Stocks vs. Real Estate

We’ve had this discussion here recently, but I stumbled across Jeff Brown’s comparision and thought I’d share it to see who would get riled up.   Feel free to comment on the original post at 



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47 responses to “Stocks vs. Real Estate

  1. ObserverX

    Why ask us to post there, Rob? I read it quickly and all I can say is that his calculation is so incomplete it’s not even worth the effort to respond.

  2. mike

    The issue of stocks versus real estate is obvious.

    Historically speaking (if you want to go by that), stocks have a greater return but higher volatility. As freako likes to remind us, risk adjusted return is the same.

    From an arm chair perspective (eg, you’re not a handy man or a landlord or investing in your neighbourhood), if you have a longer horizon, stocks are the way to go. If you have lots of risk in your life because you’re self employed already and a long horizon, then maybe RE (or bonds or whatever) are the way to go.

    If you have a short horizon, bonds might be preferable as they can be more liquid.

    If you are a handy man or a landlord or basically like to think about houses, then RE is a better way to go. The reason being here is that RE is a inefficient market and it’s easier for someone to “pick houses” (versus pick stocks, don’t bother, just invest in indexes).

    The only interesting debate here, really, is what is the future? Are stocks going to do well going forward? Which stocks? S&P? Hong Kong? India? TSX? Which RE markets are going to do well? Are we at the top of a bubble?

    The debate of RE versus Stocks is very very boring because it’s well understood and there is really not much room for debate.

  3. Skeptic

    Isn’t the correct answer that a slice of both is the best portfolio ?

  4. ceejay

    Here’s a way to have it both ways. Buy a house and with your left over cash (!) buy some colateralized debt securities, like, uh, some of them subprime backed bonds. Talk about “polled” 🙂

  5. Anonymous


  6. ihjojoi

  7. The unthinkable"Renter"

    Buy low and sell high.

    RE is a market as well, like it or not.

    You know what happens to all markets when they are at extremes.

    Would you like to buy google at $450 a share or a house at 125% of 2001’s value.

    Mind you I havent checked Googles price for over a year but both the google stock and GVRD RE are at all time highs!!!

  8. renting

    I totally didn’t get his real estate calculation. It looked like he assumed that one property could carry itself in such a way that it could be paid off in 10 years with no additional captial.

    Or that your 100 thousand could be used to buy multiple properties that would carry themselves and you would benenfit from the highly leveraged appreciation.

    Not really applicable advice for Vancouver since there are virtually no properties with any metrics close to these.

  9. WoW

    New listings are at a record high – just announced (if i’m reading it right), as are prices (new highs)…when will listings eat into prices – or if, that is the question.
    Weather’s great, hope everyone is taking time to enjoy it!

  10. spectralshift

    I’m all for real estate investment but that article made my teeth grind. I’m not going to nitpick too much and build an alternative model just to show the gaps… but seriously, if average mortgage rates over (the most likely chosen) 10 year period is ~6%, you borrow against 90% of the value of the home that appreciates at 4%… well… you are going to lose money. This implies that there is either a serious oversight (carrying costs) or there are assumed variables like rent. Either way the model is misleading.

    What bothers me about it is that these kinds of models and generalisations add significant confusion to those that actually want to figure out what is best for them. It’s how we work out our retirement plan, our goals and our future. Every errant model that is given a form of authority makes it that much harder to seperate fact from fiction.

    Afterall, how many people are going to read things like (When Does Direct Real Estate Improve Portfolio Performance? -University Reading), or heaven forbid something like (Real Estate Risk – I : A Forward Looking Approach – CB Richard Ellis).

    People who are professionals should be reading these things and basing the models of concrete data. Building errant models that manipulate – intentionally or not – the data to fit their own personal view is very harmful.

    Anyway, why real estate is a worthwhile investment;

    Lower VAR, higher leverage, secured investment, income+appreciation, tax advantages. Negatives include carrying costs (taxes, insurance, property management, etc), capital risk (real depreciation, maintenance) and all the others that come with investing (interest, reinvestment, political).

    Since I saw only one of those things factored into the “model” that was included… well… not much to say about it. Far as I am concerned, that was advertising. It didn’t educate and it did not offer advice.

    Lastly, I probably wouldn’t of been so irritated if his comments regarding the “inside trading” part of stocks was assumed, when he then uses an extremely broad index. To quote:

    That said, you have to know which stocks to pick, when to buy, and who in management might undermine your long term plans. And much of the information on which you will want to base that info is zealously kept from you.

    Using an index means you don’t pick stocks, don’t worry about management and there is no information gap. As for timing, since that applies to any investment and more to real estate than stocks by an order of magnitude (10%->100% according to him), I’m not sure what to say to that either.

    And let’s not get into “control” that he speaks of in an industry where transferring an asset will cost you multiple % points off a leveraged investment! I can change my stock portfolio in a fraction of the time, at a fraction of the cost, at a fraction of the paperwork and effort that it takes to do the easiest of real estate transactions.

    (Some of these points are addressed in the comments, like the assumption that the property is cash positive, at 10% down. FWIW, I’d love to see a property that would be cash positive at 10% down… It seems hard to find any at 25% down! I’m also curious how you can have a neutral earning property, but become cash positive when accounting for tax savings.)

  11. robchipman


    I’d like to see posts on Jeff’s blog because I’d like to see Jeff’s responses. He strikes me as a smart guy, but I might be wrong. I’d like to see the clash of opinions between some of the more thoughtfull people here and him, and see where the chips fall.


    You’ve forgotten professional management for real estate. I’ve provided that for over two dcades and watched people become quite wealthy. They don’t complain about the management fees, even though someone who hasn’t been through the process may find that remarkable.


    I don’t think the right answer is a combination, and I think that for two reasons (and they’re not really too logically connected, but…) 1: a compromise isn’t good by definition. As Ozzie often says, put one foot in hot water and the other in cold water. Do you feel comfortable? 2: I’m not sure there’s a “right” answer. In my experience people invest in real estate because they’re pre-disposed to it. There are (and have been, through time) enough of those players to construct a market that works.


    You can buy real estate at peaks and still do well. It has to do with purchase structure, taxes and cash flow. Its true that buying in a trough can be better, but remember that the trough may have less choice, often higher rates, lower rents, etc.


    Ask Jeff to explain a little. There is seldom (if ever) 10% down cash flow neutral Vancouver properties, but many investors buy with 10% down to write off income tax and increase return. I did just sell a 30% down cash flow neutral to positive property.


    Thanks for the links. I may be wrong, but I think Jeff is saying that a cash flow neg property becomes, in effect, cash flow positive by applying interest expense, maintenance and depreciation deductions to your earned income. You change income tax paid today into capital gains tax deferred until you’re in a lower tax bracket (or never, if you don’t sell). While you may not find cash flow + properties in Vancouver for 10% down, they did exist in Greater Vancouver in the not too distant past (it was a challenge for some investors to get neg/neutral cash flow with past mortgage restirctions), and you can still get them today in other markets.

  12. awum

    Consider this study completed at the Sauder school:

    Question: based on returns in real estate investment in various parts of Canada using starting dates from 1979 to 1996, can you rent and invest to get better returns than buying a home would give you, considering the tax break, the local rents, appreciation, etc.?

    Answer: “For every city, there is at least one period over which renters did better than owners
    and the reverse also holds true.” The study calculated a ratio of renter to owner wealth by city
    investing 100% of the difference in annual costs (renting vs. buying) in the TSE.

    From the study: “disciplined, investment savvy renters in Edmonton, Halifax, Montreal,
    and Regina can accumulate over 20 percent more wealth than can homebuyers after taxes
    and fees. For Ottawa, Vancouver, and Winnipeg, the ratio is lower, but renter wealth still
    exceeds that of owners. Only in Calgary and Toronto would it not on average have been
    possible to match owner wealth, net of taxes, closing costs and realtors fees, and
    investment management fees.”

    I believe that about settles it. Historically, TSE peforms better than RE in most places, and about equal in Vancouver. But that’s with the homeowner capital gains tax break. Without it, well…

  13. spectralshift

    Hi Rob;

    (…)I think Jeff is saying that a cash flow neg property becomes, in effect, cash flow positive by applying interest expense, maintenance and depreciation deductions to your earned income. You change income tax paid today into capital gains tax deferred until you’re in a lower tax bracket (or never, if you don’t sell).

    Interesting… Though I still don’t understand how this becomes a given net-positive even over the long run. I’ll have to take this up with a tax accountant at some point, but from what I understand, it’s simply a form of speculation on the appreciation of the property.

    If anyone has any paper examples of this, I’d love to see them (either the math or an example!) just so I understand the Canadian viability of this strategy.

  14. Unbiased Realtor

    Everybody knows you can’t go wrong with RE. It never goes down, and it’s a fact, we are running out of land, because they don’t make anymore of it.

    Shares they can just print, and they can go down to zero.

    I know some bear will point out at what has happened in the USA, but that does not apply to Canada, our land base is so much smaller, and our population much higher.

    We have the mountains, which are very different from the ones in places like Switzerland, there they can build on them because the ground is not as soft.

    I am all for RE vs Stocks, especially now that a new financial product will soon be available from the banks.

    It is a Rental Mortgage because rents are going up in Vancouver to close the Rent/Own gap you can now borrow to make the rent, and spread your cost over your working life.

    RE over Stocks anyday!

  15. kfinancials

    Real Estate Agent = Education Requirement = 1 month course. Not even sure if high school grad required. Noth even worth while to look up.

    Stock Analysis = Education Requirement = Undergrad University Degree & Most with CFA (3 yrs) or equivalent. Total 7 years after high school

    You make the call who to believe.

  16. kfinancials: I hope that’s not how you make all your decisions in life!

    I don’t think there is a course on common sense, is there?

  17. robchipman


    I think you’re comparing buying a home to live in to stocks, which are bought as an investment. I think you need to compare leveraged investment real estate to stocks.

    I’m on shaky ground here, because it sounds like I’m saying “I don’t want to compare stocks to real estate to determine which is best, but you need to compare stocks and real estate to….um…” My goal is just to show some of the upside of real estate, because I don’t think its well understood. I’m not trying to prove that stocks are bad, and RE good, or stocks good, RE better. There are some aspects of that that we just can’t get away from, but there you are.


    Most property investors that I know do assume some sort of appreciation in the long term. Its not critical (you could buy in other areas, and tweak the numbers), but without growth leverage becomes moot.

    Is that speculation? I don’t think I’d go that far. I assume 5% long term around here. We generally do better than that. But, it is an assumption.

    The broad brush stroke idea is as follows: I pay out $1000 per month on the property (pit, maintenance, mgt, etc). I take in $750. I’m down $250. I write off interest, maintenance, management, taxes, and depreciation. That’s most of the $1000 (a little goes to principal repayment).

    So, I pay $250/month to my PM, who uses it to pay whatever shortfall I have. That’s my net loss. I add depreciation to increase it. I reduce my taxable income as a result. Given the right numbers and the right tax bracket, I could come out paying less tax by more than the $250 I’m losing on the property. That doesn’t take into account the potential capital gain, which most assume becomes more assured the longer you hold the property.

    (This is not an argument justifying purchasing a bad, money losing property so that you can write expenses off; rather, buy a good property, and finance it so that you incur expenses).

    I don’t have actual numbers handy, but many of my clients have done this, long term. They re-mortgage the property when interest expense gets too low, and use the borrowed money for other investments. It does work. You can even mortgage your recenue properties and use the funds on a principal residence (result of a court case between a lawyer and Rev Can – the judge sided with the lawyer).

    At some point in time you have to either pay tax on free cash flow (you probably don’t want 10 highly leveraged properties with a huge interest expense when you’re 80) or pay some capital gains on sale. One solution is to leverage several properties and then, when you approach retirement, sell individual properties and pay off other outstanding mortgages. You go from 10 leveraged properties to 5 free and clear properties and collect, say, $7,000 per month. Not bad if you don;t have an indexed pension.

  18. robchipman


    I should have thanked you for the link, btw. Notice, all non-belivers, that Tsur Somerville is one of the authors. The guy who says nobody credible is calling for a meltdown also says that homeowners don’t do as well as stock investors. Hmmm……

    Anyway, the Sauder report does compare buying a home with being a savvy, disciplined investor. The renter has to be twice as disciplined as the average North American. They also admit that in real life homeowners are more wealthy, as a rule, than renters. I think the discipline enforced by a mortgage makes a big dif here. At the same time, I would not counsel providing for your retirement solely by buying your home. That’s just dumb, and has been proven time and again.

  19. spectralshift

    Thanks for that Rob;

    Is that speculation? I don’t think I’d go that far. I assume 5% long term around here. We generally do better than that. But, it is an assumption.

    I would say it is speculation because you are speculating that taking a loss in one area will be covered by growth in another. This differs significantly from, for example, buying a stock or bond. It is comparable to shorting a dividend paying stock.

    I don’t disagree with the assumption; I was implying that you are merely paying a loss upfront on the assumption that the underlying asset will increase in value. The reason I find this speculative is because you will have to eventually find a buyer that would also have to accept a negatively geared property. I hesitate to use ‘rational investor’ here since as you show below, it can be rational to do this… but outside of real estate, it normally be considered speculative to take a net loss on an income producing asset under the assumption of capital gains.

    I pay out $1000 per month on the property. I take in $750. I’m down $250. I reduce my taxable income as a result.

    At 40% tax bracket, you recover $100, losing $150, but you transfer $250 to the property – ok so far. Where I get fuzzy is how this $1800 net personal income loss at the end of the year turns into positive money. If I understand you correctly, I gained FV $3000 ($250 * 12 in) capital depreciation for the cost of PV $1800. I still fail to see the crossover point where the $3000*0.5*40% (or increased tax bracket) becomes profitable…

    Anyway, I don’t mean to derail. I’ll have to sit down and work through this to see if I can get my head around it.

    They re-mortgage the property when interest expense gets too low, and use the borrowed money for other investments. It does work.

    I don’t disagree here – decreasing your tax bill by buying more assets is a great idea… But I still think that assumes that they are cash positive/neutral.

    At some level I’m also trying to figure out why a 10% leveraged home with a negative income plus 15% in a bond with positive income would work out to being better than a 25% leveraged home with positive income… but that’s what I’ll have to sit down and work out. Tax rules makes simple situations difficult!

  20. The unthinkable"Renter"

    “Everybody knows you can’t go wrong with RE. It never goes down, and it’s a fact, we are running out of land, because they don’t make anymore of it.”

    This is a CLASSIC. 😛 Ok what’s your number I am sold.

  21. jimbob

    (result of a court case between a lawyer and Rev Can

    So you are suggesting borrowing against rental property to pay for a principal residence and deducting interest expense against rental income?

    That is not legal!

    Provide court case

  22. Negative Gearing

    Sooner or later there will be a serious recession. And sooner or later the choice will be to save the construction industry, and many of the spin offs or keeping the the economy afloat by an illusion.

    We will have to choose, jobs or inflated Real Estate prices

  23. Jay

    I’m too lazy to crunch a lot of numbers but I think RE and stocks “results” are going to close. Using John Casper’s article as an example, I think the results would have been a lot closer if he took into consideration 25% down leveraging off a mortgage (and home ownership costs, taxes on dividends vs income/rent, etc).

  24. robchipman


    It is, or at least was, legal. Its common. (I don’t think its changed, but maybe Rev Can changed the rules last week). Its not a case of incurring interest expense on your home and deducting it from your income. Its a case of borrowing money for some kind of investment, and deducting the interest incurred.

    Court case example was a lawyer borrowing money from his partnership account, and using it to buy a house free and clear. He then mortgaged the house to replentish the partnership account. He called that a business expense and wrote it off. Rev Can said no way, he took them to court and he won.

    In real estate what happens is you say “I ahve rental property with equity in it. It breaks evan. I want to buy a house, or reno my existing house. I’ll increase the mortgage on my rental props and use the money to pay for my principal residence. The interest expense is incurred because it alows me to hold the revenue properties. The alternative was to sell them. I borrowed the money to hold them. Therefore the deduction is fair.

    People sometimes say “Hold it, you’re really using the money for your principal residence”. That’s confusing doing one thing with doing another, and letting an unrelated activity deflect your focus. To hold the investment properties you have to borrow money. The interest is tax deductible. The fact that you are using other money to do other things is immaterial.

    Do a google search on principal residence interest deduction canada and you’ll find lots of info on this. Its common.

  25. Realist

    whilst you have the general gist of the Old Singleton Case, there is now new FCA case law impacting on the matter, so only an up-to-speed Professional Tax Lawyer in conjuction with an up-to-speed Professional Tax Accountant should advise any individual Taxpayer’s potential proposed dreams of changing Financing structures…

    CRA will be taking a bigger slice of Vancouver flippers RE “Profits” than they currently imagine…

  26. Realist

    “Do a google search on principal residence interest deduction canada and you’ll find lots of info on this. Its common.”

    PS: Tax advice by Google?????
    That sorta like buying lotto tickets….

  27. vanreal


    you left out the last part of your sauder article which states that over the long term owners accumulate more wealth than renters once their mortgage is paid off. so it doesn’t settle it in favour the the stocks but actually in favour of the owners.

  28. -A-

    Vanreal points out the argument in favour of the homeowner, however, what he and the article leave out, and what other realtors conveniently also leave out is the fact that the sample of homeowners referenced paid anywhere from 2 to 5 times multiples of income for their homes, as opposed to what is 11 multiples of yearly income presently. The highest of most industrialized nations. And affordability is at 70%+

    Yes it is a good idea to own your home; it’s a very bad idea to buy one in Vancouver at this time.

  29. kfinancials

    Jushua: Could you please show me where in the Real Estate textbook that shows me Return on Investment and risk? Or portfolio management.

  30. Anonymous

    OK, I just have to put on my pedant’s hat here.

    but that does not apply to Canada, our land base is so much smaller, and our population much higher.

    Uh, Canada has a larger landmass than the US, with 1/10 the population

    We have the mountains, which are very different from the ones in places like Switzerland, there they can build on them because the ground is not as soft.

    The Swiss Alps are composed of marble, limestone and granite. The Coast Mountains are granite and basalt (in the Lower mainland area. In fact, the Coast Mountains are much harder, overall, than the Alps.

    Further, when it comes to the lifespan of most buildings, rock is rock – even if it is sandstone.

    Vancouver is built on sandstone and alluvial soil – much softer than the Alps.

    Both of these points made by the biased realtor are non sequiter.

  31. Strataman

    Anonymous -for crying out loud… don’t you recognize satire!

  32. Lohachitronotsompatana

    Talk about a hot real estate market!!

    Come across this ad in Craigslist.

  33. I have a ghost doghouse; only 50K, VTB@10% and I can keep up with the TSE.

  34. robchipman


    CRA was never happy with losing that case, so your point is well taken. That said, you can still write off interest and run the investment at neg cash flow. People have been doing it for years.

    And, as you rightly point out, tax advice should come from up to speed professionals.

    Also, I differentiate between investors and flippers.


    The real point of that article is to show that passively waiting for your house to take care of your retirement is not as effective as disciplined, savvy investing. I read another study that said strolling along the Seawall isn’t as fast a way to travel as F1 racing. It’s important to note that in almost every case a personal residence shouldn’t be looked at as a serious investment, unless you plan to sell upon retirement and you plan to retire in an up market.


    Google will find you court cases.

  35. Domus

    I hate repeating things, but let me stress one thing that is being overlooked in all this conversation: leverage is a two-edge swords…..

    However much you may like the ride up (gains with no money down! Heaven!) you should also understand that any way down is doubly painful if you are held accountable for the principal, i.e. if institutions don’t let you walk out of the deal and the only thing you lose is your credit record……sometimes people have other assets and they may lose those as well in the process.

  36. Skeptic

    Good point Domus, its equally applicable to both RE and stocks

  37. Realist

    “That said, you can still write off interest and run the investment at neg cash flow.”

    Well… I woudn’t necessarily bet the whole farm……

    There are already existing tools for CRA to make life difficult in certain variations of such a situation,
    and of course there is the amendment to the Income Tax Act drafted over 2 years ago to S3 which has not been proclaimed into law, and may never be, but which could be anytime, perhaps retroactive…

  38. robchipman


    I don’t think it is a good point. In the first place it assumes that people who buy real estate are stupid and don’t take the obvious into account. In the second it assumes that real estate investors will be forced to sell if prices fall – and that simply isn’t true. (Again, I’m not counting a principal residence as an investment. Buy one, have it double in value, and unless you’re going to sell and move to Bora Bora, you’re really no further ahead).

    In real estate you typically hold for long periods with relatively stable cash flows (or at least you should be doing that, and in Vancouver there is no reason not to). As a result leverage is much safer than it is with stocks. That’s not really controversial. Its the reason why mortgages are so common and yet are specific to real estate.

    Its also clear that a mere drop in values isn’t enough cause to force a sale. There has to be something else that effects an investor’s ability to hold (because, despite the common bear belief to the contrary, most real estate investors understand that the market goes both ways and assume that they will see some bad times).

    FWIW, mortgage policy in Canada is not the same as in the States, and every person I’ve ever sold to understands the downside of securing a loan with a mortgage. Here in Canada the lender does not want to borrower to default. Most investment properties are bought with either more than 25% down or are bought by people who clearly understand the downside of leverage and do have substantial additional assets that are pledged. We’re not talking about selling an illegal alien a home with 0% down and a teaser mortgage rate (I’m not being harsh – I’m using a relatively common example from the US sub-prime problem).

    High ratio mortgages in Canada are insured, and the premiums (again, despite a common refrain that the taxpayer will be saddled with the loss) clearly compensate for potential losses (check out CMHC’s profit/loss). Private insurers are taking more and more of CMHC’s pie (which I think we can all agree is a good thing) because the margins are so good.

    With stocks, before you buy on margin, you have to demonstrate that you’re good for the loss, and its harder to do that woth stocks than it is with a mortgage. Also, you don’t have the same grace period to pay. For example, buy a house today for $500,000. Put a $400,000 mortgage on it, with a 25 year amortization period and a 5 year term. At the same time buy $400,000 worth of stock on margin. Let’s assume that both the stock and the house lose half their value. First question: how many people who can qualify for a $400,000 mortgage can also qualify for that kind of margin account? Second question: if house values fall, will the bank call the loan? Third question: will the brokerage house ask you to make up the difference on your margin account when the stock value falls by half? (I know the answer to #1, and its “no”; what’s the answer to #2, Domus?) Fourth question: when the 5 year term on the mortgage is up, let’s assume you’re still underwater. If you’ve been making the payments do you think the bank is likely to refuse to renew the loan? Will they ask you to re-qualify, or will they re-appraise the house? Or will they simply re-set the mortgage with the new, prevailing rates? Last question: if you can afford to hold, long term, how dangerous is leverage in real estate, really?

  39. Domus

    “In the second it assumes that real estate investors will be forced to sell if prices fall .”

    This is the gist of your argument: people don’t have to sell, banks are happy because they have a collateral (house) to get back and can renegotiate loans. It is all fine and true: banks tend to be kinder when liquidity is flowing. Not so when liquidity is a bit tighter, like in the past 100 years, before 2001.

    Repossessions are a very real thing. Banks are happy to recover the money the lost in any way (usually). Just like brokers will take your shares.
    Right now things are not working in the usual way: cash is cheap, banks are lenient, people take risks. But times can change and when the water retreats you see who was swimming with no trunks…..

    Final thought: time has an opportunity cost. This mantra that investor are in for the long-term seems to assume that there is no cost in waiting. Well, there is! It is called opportunity cost and it is the value of all things and investments you could have pursued during the time you waited. Time is an expensive good…..

  40. News Flash


    “understand that any way down is doubly painful”

    Only if you have to sell, otherwise it is irrelevant for most investors.

    “Repossessions are a very real thing”

    Banks do not reposses homes because they decline in value. They reposses homes because payments are not made. This has nothing to do with declining values.

    “Right now things are not working in the usual way”

    What is the usual way?

  41. Anon

    So why not take out an interest only loan? That way, you maximize the tax deduction and you don’t have to make annoying principle payments, thereby increasing the number of investments you can make.
    You’re right, it’s fool proof!

  42. Skeptic

    Guys, I think we’re splitting hairs here a bit.

    Leverage in any investment can be good or bad, it amplifies the consequences of the underlying investment.

    Rob, you are quite right that in RE, provided the loan is not in default, you won’t be getting a margin call like you would with stocks if your investment value drops below the borrowed amount. Domus, this may change, but I doubt it, banks don’t need the hassle and expense of foreclosing on lenders. And they also know that RE always goes up, right ? 😉

    If the metrics on the property still make sense, even if the value has dropped, so what. The value is only an issue if the owner wants to sell or refinance the property.

    Domus, I don’t get your point on opportunity cost ?!? Haven’t you ever bought a stock that has flatlined for months/years ? How does opportunity cost work in that situation ?

  43. robchipman


    I sell foreclosures. I’ve done so for years. I know how they work. I know that they are real. Banks lose money on them as a rule. They try to avoid them. Its not a case of banks acting “kindly” when liquidity is flowing. They act kindly if you make your payment. They don’t really care about the underlying value of the collateral if you do so. They don’t lose money if you make the payment. They will almost certainly lose money if they force a foreclosure for no good reason (and if they have a borrower willing to pay the going rate they really don’t have a good reason to foreclose, do they? After all, the liquidity is still flowing).

    Banks are no more lenient now than they ever were. Foreclosures are rare because we have reverse gravity to bail out mistakes. The difference between banks and brokerage houses is that brokerage houses aren’t banks, while banks are. Obvious, right? One makes its money trading, and the other makes its money lending. Get far enough underwater with a brokerage and I’m sure it will say “Hey, Domus, do you see a bank sign outside our door”? Get far enough underwater with a bank and they’ll say “Can you make the payment”?

    Opportunity cost is not ignored. It is the reason that investments are evaluated. Its why we have metrics. Real estate is held long term not because opportunity cost is ignored, but because long term tends to take advantage of inflation, tends to take advantage of appreciation, tends to take advantage of mortgage paydown, and tends to take the pain out of the market’s inevitable ups and downs. Real estate is also held long term precisely because you can mortgage it many times over: you don;t have to sell to extract equity, sellling triggers a tax expense, and mortgaging allows a tax deduction.

    I think you might confuse people forgetting to consider things with people not spending a lot of time talking about the obvious. In my experience people who invest in real estate (and again, I’m not talking principal residence, but investment property) aren’t stupid. They generally just share their thoughts less than I do. I have never, for example, heard someone say “I’m buying real estate becasue it always goes up in value and I won’t have to pay the mortgage back”.

  44. robchipman


    As a matter of fact, your idea is not as crazy as you think. Its not uncommon. The key is whether or not you can hold. Think about it before you laugh: If I’m going to maintain 50% leverage, long term, on my properties so that I can accomplish my retirment goal, I have to continually borrow more money, right? I can’t do that and escape paying interest, and frankly, why would I want to? (serious question – see if you can answer it).

    Here’s a hint: its not whether you pay down principal. Its whether you increase equity.

  45. LesserApe

    I believe that you can borrow money from banks to invest in the stock market, and not have the same fears about margin calls. It’s less convenient than borrowing from a broker, but probably no less convenient than getting a mortgage, if we’re comparing apples to apples.

    In that case, you could take on more reasonable leverage, like 30%, on the stock market.

    Also, according to Ibbotson Associates, US value stocks returned 12.6% on average between 1926 and 2002. So, you have to assume at least 12.6% on the stocks.

    Of course, that still isn’t comparing apples to apples, since the assumption with real estate is that the investor isn’t just buying arbitrary housing, but something that has reasonable cash flow. So, since they’re picking the best houses, it means that the stock investor can pick the best value stocks rather than just sticking with an index. That should be good for at least 2.4% outperformance, so the reasonable number for the stock picker can be 15%.

    I’d probably argue that the 90% leveraged real estate is still riskier than the 30% leveraged stocks, but I don’t think you need to push the scenario more than we already have. (If you do, you’d probably want to reduce the RE leverage to 75%, which will really hurt the returns.)

    It’s hard to work through the numbers, but it seems likely to me that a 30% leveraged 15% return will blow away a 90% leveraged 4% return.

  46. kfinancials

    Margin calls are a good thing. Keeps people on dreaming the market will recover. In a falling market, you would want a foreclosure sooner rather than later.

    Let’s see, negative cashflow because rent doesn’t cover mortgage. Interest rate expected to keep rising. Negative equity because the market value is greater than the mortgage.

    Sometimes, foreclosure is the best solution for the home owner. Why keep dumping money into a black hole?

  47. Wow! Where to begin?

    I’m reminded of the reply Hawkeye made to Colonel Potter when he was asked to be nicer to Major Frank Burns. “After all” Potter pleaded, “Frank just doesn’t know some things.” Replied Hawkeye, “Colonel, it’s just too hard to keep up with everything Frank doesn’t know.” 🙂

    Most of the observations here have been pretty solid stuff. However, those who don’t have the experience in RE investments, who feel the need to either personally attack, or question the veracity based solely on their own ignorance, is humorous.

    I don’t have time to go through all the example properties from which I was drawing numbers, but suffice to say they were real properties, in real U.S. locales.

    Just because one can’t figure out how to replicate the results of another, doesn’t render the examples worthless. It merely indicates an area of ignorance needing attention.

    It would be difficult to imagine how a broker could stay in business for nearly four decades if his numbers weren’t correct. Clients tend to get testy when they’re told one thing and reality doesn’t quite measure up.

    Buck up you skeptics, and realize maybe you simply don’t know what you don’t know.

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