1:1 to the stock market in total value. Let me reduce my claim and allow you yours by specifying that RE should be 50-85% of long term portfolios: only for folks having a pulse.
You’re right. My own financial model for rental real estate provides default values of 5% of income to be spent EACH on repairs, improvements, property management. PM on <5 units is 10% in my default model. Taxes, worse, is more like 2 months of income. For this reason NET operating income (after all those expenses) is the valuation basis for real estate. In short, yes. And yet and still: RE should be 50-85% of any long term portfolio, by an indexing argument, because those items are taken out BEFORE value is calculated.
Thanks for sharing that study. Your article is as educating as usual.
One more thought/question: I agree that investment advisors should focus their efforts on (generally speaking) getting the most for the client. What is the right way, when I really educated my client correctly and he or she is still not convinced? Is it the duty of the advisor to fullfill the ‚mistaken‘ plan, knowing up front that it’s probably not going to work out? Should we argue further at the risk of losing the client?
I am of the opinion that after having advised the client our duty is done. If she decides not to listen, that‘s on her. But often I feel very alone with this view (in opposition to some/many advisors giving the client whatever she wants to hear…).
Just eye-balling the expected return numbers above, that's is probably an unlevered real estate number? It's easier to borrow money on a real estate investment than it is to borrow money on equities, and to compare like-for-like, equities have embedded leverage through the debt on underlying corporate balance sheets. Real estate at similar leverage will likely get you comparable risk/return and non-financial folks are likely more familiar with a mortgage than they are with margin financing.
Klement, Tell me you aren’t ashamed of yourself. Real estate as an asset class is “normally” valued based on the buy/sell ratio normalized by years held. Excluding income and as the other commenter said, excluding leverage. Whereas the point of real estate is that it pays for itself. It pays its mortgage down to zero thus ultimately its cost was only the down payment, which itself can be zero (e.g., 20% seller financed). And it pays the owner continuously, so you can go buy more properties, or retire early. Plus it reduces your taxes potentially to below zero with depreciation. Selling it on the last day is not necessarily the entire value of the whole proposition. An investor buying a retirement income might reasonably not care at all about the selling price, so long as the thing keeps paying income forever during life. An indexing argument, TomVeatch.com/re, suggests 85% of wealth should be held in the form of real estate. The indexing argument has come to thoroughly dominate the stock market but is curiously (self-servingly) ignored in discussing the relative investment value of stocks and real estate. The stock flogging consultancy industry represents falsely and repeatedly (as you have done in this posting) that real estate as an investment is inferior to stocks. Which it is, only if you take out the income and the leverage and the depreciation. Which is stupid, or misleading, or criminally fraudulent. So please acknowledge that in this posting, which amounts to a one sided and false polemic against real estate, you have removed its important benefits from the argument, and misled your audience from seeing the important generalization, the truth itself: that which would direct their lifetime of effort and saving to their own greatest long term benefit, rather than to the benefit of the stock selling financial industry.
Or tell me why I am wrong. I’ve stated it strongly but I’d be happy to be wrong — I’d like to know it!
What about the costs of real estate - maintenance per year can be 1% p.a. long-term plus the rates, taxes too. Plus costs of disposal are significantly higher.
Not sure how one can compare equities to real-estate. Real-estate r.o.i. is greatly influenced by the investor's actions: choices in management, maintenance and development. Cannot be compared to passive equity investment.
You’re right because there is so much labor and difficulty in managing real estate. I have to go to the mailbox and pick up the envelopes and deposit the rent checks. See? I’m kidding. For normal folks who know how to call a plumber, and maintain their own homes, it’s not so hard to manage your own properties. If you can build or develop, so much the better. Yes you might have to interview property managers. This burden is small enough that enough people have found it and succeeded in it that real estate is STILL valued in the order of 1:1 to the stock market in total value. Let me reduce my claim and allow you yours by specifying that RE should be 50-85% of long term portfolios: only for folks having a pulse.
You’re right. My own financial model for rental real estate provides default values of 5% of income to be spent EACH on repairs, improvements, property management. PM on <5 units is 10% in my default model. Taxes, worse, is more like 2 months of income. For this reason NET operating income (after all those expenses) is the valuation basis for real estate. In short, yes. And yet and still: RE should be 50-85% of any long term portfolio, by an indexing argument, because those items are taken out BEFORE value is calculated.