# Real Estate should be primary focus



## lonewolf :) (Sep 13, 2016)

78% of Canadians wealth is residential real estate yet the primary focus on CMF seems to be stocks then probably bonds. The Bond market is something like 10 times the size of the stock market. The primary focus of CMF should probably be residential real estate as it is by far where the wealth is in Canada.

Though a contrarian might say focus where no one else is focusing & invest where least amount of investors are investing which would probably be precious metals @ this point in time


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## kcowan (Jul 1, 2010)

If most people already have RE covered as an "investment", then we should focus on everything else. I have a friend who has $3,million in RE and is afraid to be forced to invest in other things. That attitude has already cost him the wherewithal to snowbird in Mexico last year and this while the house has languished as an overpriced white elephant.


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## Woz (Sep 5, 2013)

That 78% number doesn’t look right. In 2016, 36% of Candians’ assets were in their principal residence. If you factor in debt then 31% of Candians’ net worth is in their principal residence.

https://www150.statcan.gc.ca/n1/daily-quotidien/171207/t002b-eng.htm

The 78% number may be looking at the non-financial assets (principal residence, other real estate, vehicles, and other non-financial assets) as a percent of Total assets excluding private pension assets as that would give 73%. Doesn’t really make sense to me why you’d exclude RRSPs though.


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## Just a Guy (Mar 27, 2012)

Home ownership is more of a forced savings plan than an investment for 98% of the people out there. Most people get a terrible return on it as well, except we went through a 20 year boom, so everyone thinks they’re geniuses. We’ll see what happens in the next 20 years.


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## hboy54 (Sep 16, 2016)

RE is my primary focus. It sucks joy out of my life in ways that my stocks do not. Fortunately my stocks make considerable returns that can subsidize the RE losses.


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## lonewolf :) (Sep 13, 2016)

Just a Guy said:


> Home ownership is more of a forced savings plan than an investment for 98% of the people out there. Most people get a terrible return on it as well, except we went through a 20 year boom, so everyone thinks they’re geniuses. We’ll see what happens in the next 20 years.


 The boom is over though the Canadian Real Estate Association would like you to believe other wise i.e when they say for the last 4 consecutive months the housing market is starting to get busier again yet across Canada for 4 consecutive months fewer & fewer homes have been purchased by Canadian home buyers. How can more homes be selling when fewer homes are being sold ? They use seasonally adjusted numbers when the market starts to correct to fool the Canadian public to going out & buy a home. Fewer home buyers have purchased homes for over 24 consecutive months yet you will not find the data printed by the media.


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## Just a Guy (Mar 27, 2012)

Just because the market is slowing, doesn't mean there aren't opportunities. Unlike the stock market, where prices are fixed, real estate always has deals that pop up and allow people to make money if they look. Someone always has to sell for some reason (a move, a death, a foreclosure, etc.) which allows for someone else to benefit moreso than the average market. 

That, and leverage, are two benefits that real estate has over other forms of investing. It allows you to make money even at times when the market says you shouldn't be able to. As long as you're smart and disciplined that is.


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## kcowan (Jul 1, 2010)

lonewolf :) said:


> Fewer home buyers have purchased homes for over 24 consecutive months yet you will not find the data printed by the media.


Yup the RE industry are masters at manipulating data in their favour.


Just a Guy said:


> Just because the market is slowing, doesn't mean there aren't opportunities. Unlike the stock market, where prices are fixed, real estate always has deals that pop up and allow people to make money if they look. Someone always has to sell for some reason (a move, a death, a foreclosure, etc.) which allows for someone else to benefit more so than the average market.
> 
> That, and leverage, are two benefits that real estate has over other forms of investing. It allows you to make money even at times when the market says you shouldn't be able to. As long as you're smart and disciplined that is.


Yes but that segment is reserved for the savvy investor as you say. Most RE buyers are far from savvy!


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## Just a Guy (Mar 27, 2012)

Same could be said for any investments. People who abdicate responsibility tend not to do well in stocks, business, real estate or anything else. Of course, it also has to fit your investment personality. Real estate isn't for everyone, neither is day trading.


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## Rusty O'Toole (Feb 1, 2012)

I'm a great believer in real estate investing but, it is as much a business as an investment. One often overlooked advantage to real estate is leverage. You can buy property for as low as 5% down, and 20% or 25% are routine. I have bought property for no money down, more than once, and have sold that way too. Another advantage is stability. It may not go up every year, it may even go down, but if you keep up your payments you won't be frozen out and it always comes back.

The big advantage to stock market investing is, it is so easy. But you need a substantial amount of capital to make it worth while.


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## AltaRed (Jun 8, 2009)

Leverage has killed many a real estate empire as well. When one is highly leveraged, an economic downturn can wipe one out. Think of all the high profile RE moguls who were wiped from the face of the earth during severe down markets. It is false to say that even 20%, never mind 5%, down is a sound RE play. The best REITs are not more than 50% leveraged.


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## Just a Guy (Mar 27, 2012)

The amount of leverage isn't the issue alta, it's a combination of many factors. Such statements as you must have less than 50% leverage just shows you don't understand the true power that lies in real estate. 

For example, the properties I look for have at least 100% leverage. I buy below current market value, sometime I renovate to increase its value, then I leverage it for at least 100%. Let's say I find a two bedroom for 65k, put in 5k and the bank appraises it at 100k. With an 80% LTV, I'd get upwards of 80k for something I paid 70k for. Is this highly risky? That depends on other factors, mainly cash flow. 

If the property rents for between 1-1.2k/month there is no risk really. The 1% rule basically says I could rent for $800/month and easily make bank. Where can you rent a two bedroom for $800/month in a major city? Those are slum prices these days. 

With the current interest rates, half of your mortgage payments are going toward principal pay down. That's a significant reduction. 

As you can see, the leverage in this scenario isn't the problem, factors like cash flow, purchase price and demand all play a role in success. Now, if I bought a $500k property, which I leveraged 95% and could only rent for $2k/month, I'd be facing a lot of problems down the road. There is a big difference between an "investor" who understands how to use the tools available to them and someone who "owns real estate".

P.S. In the above scenario, just because the bank offers you $80k doesn't mean you have to take it, you can always take less and reduce your risk.


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## AltaRed (Jun 8, 2009)

I beg to differ at the macro level. I am talking about 50% leverage based on NAV, which is a function of Cap rate....which of course includes an interest rate factor. Yes, if you buy below market, add value enhancing renos, etc., you will end up with an asset that has a NAV more than what you paid for it. It is no longer 100% leveraged then from an investment perspective. You cannot cherry pick RE (of multiple properties) specifics any differently than a brokerage margin account of select stocks. If RE really was different, then more of our blue chip corporations would be into real estate investing than building pipelines or making widgets, etc, etc.

You cannot be more leveraged for very long than what it will take to manage through a significant market event. In stocks, it might be a 40% decline. In RE, it might be a 20% decline aka AB in the '80s, TO and Vancouver in the late '80s/early '90s, etc. Think about the crises Dundee REIT went through, H&R REIT, Boardwalk REIT which is still recovering from the AB funk, etc. An individual having 1-10 properties cannot really look at their asset base any differently than a much larger business entity. 

I don't actually care about *your* individual circumstances, just like I don't care about any individual's specific portfolio of 10 stocks and how well they do, or don't do. That is not relevant in a discussion of macro principles...which was the point of my post as a push back at Rusty. The best REITs are 50-60% leveraged (relative to NAV) and that is the measure of long term success through market cycles.

Added: I will agree there are circumstances where an individual might be able to hold more leverage relative to NAV than a REIT. For example, one's own personal labour on maintenance and upkeep, and property managing one's own property rather than having a property manager, etc. Those are simply personal mechanisms to allow for more leverage in the Cap calculation.


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## Just a Guy (Mar 27, 2012)

NAV is a made up number when it comes to real estate. The only time you know what a property is really worth is when someone writes you a cheque. Until then, it's all guesswork. This is the reason I can buy properties "undervalued". I'm willing to cut the cheque when others aren't. Does that mean the NAV is 65k or 100k like the bank thinks, no one really knows unless I sell.

That's why I don't give a real fig about the NAV of my holdings, I care about the cash flow which happens every month and is truly measurable. 

I agree that a correction is a concern, that's why I price that into my purchase price up front. You can't do that in the stock market...I can't go to my broker and say I think apple is overpriced, give it to me for $100/share. It won't happen because the market sets the price. In real estate however a foreclosure, an estate sale, a move, a divorce, etc. Can all force the prices down for an individual unit because the seller is forced to take what they can get at the time. 

As for your statement about not being over leveraged through a downturn, why can't you as long as the cash flow supports the debt. If my rental pool (where demand would increase in a housing meltdown as people lose their houses to costs) generates enough cash flow to support the debt, the banks won't ever think of calling my loans. 

These aren't, by the way, *my* individual circumstances though I take advantage of them all the time, these are basic facts about real estate investing which anyone, or any corporation can (and do) take advantage of. I didn't invent any of my strategy, I just use it. I know companies and corporations who do the same thing on a bigger scale.

Also, if you look into some of the biggest companies (McDonalds for example) you'll see they are actually very big into real estate.


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## AltaRed (Jun 8, 2009)

As I mentioned, I don't care about your specific circumstances so I don't know why you insist post after post, and thread after thread. They aren't applicable to anyone else who is contemplating investment real estate either directly, or indirectly any more than my brokerage portfolio is any more applicable to you than it is to me. 

FWIW, you can only buy below market when someone is willing to sell below market. It is the same with stocks. I bought CN at <$95 this summer because it was on sale. I am not surprised, but am disappointed, at your tunnel vision. BTW, ask Boardwalk how they felt through 2016 and 2017 when vacancy rate went up and rental rates softened and more enticements had to be offered to retain tenants or gain replacement ones. 

I have been in REITs* now and then and have studied the metrics down to the last charts so I am not at all naive about RE metrics. As I mentioned, I understand an individual can carry more leverage (and thus higher cost) if they can reduce other costs like property management that they do themselves. Which is what DW's son-in-law does as well as his own father with their collection of rental units.

* Including BEI.UN, CAR.UN, CSH,UN, AAR.Un, REI.UN, REF.UN, etc. The residential ones are usually the most stable which I like best, but AAR.UN in industrial warehousing was my home run until it was bought out.


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## kcowan (Jul 1, 2010)

Just a Guy said:


> Also, if you look into some of the biggest companies (McDonalds for example) you'll see they are actually very big into real estate.


According to Ray, the real estate investment was to enable and control the franchise model, i.e. not an investment but a business strategy.

I fully agree that you have been a successful RE investor but I agree with AR that the average guy should not try it, just like the average investor should stay out of individual stocks according to Buffett.


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## Pluto (Sep 12, 2013)

Just a Guy said:


> Also, if you look into some of the biggest companies (McDonalds for example) you'll see they are actually very big into real estate.


Apparently, Mcdonalds owns the land of a lot of its restaruants. 

Now when you talk about buying your properties, I assume you are talking about buying apartments which may have very little land value. How long do these buildings last? At what age are they expected to be tear downs?


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## AltaRed (Jun 8, 2009)

Pluto, JAG's example of McDonalds is really not relevant to the RE business itself for the reasons already noted, i.e. it facilitates the purpose of the business. One doesn't buy McDonald's stock specifically for its RE holdings. One might argue that capital tied up in land is a poor use of McDonald's money. The actual value of the business is ultimately its overall Enterprise Value which may, or may not, reflect the true value of its land holdings.

P.S. NAV in RE is not technically a made up number, but it is only as good as the individual determining market value. Just like one's rental unit or principle residence, one only knows its true value when a buyer makes an offer. https://www.investopedia.com/ask/answers/020615/nav-best-way-assess-value-reit.asp Market prices of REIT units are usually at a discount to NAV for the simple reason that market values of RE investments have an element of subjectivity in them and investors want some conservatism. Example: Boardwalk currently claims a NAV now in the >$60/unit range, but market prices are in the $50/unit range.

Added: WRT to JAG's apartments, their market value will take into account future increasing operating costs of the depreciating building. Teardowns generally only happen in more central locations when increasing land value relative to the building cannot be fully reflected in operating income, i.e. cap rate continues to decline due to capital value tied up in the property. The current GVR and GTA issue in particular.


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## Just a Guy (Mar 27, 2012)

When I looked at boardwalk's books, I saw that, in many cases, they overpaid for their property acquisitions (in my humble opinion). Of course this was in the bull market times (which is somewhat slowing now) when any idiot couple make capital appreciation. Was I surprised that they suffered when the market burped a little, not at all because their acquisition costs were too high. Boardwalk has a reputation for nickel and dimming its tenants, making false claims of damage and is generally a poorly run company (if you do any research or talk to actual tenants). I'd avoid anything to do with boardwalk personally. They do lipstick repairs on a chewing gum budget from what I've seen first hand. 

Pluto, I'm not talking about just apartments, I was talking real estate in general, even those properties owned by REITs at the same basic rules apply to everyone (you overpay, over leverage, over extend, dont do proper maintenance, don't have cash flow, etc. You'll pay big time). As for how long they'd last, it depends on the maintenance side of things. I know buildings that are over 200 years old and still standing doing just fine. I've seen places built 10 years ago that need to be torn down. If you're not going to sell, the land value is rather meaningless, same with capital gains, if you hold for the cash flow, you're not going to realize any other gains. You could, of course, sell and acquire new properties which have less value, but once paid off there is little insentive, especially if you leverage at 100%. 

As for McDonald's not being a real estate play, maybe do a little reading...

https://seekingalpha.com/article/73533-mcdonalds-is-a-real-estate-company
http://blog.wallstreetsurvivor.com/2015/10/08/mcdonalds-beyond-the-burger/
https://qz.com/965779/mcdonalds-isn...s-a-brilliant-30-billion-real-estate-company/

30 Billion in real estate holding is certainly what I'd consider an investment. It certainly plays a role for knowledgeable investors when it comes to investing in the company. You have to understand where the money comes from if you're a real investor. 

As for being able to buy stocks below market, you simply can't. Why would I sell you a stock below market price when I can sell it at market? There is no market in real estate. There is no set price for a house. It sells for whatever a specific buyer and seller agree to. True, the market as a whole can undervalue (in your opinion) a company, but it's still all one price, I can buy that company at a further reduced rate. If you can buy apple stock today at $110 (half market rate) tell me how? Can I buy a property today for half of a comparable property? A lot more possible than the apple deal. The NAV in stocks is basically always a known quantity, that's not true in real estate where I could littterally turn that property over in a few days for double or half of what I previously paid and no one would be surprised. I have seen people literally flip a place making 30%+ in a month's time without doing a thing (other than being lucky). They didn't even actually purchase the property or ever own it. 

There is a lot of "hidden" money in real estate. One of the reasons I don't like Reits, their returns are very small considering the amount of money available...I wonder where all the money is really going. I don't find it surprising that the majority of scams out there revolve around real estate investments run by other people.

For the record, I agree real estate investing isn't for everyone, but neither is stocks, bonds, owning a business, coin collecting or whatever. Real estate is no better or worse than any other form of investing if done right. It has advantages and disadvantages just like every other form of investing. To simply try to write off the entire sector because it doesn't work for you personally is just idiotic though.

Oh, and by the way, nearly every major company has a real estate department or division. General Motors had to sell it off in 2008, General Electric is big in real estate, PepsiCo, etc. So, to your initial question of why the big businesses aren't involved...they are.


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## AltaRed (Jun 8, 2009)

I will refrain from responding in kind as it is definitely not worth my time and effort. Readers of this thread will come to their own conclusions.


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## Just a Guy (Mar 27, 2012)

Personally, I'd spend more time trying to understand what was being said, rather than looking for insult...but that's just me.


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## Pluto (Sep 12, 2013)

^^ When you give your examples of the doors you buy, you don't include maintenance costs, only 5000 grand or so to update a new door. But your door is in a building with long term maintenance costs to keep it standing. If you don't control the building, it could fall into disrepair and your door becomes a tear down. 

Stocks have an intrinsic value, and a market price. there are times, such as panic selling, when the market price is below the value. Sometimes holders of stock panic sell due to simple fear, they need the cash to pay debt, and redemptions from funds.


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## hfp75 (Mar 15, 2018)

I actually read this thread, and while you both make good points... JaG you’ve been successful with RE and need to agree that a lot of folks wouldn’t be, regardless, as interest rates increase real estate may depreciate leaving owners holding undervalued properties. AR you see the critical mass and risks of RE very clearly, I think that vs equities / bonds both pose risks and most investors aren’t using margin (similar to mortgage/debt) so traditional investing will pose less risk but possibly less reward to.

Regardless of RE and having a mortgage or stocks/bonds and using margin for more, you have risk in the debt. With RE you usually need debt to do it but with stocks/bonds you can start with $1.

I think RE and wall street BOTH have been so manipulated over the last 10 years that neither are very stable given our current situation with rising rates and central banks globally starting to tighten. The economy has been on steroids and any idiot was able to make money.... (including me) The next 5 years will thin the heard.... RE or stocks/bonds.


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## AltaRed (Jun 8, 2009)

hfp75 said:


> I think RE and wall street BOTH have been so manipulated over the last 10 years that neither are very stable given our current situation with rising rates and central banks globally starting to tighten. The economy has been on steroids and any idiot was able to make money.... (including me) The next 5 years will thin the heard.... RE or stocks/bonds.


I agree that going forward is going to be tougher in both capital and RE markets. The US Fed had 3 rate increases this year so far, say there will have one more in Dec, and are signalling 3 for 2019. Either the yield curve is going to invert and bring on the next recession, or the whole yield curve will shift upward. All that cheap debt is going to get significantly more expensive. Households, corporations and government are all so indebted, it is going to have an impact in all markets.


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## Just a Guy (Mar 27, 2012)

First off, it’s usually very easy to get control of the building simply by joining the condo board. Most people can’t be bothered, especially owners (as opposed to investors), which I find a very sad statement.

Many of the properties I’ve bought lately have been mismanaged, and take time to turn around, but it’s usually not hard to do if you appeal to others with the “we’re going to improve the building” line. 

I don’t ignore the maintenance costs, you’re right that I don’t mention them often, but they all fall within an acceptable range when I’m making my decision. It’s an automatic part of the cash flow equation (sorry, some things are so natural that I don’t even consider bringing it up anymore). Most of my building range between 300-500 a month. 

Personally I prefer special assessments to higher condo fees as I can put my money towards other projects instead of it sitting in a reserve fund. That being said, I like to have a couple grand per door in a reserve fund as well. 

Real estate does have more ongoing work than stocks, but neither is a buy and forget investment if you’re serious. 

As for real estate and debt, making money in real estate is based on debt, you want to have debt, that’s the power and where the money comes from. Without the leverage, returns on real estate are generally quite poor. I don’t think I’ve ever said real estate investing is for everyone, but I also don’t think stock investing is for everyone, nor running a business...

No investment is particularly “safe” if you don’t approach is properly. I know people who’ve lost their shirts in every kind of investing, all the way to bankruptcy...I’ve also known people who’ve made, and kept, millions from all types of investing. No method is particularly easy and none of them is a sure thing. Most people have, what I call, an investment personality which dictates the strategy they’ll need to use to be successful. If you go against that, chances are you’re going to lose. 

I agree, the next few years could be some interesting times...one difference is, in real estate you can buy in at tomorrow’s lower prices today (if you’re lucky). Something you can’t really do with stocks. It’s been easier to do this year than ever before, which tells me the end is getting nearer.


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## kcowan (Jul 1, 2010)

Just a Guy said:


> ...one difference is, in real estate you can buy in at tomorrow’s lower prices today (if you’re lucky). Something you can’t really do with stocks. It’s been easier to do this year than ever before, which tells me the end is getting nearer.


Thanks JAG. Which end are you referring to? RE bubble? Stock market?


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## AltaRed (Jun 8, 2009)

Just a Guy said:


> one difference is, in real estate you can buy in at tomorrow’s lower prices today (if you’re lucky). Something you can’t really do with stocks.


Yes, you can as many, including Pluto above, have articulated it well over time. It is just on a different time frame with stocks than it is with illiquid assets such as RE. A current stock example is CTC.b It's intrinsic value has not changed in the last two months but its market price certainly has, down from $180 to $155. Market perception changes on future cash flows affect both types of investment. I wouldn't buy investment RE today due to mortgage rate increases unless market prices come down to offset perceived rate changes in the next 12 months or so.


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## Just a Guy (Mar 27, 2012)

kcowan said:


> Thanks JAG. Which end are you referring to? RE bubble? Stock market?


I think both are overdue, at least the numbers seem to indicate it. The problem is, as was so eloquently stated, markets can remain irrational longer than you can remain solvent. 

I’ve outlined why I think interest rates will trigger the fall of real estate, now interest rates are rising, we’ll see if my theory holds up. 

Alta, I think you keep missing my point. The stock market price, IS the price of the stock today. You may think the market is undervaluing the stock price, but the market disagrees, your personal opinion doesn’t matter in the stock market. You can’t buy CTC.b today for $75, the market says its worth $155 period. In real estate however, a two bedroom in the same building may sell for half of what another unit did on the same day. There is no market price that says this is what a place will sell for. One person may have overpaid, maybe neither did, one just got a better deal, maybe they both overpaid in the long run (that’s where knowledge comes in handy).


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## AltaRed (Jun 8, 2009)

Just a Guy said:


> In real estate however, a two bedroom in the same building may sell for half of what another unit did on the same day. There is no market price that says this is what a place will sell for. One person may have overpaid, maybe neither did, one just got a better deal, maybe they both overpaid in the long run (that’s where knowledge comes in handy).


You can only buy at half the price if there is another identical unit willing to be sold for half the price the same day, week or month. Market prices for a stock vary all day too, sometimes significantly. Market price is what 2 parties are willing to do a transaction for, whether RE or stocks. The only difference is frequency and degree of variation. Not sure why you keep on insisting otherwise but it seems very much being dug in on your own form of reality. We will obviously never remotely agree.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> ... The stock market price, IS the price of the stock today.
> You may think the market is undervaluing the stock price, but the market disagrees, your personal opinion doesn’t matter in the stock market ...


To the market, no ... the market may change it's mind to be more of what one thought when buying. 


Cheers


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## Pluto (Sep 12, 2013)

Anyway, as to the origional question, I think people have too much in real estate. No balance. 
JAG appears to endorse the effecient market view, where the (stock) market is always right, so you can't get bargins in stocks. But the real estate market has ineficiencies, enabling him to buy bargins. Oh well, the debate goes on. 

The best bargins in stocks I got were compaines who were growing very rapidly, but the p/e hadn't expanded to match the growth yet. These are available from time to time for those who are looking. Those whose attention is on finding the next door - and there is nothing wrong with that - are not going to find the bargin stock as their attention is not on that task.


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## Just a Guy (Mar 27, 2012)

I’m not arguing that the market can’t be on sale, heck that’s when I buy stocks. My argument is, on a given day you can’t buy a stock for less than market price. The market may undervalue the stock, but that is the price, you won’t get it for much less (unless the stock is in free fall). For example, you can’t buy Apple stock today for half market price, it will NEVER happen. In real estate however, there is a chance that it could happen. That was my only point. 

I never said the market was correct in its valuations I just pointed out no one would sell for half price when they can click a button and get full market price. In reals estate, you get what someone is willing to pay at the time. If you need to sell, you’re going to sell cheap sometimes and won’t get market price.


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## hfp75 (Mar 15, 2018)

The advantage to investing in the stock/bond market is you invest what you have... in RE usually you need to saddle up with a bunch of debt....

Depends on the person with the cash what they are good with - both can work, but they both have their devils and pit falls.....


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## Just a Guy (Mar 27, 2012)

The power of real estate investing comes from the debt. That’s how you convert the relatively small gains into huge profits. A paid off property makes very poor gains usually, that’s why a home is a poor investment. The leverage is the key, but also the downfall if misused. 

Debt is a tool, not good or evil. If used properly you can build something nice, if used improperly, you can cut off a limb or kill yourself.

With stocks, of course, you can also use leverage in the form of a margin account. The lending amount tends to be much less than real estate, probably because actuarials have determined that stocks are usually more risky than real estate.


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## Pluto (Sep 12, 2013)

^^
I guess I'm having trouble with how you define "market price". You seem to be using two different meanings. For stocks "market price" is the price the stock sells for, according to your usage. But in real estate "market price" seems to mean an evaluation of what it should sell for, not what it actually sells for. Given these shifiting meanings, I see your point, but if you apply the same meaning to both stocks and real estate, I don't get your point. 

In stocks many value investors claim to ferret out stocks that are selling below what they are worth - the "market price" is lower than its worth/value. That's the same thing you claim with apartments: I bought a door (market price=what it actually sells for, in this case what you paid) below what it is actually worth (your evaluation of its worth). 

Supposing Bob says, "I bought a property below market". The meaning of "below maket" is really vague, since the "market" is defined by what properties actually have sold for.


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## Pluto (Sep 12, 2013)

^^
I guess I'm having trouble with how you define "market price". You seem to be using two different meanings. For stocks "market price" is the price the stock sells for, according to your usage. But in real estate "market price" seems to mean an evaluation of what it should sell for, not what it actually sells for. Given these shifiting meanings, I see your point, but if you apply the same meaning to both stocks and real estate, I don't get your point. 

In stocks many value investors claim to ferret out stocks that are selling below what they are worth - the "market price" is lower than its worth/value. That's the same thing you claim with apartments: I bought a door (market price=what it actually sells for, in this case what you paid) below what it is actually worth (your evaluation of its worth). 

Supposing Bob says, "I bought a property below market". The meaning of "below maket" is really vague, since the "market" is defined by what properties actually have sold for.


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## Just a Guy (Mar 27, 2012)

The problem, as you seem to be coming to terms with, is there is no clearly defined “market price” in real estate. Each property sells for whatever the seller gets. If you take a wider view, you can claim a general “market price”, but it’s not the same as the clearly defined market price of stocks because it’s just an average of the selling prices. 

In real estate you can often buy a single property well below market average (if you prefer that term), but you can never buy a stock for less than the price at the time of the market (plus or minus a little daily swing), even value stocks all sell for the daily price.

Something else to consider with real estate is you May have some control over the price of your asset. You can renovate and potentially increase the value above the market average. Again, unless you run a pump and dump scam or try to corner the market, or maybe ruminate on taking your company private, you are at the mercy of market price with stocks.


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## kcowan (Jul 1, 2010)

What you are emphasizing is that stocks are immediately liquid and RE is illiquid, making transactions different than market value possible. RE depends on timely honesty is reporting sales to establish current market price. And the people reporting the sales are not motivated to be timely nor accurate.

Recognizing that fact creates opportunities like JAG has emphasized.


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## AltaRed (Jun 8, 2009)

The general liquidity of capital markets simply makes the opportunities different in style and timing, albeit illiquid stocks, including many prefs, require one to be more opportunistic. RE is the same thing, opportunistic, finding the right buyer (or seller) at the right moment in time. It is simply a matter of degree. To argue anything differently so just demonstrates unabashed bias, hyperbole and non-objectivity. There is no holy grail on any investment opportunity, just patience, time and acumen.


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## Just a Guy (Mar 27, 2012)

I don’t think anyone was ever implying one form or asset is better than any other. What I was trying to say was real estate is different than stocks in a couple of ways. I was just pointing out some advantages, there are also many disadvantages like illiquidity and high costs which require time to recover. To assume all markets are the same is equally foolish. Different markets, different strategies, different products all require you to understand the differences to be successful.


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## yousufj56 (Oct 4, 2018)

Pluto said:


> Anyway, as to the origional question, I think people have too much in real estate. No balance.
> JAG appears to endorse the effecient market view, where the (stock) market is always right, so you can't get bargins in stocks. But the real estate market has ineficiencies, enabling him to buy bargins. Oh well, the debate goes on.
> 
> The best bargins in stocks I got were compaines who were growing very rapidly, but the p/e hadn't expanded to match the growth yet. These are available from time to time for those who are looking. Those whose attention is on finding the next door - and there is nothing wrong with that - are not going to find the bargin stock as their attention is not on that task.


Sounds like you're talking about equities with low p/e. What exactly is considered low?


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## kcowan (Jul 1, 2010)

The answer is It Depends! For utilities, under 10 is good. For growth stocks, under 20. For speculative momentum stocks, it does not matter. What matters is Are there enough fools to buy it?


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## Topo (Aug 31, 2019)

CMHC has some plans for Canadian homeowners:









CMHC pays UBC to research federal home equity tax meant to 'level playing field between renters and owners'


The UBC project said we must end the 'catch-22' where 'the more we made home ownership profitable, the more we made housing unaffordable'




nationalpost.com







> ....many Canadians bank on profits from home ownership to secure their financial future and gain wealth. This bound us to a catch-22: The more we made home ownership profitable, the more we made housing unaffordable.


I think one approach would be for the government to tax land ownership in particular, given that the concept of land ownership is a bit different than ownership of the building or other products.


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## fireseeker (Jul 24, 2017)

Topo said:


> CMHC has some plans for Canadian homeowners:


That phrasing may overstate it.

CMHC quickly objected to the focus of the original reporting.
More here


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## Topo (Aug 31, 2019)

fireseeker said:


> That phrasing may overstate it.
> 
> CMHC quickly objected to the focus of the original reporting.
> More here


CMHC says the focus is not on a home equity tax, but some sort of "solution."


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## Park (Sep 11, 2010)

Just a Guy said:


> Just because the market is slowing, doesn't mean there aren't opportunities. Unlike the stock market, where prices are fixed, real estate always has deals that pop up and allow people to make money if they look. Someone always has to sell for some reason (a move, a death, a foreclosure, etc.) which allows for someone else to benefit moreso than the average market.
> 
> That, and leverage, are two benefits that real estate has over other forms of investing. It allows you to make money even at times when the market says you shouldn't be able to. As long as you're smart and disciplined that is.


Private real estate markets are less liquid than stock markets, so there is more opportunity to gain alpha. 

A similar argument was made for stock market investing in emerging markets versus developed markets. But the counterargument was that the increased costs of trading in illiquid markets meant that an indexing strategy should work even better in such illliquid markets. 

However, active management is a necessity in private real estate. You can rely much less on the wisdom of the crowd in setting the price at which you buy and sell. If you're better at valuing real estate than 50.1% of other investors, you have an edge. But net alpha is zero, and that's alpha before costs. Private real estate transaction costs are not trivial. That doesn't include the time required to gain the knowledge necessary ito have above average real estate valuation skill; prior to that gaining above average skills, you may likely have negative alpha. And regardless of skill, active management will almost always take more time than passive investing. After including all costs, much less than 49.9% of private real estate investors will have meaningful positive alpha. In other words, a good majority of private real estate investors will lose money, compared to investing in public markets.

That last sentence may be wrong, if private real estate markets outperform public markets overall. But I've never seen data that supports that. 

When I say better than 50.1% of other investors, I'm not talking about the number of investors. You may be better than 50.1% of other investors, but still have consider negative precost alpha. When it comes to being better than 50.1% of other investors, I'm referring to transaction size. Transactions in local real estate markets will tend to be dominated by fewer than 50.1% of investors. And that minority of investors, who dominate local real estate markets, will likely have considerably above average active management skills. Your competition for positive alpha will not be easy. Many who try to achieve such alpha will end up being someone else's alpha. 

I can think of two broad categories of alpha generation; there is some overlap between the two categories. One is where you have better than average security selection and/or market timing skills, which is what I have discussed so far. 

The second category is taking advantage of forced buying and selling. In the second category, you profit by being a liquidity provider. You can do that in the stock market. DFA historically made money in the microcap segment by being a liquidity provider. And you can do it in stock bear markets, as a result of margin calls etc. ( As stock market liquidity “evaporates,” Goldman predicts lightly traded shares will provide big gains ).

In more illiquid markets, such as private real estate, there would be more opportunity to profit by being a liquidity provider. But as mentioned previously, there is overlap between the two categories. A local real estate market will tend to be dominated by a minority of players, who are better active managers than the majority of private real estate investors. Will you be better than that minority, when it comes to taking advantage of forced buying and selling? And once again, there are the previous caveats of the cost and time required to generate private real estate alpha.


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## Just a Guy (Mar 27, 2012)

I dont really know why you’re trying to complicate the issue using Terms like negative alpha. Just use plain English. If you can buy a property cheap, say 45k, which is rented for 850/month you’ll make money. If you pay 250k for the same cash flow, you’ll lose your shirt because you can’t do basic math.

as for needing to be an active manager, again it depends on your cash flow. Those who can do basic math can figure out that the cost to hire a manager for you depends on cash flow.

yes, real estate is illiquid, but who wants to sell a property which didn’t cost you any money (since you can leverage them 100%) which generates a cash flow of 850/month (infinite roi). Tell me of a market investment which even comes close to that kind of return.

as for buying From distressed sellers, the stock market is dictated by the market price you can’t buy a stock for 40% less than the market price, but you can in real estate.

price I was able to explain this all without trying to sound intelligent by using big investment terms which I’m not really sure you actually understand by the way you used them.

if you only look at real estate in terms of capital gains, then you clearly don’t understand how to make money in real estate, or how most wealthy people are involved in real estate.


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## calm (May 26, 2020)

I believe that all the smart money which has left the stock market has been placed into property.
In 1915 I purchased a house/property for 114 thousand and sold it 5 years later for 218.


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## Topo (Aug 31, 2019)

calm said:


> In 1915 I purchased a house/property for 114 thousand and sold it 5 years later for 218.


Forgive me for asking, but how old are you?


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## Just a Guy (Mar 27, 2012)

I was wondering what size house cost that much back then. That was the national budget.


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## calm (May 26, 2020)

Quite funny eh?
I purchased property in 2015.
Lot 40X210
I also made a mistake. I paid 137 (not 114 as mentioned) and then sold it 5 years later for 218.


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## Park (Sep 11, 2010)

"If you can buy a property cheap, say 45k, which is rented for 850/month you’ll make money. If you pay 250k for the same cash flow, you’ll lose your shirt because you can’t do basic math.

as for needing to be an active manager, again it depends on your cash flow. Those who can do basic math can figure out that the cost to hire a manager for you depends on cash flow.

yes, real estate is illiquid, but who wants to sell a property which didn’t cost you any money (since you can leverage them 100%) which generates a cash flow of 850/month (infinite roi). Tell me of a market investment which even comes close to that kind of return.

as for buying From distressed sellers, the stock market is dictated by the market price you can’t buy a stock for 40% less than the market price, but you can in real estate."









Rate of Return on Everything, 1870–2015*


Abstract. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendenc




academic.oup.com





"The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015...

In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% a year. Housing outperformed equities before World War II. Since World War II, equities have outperformed housing on average but had much higher volatility and higher synchronicity with the business cycle...we find that long-run capital gains on housing are relatively low, around 1% a year in real terms, and considerably lower than capital gains in the stock market. However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude".

HIstorically, residential real estate and stocks have had similar returns. I can get that stock return with almost no work and very little transaction cost using an indexing strategy. I can't do that with residential real estate, which means I have to own individual properties, and decide when to buy and sell them. For me to get better than average return with residential real estate, someone else has to get lower than average return. It's a zero sum game. But that's before costs, and transaction costs in real estate are not small. If residential real estate and stocks continue to have similar returns, the average stock market investor will outperform the average residential real estate investor, if a stock market indexing strategy is used. And the stock market index investor will likely have done much less work.

You can use leverage with real estate, but you can also use it with stocks.









What would happen to REITs which cannot meet their margin calls?


Answer (1 of 2): Real Estate Investment Trusts get their leverage mainly through mortgage loans, not by margining securities or using derivatives. So they don’t get margin calls, they get mortgage bills. If income from properties falls—as it will be for many REITS during the isolation slowdown—a...




www.quora.com





An alternative to private real estate is publicly traded REITs. Please see Chart 4 in Aaron Brown’s response in the link above . The average debt to market assets ratio for REITs is over 35%.

So if you buy publicly traded REITs, there's considerable leverage embedded in those REITs. Your liability for that debt means that your return can't go below zero. With private real estate, your liability may be more than just the property or properties which the borrowed money bought, and a negative return may be possible.

If you want more leverage than that embedded in publicly traded REITs, you can borrow to invest. At present, interest rates on margin loans at IB are in the range of 0.5-1.5%.

About being able to buy a property for 40% less than the market price, I think you mean that there is greater opportunity in private real estate to buy at less than intrinsic value? I would agree with you. Stock markets are more efficient at pricing than private real estate. When it comes to achieving the goal of outperformance, private real estate will tend to be less competitive than the stock market. But what I said in the first paragraph of this response still applies. And the competition for above average returns in private real estate is not light.


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## Topo (Aug 31, 2019)

I think for the average investor who is content with market returns and does not have the appetite for managing a real estate operation, buying REITs may be a good compromise (although probably not as lucrative). Retail/office/industrial REITs have had a huge draw-down recently, but indications are that at least for retail REITs most rents are being collected (80-90%). 

David Swenson has a chapter on REITs in his book, where he puts them as a separate asset class vis-a-vis stocks and bonds. He contends that rents are contractual obligations, putting REITs in between stocks and bonds. The obligatory nature paying rent is showing itself nowadays, when businesses that may be struggling have to pay the rent if they want to keep their location. At the same time, interest rates have lowered, reducing the burden of debt.


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## sags (May 15, 2010)

Why would someone sell a property for $45K that was earning $850 a month ?


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## nobleea (Oct 11, 2013)

sags said:


> Why would someone sell a property for $45K that was earning $850 a month ?


Generally, they weren't renting it out as investment. It was their home and they lost a job, or a divorce, or whatever.


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## Just a Guy (Mar 27, 2012)

Having actually owned real estate and know how much money is available, I wonder where all that money goes in a reit. If you watch shows like American Greed a lot of fraud happens when people manage real estate for others because there is a ton of money being made. Getting double or more digit returns in real estate isn’t that difficult to achieve, so why do reits have relatively low returns?


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