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Is real estate a good investment? Compared to what?

Many folks ask the question “Is real estate a good investment?”  And, almost many people are quick to provide an answer… some will say yes, and some will say no.   This question came up recently in a blog post over at www.SeattleBubble.com (http://seattlebubble.com/blog/2012/06/29/king-county-home-prices-affordability-1950-q2-2012/).  The post noting value changes ends with the comment:

“Ten to thirteen years, zero real appreciation.  What a great long-term “investment!”

Whenever I see a comment like this, I have to ask “Compared to what?”  You should never look at an investment in isolation. You have many options and you should compare them to each other. Is 0% return good?   Is -10% return good?  You can’t answer unless you answer “compared to what”.  -10% return is great compared to -20% return.  But, its terrible compared to +1% return.

Before we go any further, let me provide this one statement:

I do not believe that your home is an investment. Period.  The home you live in is almost always an expense, whether you purchase or rent. The decision to purchase vs. rent should be a matter of weighing the benefits, including financial, of the two options. I believe that in most cases, the benefits that are most important to home buyers are the non-financial benefits.

OK. Back to the question at hand.  The article on SeattleBubble.com didn’t really look at real estate as investment, at least not the kind of investment I’m looking for. Instead, I’m pretty sure “The Tim” was simply taking a shot at the NAR rhetoric about home ownership. Good for him. Someone needs to.  But, I think there is a serious side to this question, so I decided to take a look.

So, what are we comparing?

Tim compared prices, taking into account inflation.  So, he is looking at real estate investing from the ‘appreciation’ side, not the income side.  Can we find another common investment to compare it to? Sure, the most common is stocks, and many people invest in stocks for their appreciation potential.

I decided to look up the return for the S&P 500 for the same period Tim used for his comparison.  And to keep things fair, I calculated the ‘real return’, the return after inflation.

Email me if you would like the spreadsheet.  I’m going to simply show you the charts:

Yearly and cumulative returns from S&P 500 since 1950:

S&P 500 return from 1950

You will notice that the cumulative return is about 300%. Not bad at all.  And appears pretty good compared to the 200%+ return on real estate for the same period.

Now, “The Tim” specifically noted the return from 1999-2012, so lets take a closer look at that:

S&P 500 return from 1999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The cumulative return is a small 3%. Still that is higher than the 0% appreciation noted by Tim.  So, all other things being equal, the return from stocks would be better.

There is more to the issue of course

Things are not quite so simple, but you get the idea.  You should compare the options.  Keep in mind that no matter what, you will have some living expense.  So, if you can purchase a home for the same expense you can rent, you might be better off with the home.  But, like any investment there are risks.  With stocks or with homes, prices/values fluctuate.

That is one reason I feel that looking at the home you live in as an investment is not a good idea.  When investing in real estate, I prefer income producing properties.  If they have positive cash flow, you are less concerned with asset appreciation.  You still want it, of course, but you don’t need it… and your calculation of ‘return’ is a bit more complex (its also more complex with stocks if they are returning a dividend).

The point I want you to remember is:  Ask both questions.  If you are thinking of real estate as an investment, or any investment, ask how that investment compares to other options you have.  (Don’t just ask, do the math!)

Another good idea when looking at blog posts and news articles is to check the viewpoint of the author against their motivations.  I’m a real estate broker and I teach classes on real estate investing.  You can guess that my ‘slant’ is going to be towards the positive on real estate investing.  Does www.SeattleBubble.com have its own slant?  That is for you to decide. (My opinion is “yes”, but I like their slant.  It helps balance the propaganda of NAR, NWMLS, and large brokerage companies who have a vested interest in home sales.

Good luck and good investing!

Sources

 

 

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