Thread by @TihoBrkan

1/ Equity index funds vs Real Estate investing

All the time you hear how stocks have historically returned more than real estate. I'm not going to write a large thread on this topic right now (maybe enxt weekend from London), but I want to touch up on it quickly.

2/ Don't misunderstand me, stock index funds are a good investment. I use them myself and quite frequently too. But there are only 2 ways they can generate wealth for you.

1. Appreciation in price
2. Cash flow (dividends)

That's it. And they are usually not as tax efficient.

3/ Debt pay down by company improves the balance sheet, thus making valuations more attractive. However, that is only reflected in the price appreciation.

4/ Buybacks bypass paying out dividends which aren't tax efficient (withholding tax rates eat into net cash flow) so instead, a business (like Berkshire Hathaway) uses excess cash to buy back their own shares. In the end, that is still only reflected in the price appreciation.

5/ Real estate has 6 ways (I personally know of) which can generate wealth. Maybe more, depending on how CREATIVE you can be.

1. Property appreciation
2. Forced appreciation
3. Cash flow (rent)
4. Mortgage debt pay down
5. Depreciation & other tax benefits
6. Negotiations

6/ Property appreciation: while prices of stocks go up more than real estate, real state utilities leverage (margin) much better due to lack of volatility. So if stocks can average 10% and real estate 4% annually, real estate outperforms equities by a huge margin @ 70/80% LTV.

7/ Forced appreciation: renovating real estate (value add) means you can force the price of it higher during a downtrend, flat market or an uptrend.

You cannot do this as a stock investor unless you're a billionaire activist or private equity fund with billions like KKR.

8/ Cash flow: they say cash is king, but that's not true. Cash flow is king. And real estate is the king of cash flow. Rental income arrives monthly or even weekly in some cases. Dividends come quarterly.

US real estate yields are usually far higher than dividend yields.

9/ Mortgage debt pay down: your tenant can be giving you a DOUBLE return if you bought your property right. Paying your debt + extra income in hand.

S/he is paying your mortgage down (paying bank's interest & reducing mortgage owed). What you see is your equity growing.

10/ Depreciation & other tax benefits: if you earned $100k in real estate, one friend earned $100 trading stocks and another friend $100k in a salary — you would have more money left over after taxes.

Real estate is the MOST tax efficient asset available.

11/ Negotiations: you can't negotiate a higher selling price or lower purchasing price when buying an index fund.

In real estate you bet your bottom dollar, it's all about negotiating. if you're good at it, you could earn another 10% just for talking the talk.

12/ Case scenario. Let's assume you bought some real estate worth $500,000 and did it with a mortgage of 80% LTV. Your initial investment is $100,000.

If this real estate goes up 3.5% per annum and pays you only $500 per month in net cash flow. What is your return on investment?

13/ Doesn't sound amazing until you sit down and do the figures.

$17,500 profit in price appreciation
$6,000 profit in net cash flow
$7,500 increase in equity via debt paydown
$??? in depreciation & tax incentives

14/ So that is $31,000 in annual profit on your initial investment of $100,000.

You're looking at least 31% IRR (internal rate of return). Now imagine, you renovate this property by investing your cash flow and increase its valuation by 15% or more.

15/ A 15% gain on $500,000 is another $75,000 of the gross profit (net profit would be smaller since you invested your cash flow to buy materials, pay contractor, etc).

Now imagine you negotiate another extra 7.5% as you deal with potential buyers, who end up overpaying.

16/ You can make a 30%-60% return on positive cash flowing real estate, in a great location, bought as a "great deal" for a great entry price, that can be renovated and eventually exit with skillful negotiating.

Meanwhile, stock index investors are hoping for another 9% return.

17/ I know people are rolling their eyes, not believing the kind of returns I post & achieve. When you break it down & show just how powerful real estate really is & you see 6 wealth-building generators, while stocks only have 2 (and you get sky high volatility to go with it).

18/ If I was starting out again and wanted to achieve the fasted route to millionaire status — I would do real estate for sure.

Forget the extreme frugality, FIRE and 40-year passive indexing. You're losing time & leaving money on the table for guys like me!