Wall Street versus Real Estate

A friend of mine and client sent me an interesting email a couple of weeks ago, and I was so intrigued by it… I asked his permission to share it. Mark Miller is a Senior Technology Manager and avid investor. After Mark’s analysis, I present my case on why Real Estate holdings perform better, have less risk and act as a terrific tax shelter.

This is an open dialog, so feedback and opinions are welcome and encouraged.

Mark’s Analysis
Since everyone else is doing an analysis to tell me what I should do… I thought I would do some basics myself. Feel free to double check me (or call and discuss).

This is counter to practically everything I have read from investment companies….most cherry pick point in time anomalies, like a few months in a year….(perhaps I’m cherry picking longer term “anomalies”, but it seems more representative).

Basically this is what I did:
Downloaded DJI from inception to date
Click Here

Looked at the following cases:

1) Largest Year percentage drops

2) In the worst down trend years, recovery time of 100k invested

Few interesting things (at least to me) from this:
(Click here to follow)

If you were in the market in 1929, it took you until 1955 to recover what you invested (Longer counting inflation) 26 Years!
If you were in 1970, took 3 years to recover (not counting inflation)

If you were in 2000 (at peak), took 6 years (and of course as most know, that growth was really the last 2-3 years!).
Potentially second largest year, percentage drop in history (1932 had 55%).

Didn’t go over 2k until 1986 (58 years!)…then huge percentage growth (up to almost 14k in 2007)

Point here is what ‘trend’ does someone really have…if incremental growth for almost 60 years then huge percentage swings then what does that tell us?
Heading for 3rd bounce this year at 7.5k (one in 1998, second in 2002)…This looks somewhat like the ‘teacup’ handle from O’Neill. So, either we will go back up to 10k levels or plummet down (perhaps back to 2-4k levels).

So what does this tell me? I could be an economist and talk about each hand…I can tell you this, it definitely makes me question “long term’ growth in the market (based on timing obviously) and that risk (based on timing) is much higher than anyone has ever portrayed. Also, if the indicators go the other way from my last point, I personally could envision (from a historic view) going well down in the 4k range.

Mark Miller

I decided after Mark’s email to test that theory with what I know best… Real Estate. My research does not go back as far as Mark’s but Real Estate has held fairly true to the old rule of doubling every 10 years in most markets. Notice I said every TEN years, not two to three years as some areas in Florida, Nevada and California experienced before the bubble burst.

With that in mind I simply went back ten years in Charlotte to a modest neighborhood in South Charlotte (Madison Park) which is between Park Rd and South Blvd and Tyvola and Woodlawn.

Back in 1997 if you would have bought a little brick home for $100,000 in Madison Park with approximately 1,400 square feet… it would be worth between $225,000 to $300,000 depending on what updating was done to the property today.

See an historical graph of this neighborhood from 1997 until present.

Now take a minute and track what your $100,000 investment would look like if you entered the DJI in 1997 to present. Go ahead and look at those numbers again… because it should be an “Ah ha” moment for you. What if I told you we just scratched the surface? There are FIVE other advantages with Real Estate holdings. Let’s run through them briefly:

Tax Benefits: Real Estate is still one of the best tax shelters still available from the IRS. Tax deductions such as property taxes, mortgage interest, insurance, maintenance and repairs make great write-offs. In addition, under section 1031 of the Internal Revenue Code, real estate investors can sell their properties without paying capital gains taxes as long as they exchange them for others of like kind. To summarize, sell stock in which you have a gain and you’ll be paying taxes - there’s just no way around it. But sell appreciated property and if you do it right, you can defer your tax indefinitely.

Cash Flow: Most stock market investors will pay 100 percent of the share price for a stock. If you like to live dangerously, you can buy up to 50% on margin if you have the stomach for margin calls. Real estate investors typically put down only 10 percent with no risk of margin calls. In essence you’re leveraging a larger investment with little of your own money. NEWS FLASH… at the time of this newsletter, rates have plunged below 5% on a 30 year fixed conforming loan.

Control: This is where my comfort level in Real Estate shines. Property owners have total control over their assets. There is no need to worry about economic news events, subjective accounting, incompetent management or worse… fraud. It is however… work! You’re not writing a check to your broker and daydreaming of 20% returns. It’s a roll up your sleeves and work type of investment. The greater your time the more profit! Of course you could pay everyone else to do it for you… but that dips into your profitability as well.

Appreciation: This is the arena where common sense and greed have their battles. It’s not sexy to earn an average of 6% a year appreciation on a $100,000 investment where you have only 10% of your money into it. Everyone wants the 15 to 20% returns and hope they pick the right stock that may even double in value. However what’s the sense in that when three to four years down the road you give half of it back? Slow and steady is actually a great thing… you should embrace it. Any investment… stock or Real Estate for that matter that is providing returns like a Ferrari will eventually correct. It’s a fact!

Marketability: When I say marketability, I don’t mean which is the easiest to sell. Obviously selling a stock is a much quicker transaction. In most cases it’s quite painless as well unless you’re selling at a loss. No… when I say marketability I mean how large is your market and is it growing? In other words… one could go through life and never purchase a stock. However housing and shelter are basic human needs. It’s a growing market, it has a limited supply and everyone must have it… whether it’s single family apartment living or condos.

This article is meant to spark thought and debate. I am not advocating anyone to do away with their 401Ks and shifting all their money into Real Estate. That would not be prudent. However, perhaps the old adage of “long term investing in the stock market and you’ll be fine” is starting to show it’s flaws.

Frank Pixley

Principal Broker