Thread by @adamnash

Recent post by @awealthofcs cites the Fed research paper from 2017 that shows impressive risk/return stats for rental real estate vs. other asset classes over various time periods in Europe & the US.

A few thoughts...
awealthofcommonsense.com/2019/03/real-e…

... (1) The data in the research paper is fairly compelling, but only because it is fairly unique. Most comparisons of real estate to other asset classes have historically only looked at capital gains, not rental income.

... (2) Ignoring rental income is a pretty big miss. After all, this is the largest component of inflation calculations, so it’s not that the idea lacks credibility.

This is immediately interesting because, like corporate cash flows, rent grows with inflation.

... (3) Real estate is also liquid enough in the largest global cities (which is the data set for the study) to offer a reasonable estimate of volatility over useful time periods (months)

Result: Relatively high yielding investment, indexed to inflation, lower volatility.

... (4) This does *not* mean you should treat your primary residence as a “good investment.” When you live in the property, you consume the imputed rent. Every year, as inflation increases, you “pay more” to live there.

So this does not justify buying more home to live in.

... (5) Also, looking at aggregate asset class performance is not a good predictor of an individual security. When you buy a rental property, you take on all sorts of risks that are “averaged out” of the aggregate data.

... (6) Let’s also not forget that owning rental property is more like a small business than a “passive” investment. There’s nothing passive about broken appliances, finding new tenants, evictions, etc.

... (7) That being said, the academics and industry experts who are overly dismissive about rental properties seem more negative on the asset class than the data suggests they should be.

There may be significant value to a diversified portfolio from including this asset class.

... (8) But remember, optimizing the sharpe ratio of your portfolio is likely not as significant as making sure you are saving regularly.

In real life, this may be the primary benefit of real estate to most people. The mortgage serves as forced savings as people pay it down.

... (9) Many intelligent people in Silicon Valley are confused about the value and returns of real estate, because in the last 40 years, real estate here has behaved like a tech stock.

adamnash.blog/2017/06/07/sil…

... (10) However, people don't seem to realize that capital appreciation tends to hurt rental yields. A $200K home that rents at $1000 per month has a yield of 6%, while a $1M home that rents at $4000 per month has a yield of 4.8%. (This is all before expenses)

... (11) As a result, it's not surprising that people who live in these highly appreciated, global cities (SF, NY, LA, DC, etc) tend to have a distorted view of the real estate market. (In fact, this was part of the reason I originally invested in @OpenDoor @PeerStreet & others)

... (12) Just remember, there is no magic asset class that will solve all of your spending & retirement woes. There is no substitute for spending less than you make, saving regularly, investing into a diversified portfolio w/ low fees & understanding taxes. 🎉