Stocks Versus Real Estate: It Depends On Your Luck

Fortune (fu) in Mandarin

I've written a pretty detailed post about analyzing whether it's better to invest in stocks or real estate. Check it out if you're wondering where to put your money. I tried to be unbiased in my analysis, but due to my experience investing in both asset classes for over a decade, I came to the conclusion that real estate is my preferred choice to building wealth.

Once acquired, real estate is pretty straightforward. Maximize rent, minimize expenses, let inflation take its course, and keep tenant turnover to a minimum. You are the King or Queen of your asset.

Stocks, on the other hand, require constant re-balancing, trust in management, trust in a fund manager if you buy an active fund, and careful analysis of competitive forces that may hurt your investment.

Think about how many great companies have disappeared over the years. This is why I recommend keeping most of your equity investments in low-cost index funds and focus on asset allocation instead.

One commenter pointed out the reason why I prefer real estate is because I was lucky to have bought in San Francisco in 2003. In this post, I'd like to address his beliefs and see if we can all just get lucky with our investments. After all, it's always better to be lucky than good!

GETTING LUCKY WITH REAL ESTATE

Jeremy writes,

While I appreciate real estate vs. stock investment arguments since I enjoy both sides of the argument, your story isn’t a very realistic example. You bought low in San Francisco, and that turned out to be a booming real estate market. It’s far from the norm – look at the flip-side and see how many people are under water on their homes.

You basically *got lucky.* The market could’ve tanked and you’d be paying $2,400/mo + property taxes + maintenance + depreciation whereas you could’ve just paid $2,000/mo for a place to live/rent and come out far ahead of where you are now. I think it’s an unfortunate example to use because I’m reading the comments on here and all of these people seem to think it’s completely feasible to buy a place for 580k, rent it for 3.4k/mo, and then sell it for 30% more later on. There’s a reason why every major city is absolutely saturated with foreclosed rental properties, and it’s not because the profits on them are booming.

What you’re saying is akin to me talking about my stock experiences – I purchased into Tesla when it was ~$40/share and sold it when it was a bit over $210/share. Is that a good example for why stocks are better than real estate? Not really, just happened to be a fortuitous experience for me.

Overall, I’ve averaged about 12% yearly returns in the stock market, so nowhere near my Tesla experience, but fairly good for a completely passive approach to investing. I’m very interested in trying out some real estate investing, but I’m not hedging my bets on whatever market I invest in to turn out like San Fran did.

COMMENT COMMENTARY On A Lucky Real Estate Investment

1) Other people are always getting lucky.

Getting told you're lucky basically discredits any work or analysis you've put into making your investment. I remember being extremely excited, yet hesitant about putting a $580,500 offer for my condo back in 2003. I just turned 26 and was hoarding cash like a mad man because working in finance gave me daily heart burn, especially after the dotcom bust.

Getting into work at 5:30am was also killing my social life. And buying property meant committing to 5:30am start times for at least another five years (never buy property if you don't plan to own it for at least five years)! All I wanted to do was move back to Hawaii and bum around with the savings I had accumulated.

If you're like Jeremy and have never bought property before, then it's hard to understand that mixed emotion of fear and excitement of taking on so much debt while parting with so much cash at the same time. If you've never done something, why is it that you feel you know better?

Real estate is a very concentrated asset class. Spending a couple thousand dollars purchasing a stock is much less frightening than dropping $120,000 on a $580,000 property while taking on a $460,000 mortgage.

2) You've got to create your own luck.

All of us are lucky to some degree. To not recognize our good fortune in a world full of suffering would be selfishly ignorant. I spent a day touring the De-Militarized Zone (DMZ) at the North Korea and South Korea border, and I'm completely humbled and saddened by what transpired after the Korean War.

Appreciate what we have folks! Plenty of people don't even have electricity, let alone internet access. We've talked in depth about money guilt in the past, and I think it's good exercise to continue talking about money guilt as we embrace our luck to keep ourselves balanced.

If we want more, then we've got to take on risk. Keeping all your money in a savings account will never bring you outsized returns. Holding on to a safe, but boring job will never give you the fulfillment you're seeking. I

t's hard to have an exciting life if you don't take any leaps of faith. The fear in our mind is often much worse than reality. Remember, we come from a default setting of good fortune by living in a developed country!

3) Our experiences shape our beliefs.

The reason why I love reading blogs way more than news sites is because I want to read about other people's experiences. I don't want to just read the news, I want to read an interpretation of the news by an experienced author.

My experience with my first property has so far turned out fine. Yes, there were some concerning times with the financial crisis and pesky neighbors, but for the most part, I'm glad I took some risk to buy in 2003 than not.

My experience in the stock market was much more visceral because I not only invested in equities, but I also dedicated a career to equities. The turbulence was tremendous!

But I will say though that getting rich through luck feels better over time. Initially, you might feel some guilty. But then you'll realize how other people got lucky getting much richer than you! You'll also remember all the unlucky breaks you had in your life as well.

My Lucky San Francisco Condo Purchase In 2003

When I purchased my property in June, 2003, the S&P 500 was at 990. Just three years prior the S&P 500 peaked at 1,498 for a 35% drop. Investing was not as easy as now, where everything seems to just go straight up. The S&P 500 is now ~200% higher than in 2003.

The condo was purchased for $580,500 and comps have the value somewhere around $1,250,000 to $1,350,000. I wouldn't sell it for under $1 million because it is a prime 2/2, Pacific Heights condo over looking an $11 million renovated park with parking. But let's use a $1.2 million sales price to calculate a more conservative 107% return since 2003.

A 107% property return is a 50% lag compared to a 160% return in the S&P 500. The thing is, I enjoyed the return so much better due to the stickiness of the rent and much less volatility. Meanwhile, if one were to calculate a cash-on-cash return of a $116,000 down payment, then the returns would be closer to 400% if I didn't continuously pay down principal over the years.

I'm just comparing the equity amount in this particular property to what I have in my 401k, which I've maxed out every year since 2000. The property equity is at $1 million since I paid off my mortgage this year. Meanwhile, my 401K, which is now a rollover IRA is only around $420,000.

There's something to be said about consistently paying down principal, earning rental income to pay down principal, and letting inflation take its course. To me, owning this property over the past 12 years was a much better experience because it felt automatic.

San Francisco real estate cycle

4) Make some predictions and act. 

There's no use pontificating all day long if you never take action on your beliefs. I currently believe San Francisco is still one of the world's cheapest international cities. There's no other coastal big city that I know of where you can buy panoramic ocean view properties for under $1,000/sqft. It is my belief that San Francisco will continue to get “discovered” by international buyers who want to diversify their capital – Chinese buyers in particular.

Given my beliefs, I decided to take several hundred thousand dollars from an expiring CD in 2014 and look for panoramic ocean view properties in Golden Gate Heights for a couple months. It would have been much easier, and much less risky to roll the CD proceeds into another long-term CD.

I found two properties that I bid on. One was a dream property that went for a whopping $600,000 over ask (50%), which I lost. Discouraged, I kept on looking until I found my current place, a fixer with ugly wall paper, green carpets, linoleum floors, and a tiny 36 sqft bathroom downstairs. Nobody wanted to take the project on, which is why I was able to buy it for under asking.

Taking on a fixer takes a tremendous amount of courage because you've got to then take action to create value. Spending $120,000 to fix the place up is not luck. It's a consistent test of faith every time you cut a $10,000+ check to a contractor!

So far, the SF market has not fallen off a cliff with some comps in 2019 trading now at $1,100 – $1,400/sqft for similar views compared to under $800 / sqft in 2014. Let's see if the luck continues.

5) Manage your net worth as you see fit.

Buying another property with debt in June 2014 made me uncomfortable. If investing in something gives you zero fear, then there probably isn't much of a return at all. I decided that by taking on this new mortgage, I would pay off my higher interest rate mortgage I took on in 2003 by the end of 2015.

Over the next 12 months, I aggressively paid down another $100,000 in principal from cash flow after paying down $150,000+ in principal from a mortgage arbitrage. Now the mortgage is completely paid off. Paying off a mortgage early takes a lot of discipline because there's constant temptation to use the money for instant gratification.

Managing your assets and liabilities is extremely important to sustaining wealth because our lives are always changing. There are too many incidences where someone is over-leveraged, and ends up in financial ruin when a downturn hits. Don't let the bull market convince you that you're suddenly an investing genius.

LUCKY INVESTMENTS ALL AROUND

As for getting lucky investing in San Francisco, well that's obvious. But before buying in San Francisco, I could have bought anywhere in the country, just like I could have bought any stock.

I could have bought a 2/2, 1,500 square foot condo on 22nd near Madison Park in Manhattan with two balconies and a view of the Chrysler building in 2001 for $799,000, but I didn't! That property has to be worth over $2 million today. Damn it! Now that would have been really lucky. Let’s be honest, outsized wealth is mostly due to luck.

New Lucky Home Purchase In 2023

In addition, I decided to take a huge leap of faith and buy a forever home in October 2023 when mortgage rates were at its peak. I decided to sell some stocks and bonds to pay cash for this home. What transpired was feeling tremendously uncomfortable given hours now cash poor.

At the time, I didn’t know I was buying near the bottom of the real estate market. But I half a year later, it’s becoming clear that third quarter 2023 was the bottom of the latest cycle.

Then on March 15, 2024, the National Association of Realtors settled it’s price fixing lawsuit for $418 million. As a result, real estate commissions should immediately come down by one to 4%. Long-term, real estate commissions may come down 5 to 6% total, with the vast majority of the gains accruing to home owners. It’s like I got an immediate one to 4% boost in the value of my forever home. Now that’s lucky!

Residential real estate investors and owners are richer after the National Association of Realtors lawsuit settlement - A look at how much financial benefit goes to homeowners and residential real estate owners with a 1% to 6% decline in real estate commission rates

The main thing that prevents people from buying is generally the down payment. Was having the down payment to buy in SF luck? I guess. But don't tell my younger self that because he'd get pissed at anybody who thinks studying for 6-8 hours every day in college while living frugally in a studio with another fella after graduation in order to save 50%+ of his income for years was luck.

Let's forget about my lucky break of seeing $750,000 in equity over a 16 year time period. I just visited an old friend in Kuala Lumpur, Malaysia, whom I thought was just middle class.

San Francisco property prices

Massive Lucky Investment In Kuala Lumpur, Malaysia Real Estate

Her parents owned a couple, one story houses joined together in the center of KL since the 1970s. Neither house was anything special. One house was for grandma and her in-laws, and the other house was for her parents, her sister, and her.

I thought I was just going to crash in one of the rooms while visiting. Instead, I arrived at her new 6,300 square foot mansion with 15 foot high ceilings, swimming pool, and five car parking! What the heck happened in the 24 years since we last saw each other?

Well, the property her parents purchased in 1970 for 30,000 ringgit ($8,333) was sold to a Taiwanese developer for 30 million ringgit ($8,333,333)! After 44 years, now that's what I call getting really, REALLY lucky! The GDP per capita in Kuala Lumpur is only about $17,000. So the $8.33 million sale is more like a $23 million sale in the US.

Check out the picture where her property use to stand. Tall building to the left, across, and to the right. Damn, why didn't my parents buy land around her area back in 1987-1990 when we were there? We'd be so damn lucky, I wouldn't have had to kill myself in the finance world for 13 years. I could work 40 hours a week and complain why it's so hard to get ahead. But without 13 years of constant hustle, FinancialSamurai.com might never have been born!

Kuala Lumpur, Malaysia property
A 1,000 X return in 44 years is so damn lucky!

HOPE YOU ARE ALL LUCKY IN 10 YEARS

I've rarely met anybody who has invested in the stock market or real estate market who has regretted their purchase 10 years ago, let alone 44 years ago. Meanwhile, the vast majority of people who have regret are those who didn't buy and hold anything 10 years ago. The larger your regret, the more bitter you will be about other people's lucky breaks.

My preference is for investments that don't give me a heart attack. Real estate is stickier on the way down because rents are usually the same for at least 12 months due to the standard one year lease agreement. When the markets are going up, you can raise the rent, and track your property's value online based on comparable sales.

If you can keep your calm when stocks are cratering and just continue to dollar cost average, then stocks are great due to the ease of maintenance and liquidity. I just think at the margin, based on my experience, real estate has been a more rewarding investment.

I hope we are all lucky in 10 years with the investments we make today. In 10 years, those who didn't take any risks today will call us lucky. And our response will be, “You're absolutely right!

To Recap: Buy Real Estate If

1) Buy property if you think you are lucky enough to aggressively save for a down payment, feel comfortable taking on debt, and holding for at least five years. It's important to have the lucky courage to make a concentrated investment in one asset. You can dollar-cost average into real estate with Fundrise, my favorite private real estate platform. The minimum is only $10.

If your property turns into a rental, then you also need to have the luck to find good tenants and resolve problems as they rise. Your average real estate tracks the average annual inflation rate over the long term. Let's hope you get lucky and logically buy in an area that should see years of job creation. If so, your cash-on-cash returns could easily be in the double digits thanks to leverage.

Buy Stocks If…

2) Buy stocks if you are lucky enough to hold for the long term and not freak out whenever there's a downturn. You must be lucky researching the company's financials, participating with management on conference calls to make sure they are acting in shareholder's best interest, and pressing your bets when you think there is opportunity. Or you can just invest in an index fund, or let a professional try and outperform. Stocks have returned anywhere from 6-9% historically.

3) Allocate your money efficiently. Whatever you do, at least mobilize your cash. Stocks have the lowest hurdle. If you can't be bothered with actively managing your money, then invest with a low cost algorithmic advisory like Empower. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.

Buy Both Real Estate And Stocks If…

You believe in upside for both real estate and stocks and want to diversify your overall portfolio. If you don't have the downpayment to buy a property or don't want to tie up your liquidity in physical real estate, take a look at real estate crowdsourcing. Real estate is a key component of a diversified portfolio.

Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Sign up and take a look at all the residential and commercial investment opportunities around the country.

Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible.

Create your own luck. You'll be happy you did 10 years from now.

Invest In Private Growth Companies

Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI! I plan to get lucky investing in AI today.

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum.

In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

About the Author:

Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income, most recently helped by real estate crowdfunding.

He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.

94 thoughts on “Stocks Versus Real Estate: It Depends On Your Luck”

  1. I have a real estate riddle that I am unable to solve and am seeking help from those able to make sense.

    I have 3 home mortgages, one of which I live in. The two remaining homes, both rented, are as follows:
    House 1: $70,000. Mortgage at 6%, 20 yrs remaining, monthly payment at $650. House is on one acre on a main road that used to he country but is becoming developed and should go up in value . Rented at $400.00 a month. Bought in 2006 as investment and is now appraised around $30,000. Ugh…

    House 2: $155,000 mortgage at 5%, 20 yrs remaining, monthly payment at $950. Rented at $750 a month. Bought in 2005 but my family (3 kids under 6 yrs old) outgrew. Appraised around $115,000. Again, ugh…

    My options, as I see them are:
    Sell both at a loss, where I would probably have to pay down the mortgages by a total of $70,000. To simply walk away.

    Keep renting and increase rents until market rebounds, or, I keep on trucking as a landlord amd keep the homes fpr 20 yrs, with my tenants paying most pf the mortgages.

    Pay off mortgages totally, ala Dave Ramsey, and stay landlord.

    Being self employed and having debt reduces my ability to refinance, unfortunaly. I also must fund all of my own retirement and most of the calculators I use point to my IRA doing much better if I do not aggressively pay off mortgages early.

    Any help would be appreciated!

    Thanks,

    Erik

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  3. I would rather invest in something that would be much more stable as far as investments. Real estate carriers a lot of baggage and requires large amounts of money upfront. I recently started reading this great e book that gave expert advice on silver investments and was free, http://www.silverinvestorguide.com

  4. Perhaps I’ve not delved far enough back into the archives, but I’m amazed that in this debate over stocks vs. real estate that you’ve only examined the passive side of stocks as opposed to the trading side, where you can make a lot more money. Yea, the stock market can make on average 8% a year, but that is if you ride it all the way up and down. If you go long during a bull market and short during a bear market you can beat the average easily if you have enough discipline to set up a system and execute it. You certainly don’t need to worry about a company flaming out if you’re not planning on holding onto it for years.

    At least that is my strategy. Save money, trade to make enough to pay off student loans and other debts, then once those are paid off, keep slamming profits into downpayments on rental properties.

  5. wallstreet26

    lol. essentially real estate good cuz of leverage. the upside is great as he explains it. the downside is even better. consider you buy a house at 100k and you put 5% down so 5k, now market tanks 30%. so now its worth 70k, but you owe 95k. so u default, live rent free for a year before they evict you. then once they do evict you, now they own an undervalued property. real estate is like an amazing call option. in short, borrow a ton of money, everything u can, and try ur best to never put anything down.

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  8. I made a 250 percent return on a stock over a three week period a couple months ago. There was skill and luck involved…just like in anything else in life. Wall Street Playboys nails it with number 2: I made that much in a short period because I have a high tolerance for risk and I thought the reward validated it.

  9. Sam,

    I’m mostly in agreement with Jeremy. You are lucky. And it is important to recognize that. You were in the right place and at the right time. You made decisions which happened to work out.

    You’re always very bullish on San Francisco and it is a nice city. I just think it is unrealistic to tell every kid with a computer science degree to come out to the Bay Area for a $100,000/year software job and life will be paradise. The reality is just quite different.

    1. What are your thoughts on why wouldn’t a kid with a CS degree come to SF for a solid job? I’m seeing it with my own eyes and the opportunities are enormous right now with massive amounts of VC funding and record profits in the tech/internet space.

      Go where the money is. It’s very easy to move around this great country of ours.

      1. There are great paying jobs every where for computer people. There is no need to move to San Francisco.

  10. My thoughts about the stocks vs real estate. Real estate as an investment is expensive. Very high carry costs! Complicated, illiquid, and a higher risk than the stock market.

    But…. The advantages are leverage (mortgages, HELOCs, etc.), government support (tax deductions, VA loans, various grants, and a very long etc. list), automated savings (by paying mortgage down), emotionally positive for people (a sense of community, the ownership concept, better overall lifestyle, etc.), and maybe a sense of stability.

    I think purchasing a place to live is normally a good investment (everyone must live somewhere). I think becoming a landlord is much more complicated and may not be a positive experience for most folks (but if you can make it work with a positive cash flow, it is an optimum situation).

    I think investing in index funds (or maybe the “SPY” ETF) would be a far less stressful and easy way to build longterm wealth (especially in a 401k). Brainless and automatic is the way to go.

    1. If you invest in stocks in the long run, it will be tough to beat 8% annualized over a long period of time. Assuming you do a 60/40 stock/bond portfolio today, you are looking at 6% maybe over 30 yrs (based upon historical analysis). After inflation, you are lucky to get 4%. That is ok for a lot of people and if your savings rate (pre-tax) is over 30% and you save for 30 years this should get you to a comfortable retirement number.

      With real estate, though, if structured properly, it is fairly easy to obtain 10% returns over long periods of time and if you get involved in value-add properties, could easily break 12% or up to 15% IRR. Unless you are earning an extremely high income ($1m+), this is the only way to get really wealthy for the average person. Yes, it takes a lot of work.

  11. Hi Sam,

    I am not planning to buy at the moment. I am just curious whether rents have kept up with appreciation and it seems like it did. You mean you have consistently raised rent 10% every year for the past 11 years. Impressive! More importantly, how easily are these properties rented out? Ease of renting out is very important. It is no use having high rental yield but you are suffering 6 months vacancy in a year or 2. Generally, from your experience, are the vacancies high or how long does it take for a unit to be rented out? What is the longest you have to wait?

    Thanks

    1. I’ve had over 120 consecutive months with zero vacancy for this one property I started renting out in 2005, a 95% occupancy for 9 years on another property, and a 100% occupancy on my newest rental which just started in June 2014.

      I’ll have a post on how to reduce vacancy rates to as close to 0% as possible.

      The rent for this one property started off at $2,100, and is now $4,000. So yes, that’s about a 100% increase in rent vs. a 100% increase in property price over the past 11 years.

      What’s your current property portfolio like and where are you looking to purchase? Sounds like you have a bearish bias at the moment?

  12. Hi Sam,

    I would like to know what was the rental yield when you bought the property in 2003 and what is the rental yield now? Assuming that your property is valued at $1,200,000 now, how much roughly are the monthly installments (if one were to buy now and finance 80%) and how much is the rental per month? Is it very easy to rent out your property?

    I agree with you generally that real estate is a better bet compared to stocks mainly because of leverage and forced savings.

    Thanks for so many quality posts.

    1. Hi Constante,

      Just did the calculation and the gross rental yield is around 4.5% – 5.3% a year with the rent back in 2003, and the rent now in 2015. In other words, not too high at all. This is common in expensive cities all around the world. Valuations based on income are very high due to a strong domestic and international demand curve. I’ve raised rent to keep up with the market -10% for the past 11 years.

      But if you can beat the 10-year bond yield and see strong capital appreciation over the years that outperforms inflation, then it’s worth it.

      You planning on buying property? Where are you thinking of buying?

  13. I really enjoy reading FS each week. You mentioned that you like to read other blogs as opposed to reading the news. What are some of your go to blogs?

    1. Let’s see, I like Retire by 40, Budgets Are Sexy, Sparkline, the Motif blog, Untemplater, Daily Capital, and lots of bloggers who comment on here where you can click their name to check out their work!

  14. “I’ve rarely met anybody who has invested in the stock market or real estate market who
    regretted their purchase 10 years ago”

    Well, now you can meet one of those people. I bought in a suburb of Detroit in 2004 with the goal to live in the house for a few years and then rent it out. Since that time, my property value has dropped over 60% from its original value. It’s now at only about a 50% drop. What I’ve put into maintenance the last few years is probably the same as the value of the house. I get a decent rent, but I still lose money every year because the interest rate on my mortgage is so high, and I have no chance of refinancing due to how much the house is underwater, and I can’t qualify for a loan adjustment because it is in a recourse state and I make too much money. Worst decision of my life. The only lucky part is that I bought the house for under $100k, so I’m not financial ruined by it, but I am screwed by being responsible and making the payments. I should have just foreclosed before I moved out to Denver.

    Speaking of which, I have a house out in Denver and it has gone up 23% since we bought it. That was also incredibly lucky. I did do quite a bit more research for this house, but we got lucky in the sense that we bought when houses were getting only a few offers, not dozens like they are now.

    So as far as you premise goes, I agree you can influence the decision somewhat, but much of real estate is are you lucky to live in a market that is doing/going to do well, or in the case of somewhere like Detroit, did you happen to buy during the crash, rather than before it. If you were to take my Detroit area house and move it out to Denver, it would easily be worth 10x a much.

    1. Thanks for sharing. I’d like to look on the bright side though. You got lucky buying a Detroit house for less than $100,000! Even if you lose 100%, it’s at most $100,000. Imagine the folks like me who bought vacation properties before the bust that were in the $700,000+ range. Ouch!

      1. Well that is where luck definitely comes in. The low cost is lucky I suppose, but for someone who is interested in reducing hours of myself and my wife after the kids are a bit older, a negative cash-flowing rental does not help. I do know plenty of people who were wiped out due to the housing crash in Detroit metro area, who were in much nicer neighborhoods than my rental is. I mean my parent’s house is bigger and in a wealthier area than my house in Denver, yet my house in Denver is worth 60% more than theirs. That is completely luck.

        Where you were born and into what type of family is mostly luck. I would add for most people, where you live now is also luck, as it is pretty hard for most people to move away from their extended family. So unless you have a large portfolio of houses in your particular area purchased over a boom and bust cycle or have bought houses outside of where you live, then I would say most of anyone’s real estate gains are based primarily upon luck, not skill.

        I’ll give you another example. The people I know who are doing well with rentals in the Detroit area picked up theirs at the very bottom of the market. To do that, you had to have the money to do that at the right time. I was actively wanting to do that type of investing at that time period, but I didn’t have the money to do it. Now that I have the money, the opportunity is now gone. Unless you had been sitting on hundreds of thousands in cash for a long period of time, and had been looking hard at the Detroit market, then making a ton in the Detroit market was more fortuitous luck than any real skill other than having the willingness to pull the trigger. So while I agree somewhat with the premise of creating your own luck, at the end of the day, so much of real estate investing is down to chance for those without deep pockets.

        1. Very true about needing the money. I wish I was more liquid in 2012/2013, but I had just left a stable job of 11 years to work on my online endeavors. I was in NO MOOD to take on debt then. Instead, I tried selling my house despite my gut instincts to hold on for 28 days on the market. Luckily, I got some low ball offers in 2012 and I pulled it.

          If I sold my house in 2012, I’d be KICKING MYSELF! It’s funny having a blog, b/c I’ve recorded all my journey:

          * Should I Sell Property Now That Facebook Is Public (3/19/2012)?
          * Should I Sell Property And Simplify Life (10/28/2013 – Still thinking of selling!)?
          * Pay Down Debt Or Leverage Up To Buy More Property? (4/8/2014)

          Thank goodness for luck! I will never sell for as long as possible. The spread between rent and cost is sufficiently huge now that I don’t care.

  15. Great article. I would also choose property over the stock market, but that’s probably because I got lucky as well. In 2008 I started telling people an area I wanted to buy in because of a proposed train stop. Years later, in 2010, after saving up enough cash for a downpayment, I was lined up to buy a short sale condo for 179k that ended up taking a year of my life and never closing. After this failure, I kept chugging along to 2012 when I made offers on 5 properties in this area. I eventually got an offer accepted on a 2 family where the inspection pointed out a tilting foundation, no heat on the third floor and things much worse than that. Eventually closed for 550k and the place is now worth around 950k. When the train stop arrives in 2017 it will be worth around 1.2 mill, condo’d out will be more like 900k and 700k for the 2 units. When I was looking at properties, my friends told me I was crazy to take on that much debt. Now, they call me lucky. I believe we give ourselves the opportunity to be lucky through planning, mindset and vision. I truly believe that if I didn’t buy at the perfect time, I would find many other ways to excel and be “lucky” yet again.

    P.s. The short sale condo is now worth 550k

    1. I like your confidence that your property will be worth 1.2 million in two years! What city is this?

      On the flip side, do you think the people who sold to you now think they are unlucky?

      1. Somerville, ma. Union square. Great question.. They bought for 340k in 2001 and sold for 550k in 2012 so I think they did just fine. When the greenline arrives we will either condo it out and sell into a 1031 exchange to then buy a few equally profitable properties or hold onto it for it’s own generous cash flow. Although Boston is in the same bubble you are, I can still find properties for 100k down in appreciating areas profiting $1500/month. My luck might be less cash positive in San Fran it sounds like.

  16. * When referring to stocks here, I am referring to passive, low cost index investing with a 20-30 year time frame

    Stocks:

    Pros –
    – Much better historic returns
    – Easy, no maintenance
    – Liquid
    – Possible dividends
    – Only way to take advantage of most tax friendly retirement vehicles

    Cons –
    – Passive investor
    – No way to add value

    Real Estate:

    Pros –
    – You have to live somewhere (at least for first home)
    – Add legitimate value with tangible benefits (rec room, new kitchen, pool etc.)
    – Tax friendly deductions
    – Government subsidized leverage (30 year loan cannot exist without govt. backing)
    – Rental income
    – Tax free appreciation
    – Owning multiple rental properties can turn into a business rather than passive investor

    Cons –
    – Maintenance, maintenance, maintenance….oh, and did I mention MAINTENANCE!
    – Historic returns on par with inflation (no ALPHA!)
    – Illiquid
    – So many fees (escrow, title, prop. taxes, broker!)

    Final Verdict:

    Buy your first home if numbers make sense. But, unless you plan on becoming a developer or large property manager, buy stocks rather than a few rental properties (not worth the hassle).

  17. Depending on how I look at it, I have been lucky and unlucky. I can sit and complain about the unlucky breaks, or appreciate the lucky breaks I have received.

    Born 1982, Graduated college in 2004

    * Unlucky: Graduated college in 2004 with comp sci degree. Tech boom was over

    * Lucky: Didnt graduate in 2008, so I had a job throughout financial crisis

    * Lucky: Got to lock in student loan interest rate at 2.8% . A few years later, my brother locked in at 6%

    * Unlucky: Missed housing price increase in early-mid 2000’s, as I was establishing myself

    * Unlucky: Bought a house in Nov 2007 (the statistical peak of housing bubble). Sold 5 years later for a 20% loss

    * Lucky: Bought a more expensive house in 2012 (bottom of housing market). Up about 15% thus far

    * Lucky: Locked in 30 year interest rate at 3.3%

    * Lucky: When the financial crisis hit, I had only 4 years of investments. The past couple years has been a great time for me to grow my investments

    1. LOVE IT! GREAT way to look at things. I’ve definitely been unlucky before too. If I joined the work force one year earlier in 1998, I think I woulda made a killing in 1999 in stocks. But who knows, maybe I would have lost it all in 2000.

      I got unlucky buying my vacation property for a couple hundred grand too much. But, I’m lucky to have got a free loan mod down from 5.875% to 4.25% from BoA. I plan to hold onto it forever.

  18. There’s an easy way to evaluate stocks versus real estate and I didn’t see any comments about evaluating real states true “cap” Rate. If you calculate the true Rate which is actual income less total expenses except interest that rate is your percentage yield on your investment. View this as your safe return the upside in terms of appreciation is the gravy that can create spectacular returns in the right markets The combination of these two components of return greatly exceed the typical indexed stock return in some lucky markets, in other markets the caprate represents A reasonable safe investment return with minimal appreciation.

    The key point to remember is that appreciation is really speculation only count on the caprate as your return. if mortgage rates (fixed)are significantly lower than the cap rate then finance the property, otherwise you shouldbe paying cash. By the way if the cap rate is significantly lower than 30 year interest rates you should really be reconsidering whether this property is a good investment

    1. Appreciation is always gravy, but A LOT of property buyers buy for appreciation in already expensive cities. The cap rates become secondary, which can lead to bubbles and busts as we know.

      My cap rate has always been above the risk free rate of return, with the underlying expectation to have some gravy in SF given I think it’s so under valued compared to other major cities in the world.

  19. Sam,

    You are so right- it’s better to be lucky than good.

    And your friends in KL are incredibly lucky. It’s a “Last of the Mohicans” kind of story. They bought in 1970, just after the horrible race riots of 1969, and two years before the city was incorporated in 1972. They then just happened to have two large plots in the area where downtown KL developed years later. And they took a long time to sell, waiting 18 years after the Asian Crisis. I’m sure they were not pleased in 1998 after the value of their property took a huge haircut but by waiting it out and being one of the last to sell they extracted maximum value. In fact, one may ask- why did they sell now if they know it will keep going up?

    It would be like someone buying a large Apple Orchard in Santa Clara in the late 1950’s and then waiting through all the development booms of the 60’s, 80’s and 00’s until now to sell this for a huge fortune.

    Another benefit is that in Asia there is no annual property tax, so you can hold the property without paying tax to the government each year. If that were in the USA and assessed at $8M, the annual property tax bill would be $80K, nothing to sneeze at.

    Put it this way, a 1000X return is 10 doublings, over a 40 year period or about once every 4 years. That’s an 18% compounded annual return for 40 years, something that is up there with Buffett who is very skilled at allocating capital and among the best in the world. All this in a passive asset that they enjoyed appreciating while watching the durians grow and fall down. It really sounds too good to be true, right? Well the definition of extremely lucky.

    While I agree that the average person can do very well by buying and holding appreciating assets, this case is really exceptional. That being said, I’m totally happy for your friends. They should have bought even more back in 1970 :-)

    -Mike

    1. Indeed! And I so, so wish my parents bought some similar property there in 1988, pre boom. That’s right.. the Asian Crisis was vicious. Good on them for holding on for 18 years later! Shit, people don’t know or remember how bad the 1997 Asian Financial Crisis was.

      I don’t think I’ll be making it to Bangkok. Here at Pulau Redang and off to Cambodia on Mon, June 1 then probably go back via Taipei. But still, no flights booked yet! :)

  20. I started investing when I was in Graduate School. I took a risk by taking out the maximum student loans and then on top of that utilized margin to double down on Apple stock with it was $300 dollars a share (2010) (or after split $42/share to compare to today’s price) and owned $120,000 in Apple stock. I chickened out and sold early on for a $10,000 gain. If I had held on until today, would be worth almost $380,000…… and that would be only 5 years of holding…. Lesson learned.

  21. To me the main issue is leverage. Would I rather have a mortgage or buy on margin… To me, I feel much more comfortable with a mortgage than I do with an equivalent amount invested with a margin account.

    I have a rental property that was originally my primary residence. I purchased it in 2005. If I sold it today, it’d still be for a loss. However, I’ve been renting it out for the last 6 years and have never felt uncomfortable owning it. The first couple years of renting, it was cash flow negative, but with principal pay down considered, it was basically breakeven. Today, I am cash flow positive with it.

    My mindset when real estate crashed was that I’d just ride it out. It’s not a loss until its realized and unlike a margin account, it’s entirely my choice to realize it.

    So, while I have a poor performing real estate asset (capital gains-wise), if I had a stock perform the same way on margin, I would have been in a lot more trouble.

    1. That’s the thing. So many publicly traded companies I know have disappeared. At least with real estate, there’s a physical asset that has insurance in case there is some disaster.

      Yes, buying in Detroit over the past several decades might not have been a great move, but at least the houses are still around.

  22. Would be interested to know how real estate did in the San Francisco Bay area from 1955 to 1985. I saw those paragon statistics a couple weeks ago with the one that Sam included in this post. There was also a chart from them showing the interest rates going from 15% down to 3% from 1985 to 2015. If interest rates ever do start to rise again to more normal levels it will be interesting to see what asset class will outperform for the next 20 years?

  23. Hey Sam-

    Do you consider an index like IYR to be “stock” or “real estate”. I think purchasing and owning actual property can have great returns – especially with leverage involved (put down 100k on 500k property, end up selling it for 600k, essentially doubling your money). However, I do think that the time associated with purchasing, maintaining and renting property should be considered. Purchasing a rental property could easily take 80 hours of work. Once purchased, paying the mortgage, finding tenants, and maintaining the property could take another 40 hours of work in a given year (largely depends on if you do any labor yourself or hire people). I am not a land lord but invest in real estate stocks. Curious to get your thoughts on that fills the real estate asset class.

    Best,

    David

    1. Hi David,

      I’d consider those index funds more stock than real estate. Different tax/leverage/hard asset/utility/return profiles. Maybe think about it as 70% stock/230% RE for those index funds.

  24. You need to work hard and have some luck sprinkled in. This life is full of ebbs and flows and if you work hard and grind it out you should continue to rise.

    With respect to Sam’s real estate purchase while the appreciation is nice let’s not lose sight of the fact he worked his ass off and sacrificed to pay the property down and make it cash flow positive. Even if his property had not appreciated he has a paid off asset that pays him money every month. That in of itself is something to be proud of.

    I get nauseated by the peanut gallery who has a high monthly burn rate and negative net worth who chalk people’s success up to luck. This happens at all leveks of the income sphere btw. Imagine how much further ahead you would be if you drove a Honda instead of a Benz, forwent a 15k tropical vacation and did a road trip (for just one year), maxed out your 401k and only took on a mortgage you could pay off reasonably in 10 years.

    Everyone has to make different sacrifices at different levels to get ahead. if you haven’t made legitimate sacrifices yuou should think twice before calling somebody elses good fortune, luck.

  25. The “real” price of your 2003 real estate acquisition is probably closer to between 800k and 900k. It’ll be interesting to see if SF real estate market ever crashes. I think it sort of has to. Perhaps a private equity market crash will cause a SF real estate crash at some point.

    As for luck, if a person is able to do something for a long period of time it’s not luck. Perhaps, it’s a proven formula. Unfortunately, the majority isn’t able to follow such a formula.

  26. Great post! I find that the notion of luck is a status that is placed on people by others who do/did not have the wisdom, energy or interest to create a risk taking action. My luck came when, after YEARS of studying the LA real estate market, we jumped in when the target price and property crossed paths in 2011. My husband and I bought a condo in a great part of LA where our monthly costs are below $1,500. I am close to the beach and with us having one of the largest units in the area, I could rent easily for $2,700 (whether the market is up or down). Now lucky would have been to buy the cheap 3 bedroom in our building at the same time and making 2,000 of passive income!

    Question – I would like to buy a second home and preferably where we would retire in 20 years. I read your posts about tax free states and I am looking at Nevada – Lake Tahoe area. Even better, I would like for this to be our rental property until we retire. Afterwards we would turn our LA property into our rental property as the mortgage will be paid off and can collect 2k monthly without fail. Thoughts about this strategy? Or should a second property not be considered without maxing 401K first.

    Keep these types of posts coming – my potential net worth increases with (almost) every one.

    1. “Luck is what happens when preparation meets opportunity.” ― Seneca

      I moved to NV last year and sold the house in Calif for the following reasons:
      >Long distance land-lording may require a management company that cuts into profits
      >Although you collect 2k monthly, you have property tax, insurance, maintenance, etc. expenses skimming from that 2k.
      >Not sure about this but I think rental income (minus expenses) is taxed as regular income
      >I invested the cash in dividend stocks, taxed at dividend rates
      >Keeping and renting the Calif house means – annual Calif tax returns!!!

    2. I like the idea, and I’ve thought the same thing as well e.g. buy in a no state income tax and retire for half the year to avoid paying state income taxes.

      It’s important to try and REMOVE/SELL all California real estate before implementing this plan, as the CA government may figure out a way to get you (you have to file in CA).

      Definitely max out the 401K first.

  27. HI Sam!

    I get called lucky a lot, and I just take it with a smile. Sometimes it feels like a slight, other times it doesn’t, but when it is a slight, it usually comes from a need to compensate.

    I also find that people who do this usually over emphasise the part of the process that they attribute to luck, and dismiss/ignore all of the other aspects that had lead to the final outcome. I think you have illustrated that point in your post anyway.

    I also find that some people are just immune to any contradictions of their beliefs, so there is really no point arguing. Nobody benefits. Its why over the years I’ve simply met their moans and slights with a smile.

  28. Indeed, it comes down to luck. We are lucky to be born in a part of the world where we have a lot of freedom and opportunities. In a lot of emerging countries, they have less freedom and opportunities.
    We are also lucky to be exposed to proper education. And we are lucky to get interested personal finance as a subject.
    After that, it is having the guts to make an investing move. There are many people that have the same luck as us, but they do not take action.

  29. agree with you 100%. People always discount the years of hard work that they were too lazy to put in. I am called lucky, silver spoon etc. for the exact same reasons as you. Congrats on your “luck”!

  30. I agree with everything you said, but with great emphasis on the importance of luck (like you recently saw in the DMZ). I was lucky to graduate during a recession, because I started buying real estate at the bottom rather than the top, and started investing at a time when the market could only go up. Sure I worked hard in school and was disciplined with savings, but arguably that is because I was incredibly lucky to have parents who taught me those things, and live in a developed country with good, free education. I am no more deserving of my fate than are kids born into poverty in Africa with almost no chances in life. Luck!

    1. Very well stated. It is easy to be smug when you have choices and chances. Recently I read a comment by a smug working mother demeaning to stay at home mothers. Some women stay home to take care of disabled parents or children and lose their chances and choices. Some women have (grand)parents willing to give free, quality child are. It is easy to be smug when you have choices and chances. Thank you for being humble. Congrats on your successes.

      1. @F.S.F Not sure about the comment you read, but I’m sure the decision to stay home with parents or kids was not an easy one! I too am envious of people with parents who are available to watch their kid(s), as quality child care is so painfully expensive. On the other hand, some women, such as single mothers, might be envious of someone who even has the opportunity/choice/chance to stay home with her child(ren). It is easier and happier to make the best of the hand that you’re dealt rather than lament when life gets hard or your luck is down.

  31. “every major city is absolutely saturated with foreclosed rental properties”

    I don’t know where this guy lives, but the Denver market is BOOMING. My neighbor’s rental unit sold for $135k a few years ago and is now selling for 205k today. I wish the Denver market was “saturated with foreclosed rentals” so I could buy all of them up in a heartbeat! Most houses that sold for 180-200k a few years ago are selling for 325-375k++ today. I rent right now, and the massive appreciation has priced us out of buying our own home to live in.

    1. Denver and SF don’t count. :) But neither does Miami, LA, San Diego, Boston or NYC either.

      DAMN, I should have bought in Denver over the past 10 years. I’ve been wondering why the hell the place is so inexpensive with all the good weather, nature, and proximity to the slopes.

      Now it’s happening… and California money seems to be flooding in.

      Damn unlucky if you ask me.

      1. DC doesn’t count either.

        I’m not sure why you’re getting so much heat for this article Sam. Sounds like a bunch of people who live in flyover areas are upset because they’re not willing to move to a desirable location and work to create wealth. That’s cool though, better margins for those of us who made the move and use sound analysis on our investments.

        1. Ah yes, DC is hot too! I used to live in McLean, VA and know the area well.

          I’ve always wondered why more people just don’t gravitate towards cities with strong job markets. You hear the story of some person in a random town making their pilgrimage to Hollywood for the bright lights. Why not make the trek to DC for political opportunity, or SF for tech opportunity, or NYC for finance opportunity?

          Go where the opportunities are!

  32. General Tsao

    There are always elements of luck, and we are all emotionally tied to our previous experience of success or failure. Many people in Asia have return 1000x, not 1000% on their real estate investment like FS friend in Malaysia. They absolutely love real estate.

    I on the other hand am so so about real estate compare to stocks.

    what I see is good about real estate is that it
    – Forces you to put a large chunck of money in
    – it’s illiquidity kept you from timing the market like stock investors
    – ability to leverage 1:5 while having a sense (false sense) of security that is a safe investment
    – mortgage forces you to save

    Many stock investor talk big about their return 1000% on their Google stock but when you ask them how much they invested? $5000? So they made $45000, big deal. I made 40000% on my Yahoo stock but at the end of the dot com crash I only walked away with $40,000 profit. Why? Because I bought and sold so many times.

    At the same time my janitor put all his savings $32,000 to pay the down payment for his $160,000 house. Last month he sold it for $360,000. He walked off with a close to $300,000 profit.

    If people have the discipline to save and invest in the stock market without trying to time it they should do slightly better than the real estate investors – historically, on average, nation wide. However once you throw in the variable of 1:5 leverage available to real estate than its harder to make the comparison.

    1. My Malaysian friend had a 1000X return… it was nuts.

      Buy and hold folks. The stock market is a mechanism to transfer wealth from the impatient to the patient. The same goes for real estate.

      The leverage aspect creates aggressive wealth. And if you can write off the interest like you can in the US, all the better.

  33. I think you missed his point, Sam. His comment was less about luck than about sampling.

    His point was you have an outlier sample size of 1. Had you not been in a real estate market like SF or NYC, your conclusion might have been different. I, personally, don’t think it was luck since you strategically chose SF and had done your due diligence. There are some fast growing areas of the country, but how much of the entire real estate market do those account for? 10%? 5%? The point is, the rest of the country is not experiencing the same growth as SF. This is what Jeremy was trying to point out.

    He shouldn’t have called you lucky, but his point stands.

    The snarky response was pointless and could have been summed up in the first 2 paragraphs.

    1. The Alchemist

      Gotta agree with Tom here, Sam. Jeremy’s basic point is that SF real estate is an outlier; you cannot use it as a general reference point for the value proposition of RE investing elsewhere. He’s also right about the “luck” thing. No one who’s followed FS for long would be foolish enough to say your wealth was the result of luck. That’s a no-brainer. And yeah, a whole post refuting that in a snarky way was a little… snarky. :)

      Jeremy’s main point was that a more realistic comparison of RE vs stocks would look at a more average RE market than SF. The Bay Area is just nuts. I actually “toured” a 500 square foot single family home last weekend down here on the Peninsula (took me all of about 90 seconds) that was offered at $575k. I’m dying to see what the final sale price turns out to be!

      1. I do wonder if people get my point though:

        * I didn’t have to buy in San Francisco, just like one doesn’t have to buy a particular stock. We’re free to buy anywhere in America just like we’re free to buy any stock.

        * EVERYBODY seems to get lucky if they hold an asset, stock or real estate, for a long enough period of time. Hence, anybody who takes action to buy is lucky, myself included.

        * I love comments and people’s perspectives. Sometimes, they are so interesting that I can create a whole post around it like this one.

        1. Adam @ AdamChudy.com

          I have to agree with the commenters above. Your wealth is purely a product of hard work from high-school, to college, to career, to saving and investing. I’m certainly impressed and it makes me want to work harder.

          However, the comment specifically addressed using a highly unusual outlier of a real estate market and good timing to then extrapolate to the more general topic of real estate vs. stocks. I think comparing that to investing in Tesla at $40 then using that as why you should buy stocks in general is a pretty apt comparison. It’s a great story about hard work paying off, but it’s not good data to make a general recommendation.

          1. The longer you live and the more chances you take, you’ll begin to realize a lot more “unusual outliers.”

            There are rarely ANY outliers if you take no risk.

            I wonder how come nobody has commented on the $8,300 to $8,300,000 real estate investment outlier in KL, Malaysia? That is way, WAY more impressive than a measly $500,000 gain over a 13 year time span.

            1. Matthew Kime

              because a bigger outlier doesn’t mean that you’re not an outlier?

              just because one person had success with something doesn’t mean that its good advice for everyone – there are many lottery winners, but that does not mean that buying lotto tickets is a good investment.

  34. Great explanation of luck vs hard work. To me, my luck was being born to my parents, in a developed country, and picking a major I was interested in that turned out to be high paying. Luck was not needing student loans, but hard work got me the savings I graduated from undergrad with and gave me the tools to save a high % of my income post-college as well. Hard work also earned me the promotions, bonuses, and subsequent raises, but there was a bit of luck involved in having good managers who believed in me at various points.

  35. Even Steven

    So let’s say buying in SF was luck, but what about graduating from a great school, working in the finance world for long hours for a great salary, creating FS and Yakezie, being a consultant for major firms, when all of this happens it doesn’t feel much like luck to me.

    I think that some people need to say it is luck because they have not achieved in this particular category. It would be like me saying FS is lucky because you started 3 or 4 years before I started my blog, not because of the hard work and great writing/research you put in. It’s a slight to you and boost to me, but that does not make it luck.

    Hope the trip is going well!

    1. Dividend Growth Investor

      Ha, this reminds me of the great J Paul Getty quote on how to get rich:

      “rise early, work hard, strike oil”

    2. After a while, it doesn’t start to feel like luck because there’s so many hours put into an endeavor. Anybody who publishes online will tell you this. It’s 7:28am and I’m writing this comment and cleaning up all spam in Malaysia, for example.

      At the same time, I think we’ve got to be cognizant about all the luck around us that continues to propel us forward. Eventually, our luck will run out…………. It’s scary to think about, but it’s true.

  36. Wall Street Playboys

    Hilarious average people beliefs:

    1) anyone doing better than me is a mean person (good luck networking!)
    2) anyone richer than me got lucky (that’s called risk adjusted decision making)
    3) anyone earning more than me doesn’t deserve it (good luck getting promoted!)
    4) I deserve to get paid more (doesn’t generate any revenue)
    5) increasing my education without any transferable skills will be a good long term decision (simply LOL at this one)

    1. 4) Unless you’re working for someone who is taking advantage of you and doesn’t recognize your worth, in which case you should find someone who will pay you your actual value.

      5) You lost me on this one? If someone switches careers because they earned another degree, yet the two careers are totally unrelated (few transferable skills), why would this necessarily make this a poor long term decision? To be honest though, there’s never “zero” transferrable skills. You can learn something everywhere you go whether it’s at a McDonald’s fryer or Wall Street.

  37. theofficialjohnandre

    I think you both have a point. My parents purchased a home in South Jersey in 1986 for $85,000, sold it in 1997 for $87,000, so it depends….

    You found your niche and San Fran is HOT right now….

      1. I second this point. You have to do your homework, have the money, and create some luck. My parents purchased a home in KY for $165k in 2000, and sold it in 2015 for $162k, not including realtor fees. This was after the house had been on the market for 300 days.

        Obviously this home was purchased for the purposes of living in it, but I’d doubt that it would be able to command much income if it were a rental and would have likely gone unrented for some time between tenants.

  38. One real estate plus for a lost-ball-in-high-weeds investor (like me) is it is forced savings. I was tired of paying high fees to “advisors” and didn’t know what to do with my cash. When I bought my investment property which is not earning me a dime (yet) I had to forgo buying things I wanted but didn’t need.
    Bonus =s Temptation.

    Next question, pay it off or invest.

  39. Nice article Sam…something I think about often enough. One day when I hit my goals and look back on how I got there will I attribute it to luck or hard work or a balance of both.

    I like to remember a quote from the sandlot…

    “Let me tell you something kid; Everybody gets one chance to do something great. Most people never take the chance, either because they’re too scared, or they don’t recognize it when it spits on their shoes.”

    1. I do hope we get to do something great multiple times in our lives. How about once every 10 years? That’s not asking too much!

      I think in 5 year blocks… so after 6 years of FS, I’m thinking about the next chapter now.

  40. Great to read that. I am just thinking if I shoud take some money out of the stock market to buy real estate. Somehow I feel that I can make more money on stocks, but I like the fact treating real estate as a real business… :-/

  41. Buying in SF in 2003 was a timing play. The lucky part was that you were born on the right date, had money on the right date. The fact that you bought wasn’t exactly luck since you had an educated guess about it. The fact that those guesses played out may be considered luck, who knows. At any rate, there’s some luck involved and some calculated risk but that doesn’t mean anyone should discredit investing. You’re right, it does seem to give people an excuse NOT to invest when they attribute other’s success to luck.

    Everyone recommends index funds but I would consider those more of a gamble than buying an individual company or quality real estate. No one can replicate Wareen Buffert but that’s how he would tell you to invest since he did it himself. It’s about finding value and capitalizing on it. With index funds, you’re betting on the market as a whole which has way too many parts for one person to make an educated guess. Not even a super computer could make that kind of prediction.

    1. I have rental property, stocks, and bonds. I guess they all have their place.

      I personally like index funds because of their low fees, if you don’t have time to do the proper research. If you do have the time to do the research finding value in my opinion is a better play. My company 401k is in Index funds (0.65% fees no loads/transaction costs). My IRA and taxable investment accounts are in bonds. Not bond funds but individual bonds. They are split between Municipal, Corporate, and Real estate (REMIC, and MBS)

      The S&P 500 in the 50+/- years it has been around has only 83 of the original companies in it. They do a lot of adjustments for the changes so it is always hard to see into their valuations and there are multiple versions. (see below not sure which you were graphing) so by investing in the index you get some “help” keeping current with companies, and re-balancing across sectors.

      “The “S&P 500” generally quoted is a price return index; there are also “total return” and “net total return” versions of the index. These versions differ in how dividends are accounted for. The price return version does not account for dividends; it only captures the changes in the prices of the index components. The total return version reflects the effects of dividend reinvestment. Finally, the net total return version reflects the effects of dividend reinvestment after the deduction of withholding tax” (from Standard and poors)

      Inflation over the last 50 years took a 1965 dollar to $7.53 in today’s dollars compared to the total return of +/- $88 in S&P you are still money ahead if you didn’t need it during a down year.

      (Source: The Bureau of Labor Statistic’s annual Consumer Price Index (CPI), I used the calculator I didn’t check the math of 4.12% inflation average, the 88$ return is from the Wikipedia page so take it for what it is).

      I like the bonds because of their consistency and tax advantage. (the tax frees are generally in the my taxable account, the taxed are generally in my IRAs/Roths) I know I have blended tax free rate of return of 6.8% through 2032, and a blended taxable rate of return of 8.7% through 2028. Those are coupon values and assume no defaults.

      Residential Real estate investments I love because of their consistency, and tax advantages but dislike because of the upkeep, and low liquidity. (sadly my rentals are not close due to cross country moves due to work) I have management companies that take care of them but lose out on some cash flow/profit because of them.

      Commercial Real Estate my family has a lot of experience (good and bad) but I see the volatility much higher than residential real estate. Since the 2007/8 crash I’ve watched a partially developed property lose and regain 60% of its book value in 7 years due mostly to changes in mortgage requirements, lending standards, and appraisal rule changes. I think there is a lot of opportunity there, but being locked in for longer/faster potential cycles in the real estate market brings the risk to go with the opportunity.

      TLDR version (my opinion):
      1) Index funds are nice for very liquid easily manageable low cost investing with good liquidity.
      2) Individual stocks are better if you have the time and knowledge to follow, track, and pick them.
      3) Bonds (individually purchased) give good rate of return and fall into the same category as individual stocks, more consistent returns, less liquidity.
      4) Residential Real estate (rental) great long term investment, have to research and know markets and area, and be prepared for a long haul, otherwise it locks up
      5) Commercial more risk more reward, and I’m not experienced enough to play myself

      Sorry that rambled a bit

      ~T~

      1. Thanks for sharing! I missed out on commercial real estate, although most people I know who invest in commercial do so in partnerships given it takes quite a bit of coin.

        I don’t like investing with partners. Can get hairy at times if someone wants to sell and someone doesn’t. The reason why I’m scared of Tenancy In Common apartments, although a 2 unit to live in and then condo convert is like instant 15% gains.

    2. Hey Ricky-

      I disagree with the above. Warren would tell the average investor NOT to do what he does and to buy index funds. It is pretty common knowledge nowadays that buying individual stocks is never going to beat the market over a long time horizon for an average investor. When you buy the market, you don’t need to do any analysis. Just hold for years and years.

      Sam?

      1. What he’s done certainly isn’t commonplace – but he’s never been an index investor. If he did tell everyone that index investing was the way to go – why would you listen to him when he’s never actually done it and never will?

        Obviously what is right for him is not necessarily right for everyone. Indexing is definitely the way to go for the majority. I’m just saying that index investing is arguably more of a gamble than anything else. No one can factor all the moving parts into something as broad as an index fund. You’re simply betting that, overall, companies in the US will be worth more in 10+ years than they are now. How does one go about accurately predicting that? Conversely, individual stocks may be more risky, but its also less complex in comparison, so there is perceivably more “control” so long as you have a brain like Buffet’s.

        1. Warren Buffet does say that most people would be better off in index funds. I’ve read his quote recently.

          Point taken that it’s not what he did to make his fortune.

        2. “I’m just saying that index investing is arguably more of a gamble than anything else.”

          You’ve said this a few times and it just isn’t true. Buying individual stocks is a billion times more risky because it’s a heck of a lot more likely that McDonald’s will have an off year than every major company in the US. Business overall tends to grow relatively steadily. GDP data supports this notion.

          A company can go bankrupt. All 500 companies in the S&P won’t.

    3. The aggregate value of all U.S Companies is equal to the P/E ratio * GDP * corporate profit margin.

      P/E and profit margin are both bounded, so buying an index fund is essentially investing in the idea that GDP will grow over time.

      The thing about real estate is that it is highly leveraged which makes a direct comparison to stocks challenging. It is also notoriously difficult to calculate a true return on investment since there are so many incidental costs along the way.

    4. Folks can always just buy Berkshire Hathaway plus an index fund or two as well, to address this debate below.

      Warren is great, and famous for not doing himself what he says to others.

    5. Firstly, Warren Buffet recommends to people that stock index funds is the best way to go.

      Secondly, Warren Buffet isn’t just a normal investor. He buys portions of companies that he feels are under valued, but in addition, he has enough resources to purchase enough of the company that it allows him to have a say in the management of the company.

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