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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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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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CMHC has some plans for Canadian homeowners:


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

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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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"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."


"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.


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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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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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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