# Real estate vs. trading



## kerosam (29 September 2006)

for those who invest both in RE and trading, do you apply the same investing or trading principles to RE? e.g. would anyone still buy investment ppties when it is more or less at a peak e.g. in WA, and why?


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## coyotte (29 September 2006)

*Re: - real estate vs trading*

A Short Term Trader would keep taking  profits on a regular basis --- buy/sell -- buy/sell , etc, etc 


A Long Term Trader would ride it up to it's peak -- let it roll over -- then dump as it it started to fall ( you never know where the peak will be , untill the decline starts )


A Investor ( from what I gather from this forum) would probably buy as it started to FALL ( what a bargain ! ) and then winge and bitch as it it kept falling  but keep on BUYING (a biger bargain ) and continue the winging as it kept falling.

A Trader on the other hand would wait untill it had began a proven RISE from a bottom , and just repeat the process.



Cheers


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## wayneL (30 September 2006)

*Re: - real estate vs trading*



			
				coyotte said:
			
		

> A Short Term Trader would keep taking  profits on a regular basis --- buy/sell -- buy/sell , etc, etc
> 
> 
> A Long Term Trader would ride it up to it's peak -- let it roll over -- then dump as it it started to fall ( you never know where the peak will be , untill the decline starts )
> ...



LOL

To paraphrase "Yogi" Berra- "_You notice a lot of things when you're watching_"


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## dr00 (30 September 2006)

*Re: - real estate vs trading*

an investor would do a ****load of research to work out what area is going to grow based on economics then buy and forget about it for 10 years.


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## swingstar (30 September 2006)

*Re: - real estate vs trading*



			
				coyotte said:
			
		

> A Investor ( from what I gather from this forum) would probably buy as it started to FALL ( what a bargain ! ) and then winge and bitch as it it kept falling  but keep on BUYING (a biger bargain ) and continue the winging as it kept falling.




And it's very consistently patterned, which traders love.


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## tech/a (30 September 2006)

*Re: - real estate vs trading*



			
				wayneL said:
			
		

> LOL
> 
> To paraphrase "Yogi" Berra- "_You notice a lot of things when you're watching_"





And thats what MOST do.---watch.

*This IS what your all missing.*

Lets say now that the market has stalled BUT you can and will still find pockets of average growth.

I'll show 2 examples.

Option 1
Lets take a $350,000 house which you positively gear.( This is easily done by putting more down than the 20% deposit---so lets say $100K).

Lets say Modestly that over the next 3 yrs you get a modest growth of 7% each year. (Dont tell me that thats not possible--- and sure if you dont do due diligence it could be negative--but FOR THE EXERCISE).

So in 3 yrs you sell for $428,000---7% compounding.
Say expenses are covered by rent return.
So you have $78,000 plus your $100K or Gross 78% return on your money.

Option 2

As above and you put 20% or 70K down.
Return $78k or 111% gross.over 3 yrs.

Now having said that its all about timing.There are opportunities STILL out there and do the maths for 15% if your* really good*.

Dont whinge that its rubbish. (Those who perminently sit and wait---while those who actually do it DO IT).

Gone for the time being are the 30-50-100% rises in property each year,they will come again but not for many years.
But when they do REMEMBER THE MATHS!!!

Now think exactly the same with STOCK TRADING.

There are times to belt it and times to stand aside.
The beauty of the Stock market is that you can sell $350K of stock in 2 minutes---you cant do that with a house.(I know your not trading $350K but if your comparing property to stock trading then you should!!).

Lets take an example.

Lets say you traded one stock lets say WOW---Woolworths

3 yrs ago it was around $16 today its $20.

$100K down and trade $350K worth the same as a house.
Today its worth $437K the same as a house at 7% growth.

These are just examples of how you can make other peoples money work for you.THIS IS THE KEY.

There are better and worse case scenerios but I'm just offering up the comparison ---


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## ghotib (30 September 2006)

*Re: - real estate vs trading*



			
				dr00 said:
			
		

> an investor would do a ****load of research to work out what area is going to grow based on economics then buy and forget about it for 10 years.



OR, 

an investor ignores "the market" and "the area" and "the sector" and all the other aggregates and finds "a deal". Of course a trader can do exactly the same thing, as Tech keeps pointing out. 

What on earth is the point of spending time and brainpower arguing about real estate vs stock market or home ownership vs renting or trading vs investing or gabble gabble gabble....  There are plenty of ways to make money. No one can do all of them at once. Pick something that suits you and DO IT. 

Ghoti


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## mime (30 September 2006)

*Re: - real estate vs trading*

Why not a RE trader? I heard many stories where someone bought hugh lots of land a sub divided them and flipped them making a killing. I hate the RE is so highly taxed though. Duties and taxes give me a break.


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## Julia (30 September 2006)

*Re: - real estate vs trading*



			
				tech/a said:
			
		

> And thats what MOST do.---watch.
> 
> 
> 
> ...




Just for the record, WOW didn't reach $16 until about March 2005.
Three years ago it was around $12.  So you'd get more shares for your money.
So, doesn't that mean you are going to have been better off with the stock than the house?

Apologies if I'm misunderstanding the concept or the calculation (which is entirely possible).

Julia


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## mime (30 September 2006)

*Re: - real estate vs trading*

It would depend on how much money you have borrowed to buy the stock. Margin lend at 70% your would probably done better with WOW.


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## markrmau (30 September 2006)

*Re: - real estate vs trading*



			
				ghotib said:
			
		

> Pick something that suits you and DO IT.



Good point Ghoti.

I have been racking by brain over the last week on whether I should sell all my shares, buy the place I rent, knock it down, subdivide and build.

But I enjoy share investment, and have no interest in real estate.....The answer is simple really.


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## Julia (19 October 2006)

*Re: - real estate vs trading*

An article by Mark Tier on this subject.

Why Are There So 
Many Real Estate 
Millionaires?

The real estate investor has a "secret" 
advantage over most other investors. 
And he doesn't even know it!

Many years ago, I saw a study which concluded that some 90% of all millionaires in the United States were millionaires, thanks to their ownership of real estate. 

My guess is that the majority of these millionaires are like a couple I know in Sydney. When they got married in 1972, they bought a house which cost around $100,000. At that time, it was a very expensive property and they could only afford to buy it because their parents helped with the deposit.

They lived in this house for 28 years, until 2000 when they divorced. As part of the settlement, they sold the house and split the money. The result: they were both millionaires ”” and they did nothing more adventurous than buy a house and live in it for most of their lives!

The fact that you can buy something, sit on it, and with your fanny make a fortune is certainly one reason why there are probably more people who invest in real estate than stocks, commodities, or anything else.

Indeed, if you took a poll I'm sure you'd find that the majority of people think that real estate is the best investment of all.

The most commonly given reasons would be factors like inflation, tax advantages, population growth, rising wealth, and scarcity of land (especially in prime locations).

All good reasons. But if you're familiar with Warren Buffett's style of investing, you'll immediately see that you could just as easily apply most of those reasons to the kinds of investments he prefers to make. 

I believe that there is a deeper, more fundamental reason why there are so many real estate millionaires. But first, let's quickly survey the generally-accepted reasons I listed above.

Inflation. Over time, inflation has pushed up the price of everything. As long as governments continue to issue unbacked paper money, inflation won't go away. So any asset purchased with leverage and held for the long term will inevitably return handsome profits to the investor. (On paper, at least. Your "profits" won't buy you anything near what they would have done when you invested; but in nominal terms you'll have made a killing.)

Tax Advantages. In many countries real estate investments receive special tax treatment. The most common ones are lower capital gains tax (in some circumstances, even zero) and the ability to deduct interest payments from your income tax. As a result, you can compound your money pre-tax.

Thanks to the easy availability of mortgages, you can also defer capital gains taxes forever by never actually having to sell your real estate. You can get money out simply by taking out another loan (and, of course, deduct the interest on that new mortgage as well). This also makes it easier for investors to add to their real estate holdings over time.

Rising population and rising wealth. Population growth means more people want homes. And when people are wealthier, they prefer bigger, more expensive homes ”” and can afford them.

Land Scarcity. In desert cities like Tucson, Arizona and even Palm Springs, California, when developers need more land to build more houses they simply fence in a bit more desert. You can't do that in cities like New York, San Francisco or London. Similarly, it's pretty tough to create more beach front property in places like Surfer's Paradise, Miami and Waikiki. 

Obviously, the rise in the price of real estate in places where land is abundant and cheap significantly lags the increase in the value of properties in places where land is scarce. 

All good reasons for investing in real estate. Indeed, you're probably quite familiar with all of them even if you've never actually purchased a property in your life. 

But, as I said, I think the real reason there are so many real estate millionaires is something completely different. 

Day Traders Not Invited

By its very nature, real estate is a long term investment. It takes time, sometimes months, to buy or sell a property: there are no day traders in the real estate market.



Note: the US hardcover edition was titled Becoming Rich. Except for the title change ”” and, of course, the price ”” it's the same book. 
Why is this significant? In The Winning Investments Habits of Warren Buffett & George Soros I referred to a study which showed that investors who traded stocks actively had, on average, far lower returns than investors who followed a buy-and-hold strategy. (You can read this study, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, from The Journal of Finance, online.) 

Of all investment markets ”” with the probable exception of privately-owned businesses ”” real estate has the longest holding period and the lowest turnover. 

A major reason long term investors, on average, make more money than day traders is simple: they make fewer mistakes. As Warren Buffett puts it: "an investor needs to do very few things as long as he or she avoids big mistakes." The nature of the real estate market ”” plus the fact that, for most people, buying a property is the biggest investment they'll ever make ”” means that investors take far more care over their selection of real estate than stock market investors generally do when presented with the latest "hot tip."

Crash Survival 

In addition, a real estate investor has a much greater chance of surviving a recession or market crash with his holdings intact than a stock market commodity investor. 

Firstly, as long as he has the cash flow (whether from salary or rents) to continue paying off his loans, the real estate investor never gets a margin call. 

Secondly, real estate is hard to sell. In the stock market, all you have to do is call your broker and moments later you're out. This is exactly what thousands of stock market investors do in a market crash: they panic, and sell like lemmings -- at a loss. 

Certainly, when the real estate market crashes many over-leveraged investors are squeezed out. But the real estate investor who is cash-flow positive or neutral is far more likely to ride out the collapse ”” even if his first reaction is panic. (If he does panic, he would probably dump his property, even at a loss, if he could ”” but he can't.) 

The result: he has not been frightened away from the market; and he is still holding his properties when real estate inevitably turns hot again...to the long term benefit of his net worth.

To put it in another way: while there are many ways you can go broke investing in real estate, day trading isn't one of them. 

Finally, the real estate millionaire has benefited in full from what some people call "the Eight Wonder of the World": compound interest. By holding his properties for decades, he sees his stake ”” a deposit of 10% to 20% of the purchase price ”” compound into 100% ownership of a property that is far more valuable.

17.9% for 28 Years: 
Hard to Beat!

Consider my friends in Sydney. They put down around $20,000 (20% of the purchase price) and 28 years later netted over $2 million! That's an annual compounded return of 17.9%. 

Okay, over that time they had to pay back their loans, plus interest, plus all the property taxes and maintenance costs that every home owner must pay. But had they rented a similar property, their total expenditure would have been much, much more.

And considering they borrowed the deposit from their parents, their actual return on investment was infinite. 

Certainly, investors like Warren Buffett and George Soros could have taken that $20,000 and done a lot better than 17.9% a year. But very few professional investors, let alone the average man on the street, do anywhere near that well over any 28-year period you care to name.

As the investor Bernhard Mast (featured in The Winning Investments Habits of Warren Buffett & George Soros) put it when I interviewed him: "First of all, you have to protect yourself from yourself." 

There are no daily, hourly, or even monthly price quotes in the real estate market to send your emotions on a roller coaster ride. In fact, if your mind is focused on the cash flow from your properties, you probably almost never worry too much about their market value. 

So emotions like fear, greed, and panic ”” which have ruined many a stock market investor or commodity trader ”” are far less likely to trip up the property owner. Not only does the real estate investor have a much more peaceful investment life, he also avoids without trying many of the mistakes and crippling losses that other investors regularly suffer.

Being the market where it's easiest to "protect yourself from yourself," the real estate investor can far more easily adopt the winning investment habits that separate the investment sheep from the investment goats.

And that's the main reason why there are so many real estate millionaires. ”” Mark Tier

Julia


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## GoldenYears (19 October 2006)

*Re: - real estate vs trading*

As a percentage there are many more millionaires around today than there were a generation or so ago.  One of the main reasons as I see it, is the rise in property values.


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## tech/a (19 October 2006)

*Re: - real estate vs trading*



			
				markrmau said:
			
		

> Good point Ghoti.
> 
> I have been racking by brain over the last week on whether I should sell all my shares, buy the place I rent, knock it down, subdivide and build.
> 
> But I enjoy share investment, and have no interest in real estate.....The answer is simple really.




M

Let me tell you that like trading the interest in R/E rises exponentially with profit derived.
The more you're involved in something---the better you'll get at it!


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## Smurf1976 (19 October 2006)

*Re: - real estate vs trading*



			
				GoldenYears said:
			
		

> As a percentage there are many more millionaires around today than there were a generation or so ago.  One of the main reasons as I see it, is the rise in property values.



It's easier to become a millionaire today simply because a million dollars is worth far less than it used to be - inflation.

Someone who is a millionaire today is no wealthier than someone with $100K some years ago or even $10K some decades ago. Inflation!


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## Realist (19 October 2006)

*Re: - real estate vs trading*



			
				tech/a said:
			
		

> Lets say Modestly that over the next 3 yrs you get a modest growth of 7% each year. (Dont tell me that thats not possible--- and sure if you dont do due diligence it could be negative--but FOR THE EXERCISE).
> --




Okay lets say that over the next 3 yrs you LOSE a modest 7% each year. (Dont tell me that thats not possible it's happened in Sydney the last 3 years --- but FOR THE EXERCISE).

You end up in the poor house    

Investors watch and wait for good reason!!!

Often the best thing to do is nothing!!


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## nizar (19 October 2006)

*Re: - real estate vs trading*



			
				Julia said:
			
		

> In addition, a real estate investor has a much greater chance of surviving a recession or market crash with his holdings intact than a stock market commodity investor.




Tell that to the Japs who bought property in the late 1980s.


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## nizar (19 October 2006)

*Re: - real estate vs trading*



			
				mime said:
			
		

> Why not a RE trader? I heard many stories where someone bought hugh lots of land a sub divided them and flipped them making a killing. I hate the RE is so highly taxed though. Duties and taxes give me a break.




Exactly.
Thats how you make the big bucks.

There were alot of traders in melbourne/sydney a few years back doing like a T+3 trading with property. Buy, wait 3-4months, and sell before the settlement. You wouldnt wanna be the one holding the properties when the music stopped though.


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## Realist (19 October 2006)

*Re: - real estate vs trading*

Shares over the longterm have always been a better investment than property. And always will be...

Simple as that.

Shares have no costs if you just buy and hold, you get dividends and the price appreciation is greater than property.  You can easily diversify across companies, industries and countries to protect yourself.

Property has expenses, rennovations, rates, repairs, maintenance, body corporate fees, management fees, advertising, real estate fees, rising interest rates, mortgage fees, empty time, low yields, bad tenants, capital gains taxes and the list goes on and on and on....  People forget to mention these and the fact profits need to be indexed to inflation when they tell you their house has doubled!!


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## markrmau (20 October 2006)

*Re: - real estate vs trading*



			
				tech/a said:
			
		

> Say expenses are covered by rent return.



Seriously?

Best interest rate for borrowings you could get is probably 6%.

The 'cost' of your deposit is the risk free rate you could get by leaving it in the bank or term deposit.

Do you know of any rental yields in the 5-6% range?

The house I rent just sold with a rental yield of just over 2%.

I'm not saying that it isn't possible to make money out of R/E, I just that I don't think there is much low hanging fruit.


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## tech/a (20 October 2006)

*Re: - real estate vs trading*



			
				markrmau said:
			
		

> Seriously?
> 
> Best interest rate for borrowings you could get is probably 6%.
> 
> ...




Now yes I agree.If putting 100-80% loaned funds into a deal.

But all my rentals including my commercial properties return 10-15%
But bought them in the mid to late 90s.
Other properties are now freehold due to selling those with in my view least potential and putting the capital gain in those which do.
Bit like selling the least performing stock and keeping the best.

There are ways to benifit from both asset classes.
Most here unfortunately are fixed in their opinions which is effected by "Popular belief" (Remember only 6 mths ago petrol would be $2 a litre by Xmas!!!!). Those that prosper will stand out from the crowd.



> The house I rent just sold with a rental yield of just over 2%.




What would that be if the owner had invested 50% capital of his own in the property? OR paid 100% in a super fund?


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## Realist (20 October 2006)

*Re: - real estate vs trading*



			
				tech/a said:
			
		

> What would that be if the owner had invested 50% capital of his own in the property? OR paid 100% in a super fund?




A rental yield should be determined by the value of the proprty compared to the rent you get.

Not by how much you owe on the property.

So if a house worth $500K that you owe only $100K on returns $25K a year in rent its yield is 5% - not 25%!

Because quite simply you could sell the $500K place and put $400K unhedged into shares and get $50K a year return and have no expenses or effort!!

That is why property is not a great investment at the moment.  Yields compared to price are very low!


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## GoldenYears (20 October 2006)

*Re: - real estate vs trading*



			
				Smurf1976 said:
			
		

> It's easier to become a millionaire today simply because a million dollars is worth far less than it used to be - inflation.
> 
> Someone who is a millionaire today is no wealthier than someone with $100K some years ago or even $10K some decades ago. Inflation!




I agree it has been much easier to become a millionaire through property in the last 10 or whatever years due to inflation as well as other factors (like low interest rates fuelling high demand) driving up property prices, but I think your comparisons of 10k and 100k are a little off. I see what you are saying though.

Using a guesstimate average inflation rate of 5% for the last 20 years then $1M today discounted back for 20 years = a little over $376k in 1986


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## Realist (20 October 2006)

*Re: - real estate vs trading*



			
				GoldenYears said:
			
		

> I agree it has been much easier to become a millionaire through property in the last 10 or whatever years due to inflation as well as other factors (like low interest rates fuelling high demand) driving up property prices, but I think your comparisons of 10k and 100k are a little off. I see what you are saying though.
> 
> Using a guesstimate average inflation rate of 5% for the last 20 years then $1M today discounted back for 20 years = a little over $376k in 1986




Being worth a million $ in Sydney means you probably still have a mortgage and will have to work hard for many more years to pay it off and set yourself up for retirement....


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## markrmau (20 October 2006)

*Re: - real estate vs trading*



			
				tech/a said:
			
		

> What would that be if the owner had invested 50% capital of his own in the property? OR paid 100% in a super fund?




Sorry, I don't understand.

The yearly rent I paid, was 2.38% of the sale price.

If you subtract the council rates, sewerage charges (not including fresh water charges which renter pays), $200 for insurance, from my yearly rental, the return drops to 2.04%.

This doesn't include maintenance charges because I typically do the small stuff myself.

It doesn't matter how much of the owners capital is invested and how much is borrowed. If you fund 100%, the cost of the capital is about 5%. If you borrow the whole lot, the cost of capital is probably 6.5% or more.

Either way, you are paying 5-6% for a return of 2%.

Thats fine, as long as you expect capital growth of a minimum about 4% to break even. (ignoring tax for simplicity).

So, to make a decent return considering the risk, perhaps you would want to expect a growth greater than 7%. (ie for me, 3% [=7% expected return - 4% standstill return]) is not sufficient risk v reward.

Thoughts?


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## GoldenYears (20 October 2006)

*Re: - real estate vs trading*



			
				Realist said:
			
		

> Being worth a million $ in Sydney means you probably still have a mortgage and will have to work hard for many more years to pay it off and set yourself up for retirement....




I was talking about nett worth not gross.


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