I personally have been investing in Bay Area real estate since I moved out here from Brooklyn in 1977. I have 75% of my assets invested in Bay Area Real Estate. Most of my remaining assets are invested in the stock market. I was curious which investment has had the best return on my investment over the last 20 years. Bay Area Real Estate has proven to produce an 8% greater return than the S&P over the last 20 years. Quite honestly I was expecting that number to be greater, but I am grateful, that with all of the ups and downs, I have made the right decision.
Let me quickly explain my numbers. I took a $100,000 investment in the S & P in 1990 and compared that to a $500,000 home purchase using the same $100,000, or the standard 20% down payment also in 1990. I am not a statistician so my numbers are rounded off and are deemed reliable, but certainly not guaranteed. These numbers are based on not selling and leaving it invested in an S&P index fund. Let me say if you paid cash for that same $500,000 home you would be substantially better off with investing in the S&P.
Please review the facts and would love your comments.
Year | S&P % | $100,000 investment | Bay Area % | $500,000 purchase with |
1990 | -3.42 | $96,580 | -0.005 | $497,500 |
1991 | 30.94 | $126,462 | 0.024 | $509,440 |
1992 | 7.6 | $136,073 | -0.012 | $503,326 |
1993 | 10.17 | $149,911 | -0.004 | $501,313 |
1994 | 1.19 | $151,695 | 0.022 | $512,342 |
1995 | 38.02 | $209,370 | -0.004 | $510,292 |
1996 | 23.06 | $257,650 | 0.05 | $535,807 |
1997 | 33.67 | $344,400 | 0.072 | $574,385 |
1998 | 28.73 | $443,347 | 0.121 | $643,886 |
1999 | 21.11 | $536,937 | 0.131 | $728,235 |
2000 | -9.11 | $488,022 | 0.253 | $912,479 |
2001 | -11.98 | $429,557 | 0.046 | $954,453 |
2002 | 22.27 | $525,219 | 0.086 | $1,036,536 |
2003 | 18.72 | $623,540 | 0.077 | $1,116,349 |
2004 | 10.82 | $691,007 | 0.151 | $1,284,918 |
2005 | 4.79 | $724,106 | 0.115 | $1,477,655 |
2006 | 15.74 | $838,081 | 0.051 | $1,553,016 |
2007 | 5.46 | $883,840 | 0.071 | $1,663,280 |
2008 | -37.22 | $554,874 | -0.227 | $1,452,043 |
2009 | 27.11 | $705,301 | -0.207 | $1,151,470 |
TOTAL GAIN | $605,301 | TOTAL GAIN | $651,470 |
Tax consequences and principal pay down really need to be considered to compare real gains. |
CAGR is the Compounded Annual Growth Return -http://www.moneychimp.com/features/market_cagr.htm |
Bay Area Median Price from CAR Annual Historical Data Summary http://www.car.org/tools/smart/archive/2010ahds/
I consider Real Estate a safer and more conservative investment. The temptation to buy and sell as the market fluctuates while invested in the stock market is much greater than in Real Estate. I believe Real Estate has many other benefits; certainly the tax benefits are great. As an investor you can have a non-cash write off of depreciation, and as a homeowner you can deduct all interest and property taxes, plus you are allowed a tax free gain of $250,000. Picking a stock is much harder than picking a home. Most homes in a regional area appreciate in similar proportions. I quickly looked at San Bruno and San Mateo for the last 10 years and they both appreciated 19%. Not sure if you can say the same for the S&P. You could lose everything if you invest in the wrong stock. Having the discipline not to sell a stock is very difficult. With Real Estate you can never lose everything. Even if it burns down and you have no insurance, the land has value. Real Estate investments are a bit more difficult to liquidate so it is forced savings. Most important Real Estate offers you a home to live in. The cost of borrowing for homeowners comes with the tax benefits above and in 30 years it will be paid in full. The cost of borrowing for Real Estate investors is paid by the tenants and so is the principal payoff. Many financial advisers believe in diversification; small cap, large cap, international, etc. I do not suggest that for Real Estate Investing. Managing single family homes is different than multi unit buildings and different again from commercial property. Managing properties in different areas even if they are the same type of property does not work either. Different areas have different rent control policies, different laws, and different expenses. I am a believer one should only invest in real estate you can drive to in an hour or two. I heard about a great investment on the east coast. If everything went as planned it would have been a great investment but being 3000 miles away I was not able to control the plan. I am happy to be out of that investment. I would love to hear your feedback. www.leesellsmore.com |
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