this is the problem. you confidently drop false and irrelevant claims and refer to your post as a thesis. if you said oh hey guys i have an idea or this is my opinion... you confidently dropped your "thesis" on us with false and barely relevant reasons as to why something is "horrible"
are you aware we currently have factory housing. how exactly is 3d printing going to revolutionize the housing industry in 20 years? we just had the back to the future movie anniversary. a lot has changed and a lot hasnt

i think your shallow thought process on 3d printing is born from a bias and a lack of understanding in real estate value. youre coming up with reasons to get the answer you want. past real estate investment completely stomps index funds. moving forward it seems like you are just coming up with reason to get the answer you want. you might be right but you arent providing good reasons imo

3d printing is great technology. im in. weeeee. printing stuff will be fun for all. i will get my jollies also. how is this going to replace construction? first you need a beast of a printer to spit out houses. how much will that cost? how and when will that be economical? how many houses will you have to spit out to turn a profit? what is the benefit? you are basically saving on labor. materials will cost what they cost. you have printed this house, just like in the current factories they have, now what? how are you getting this house from the printer to the address? that costs time and money. oh you have to ship the house in parts? that costs time, money, and labor. oh you have to build a completely different quality of home that can be shipped? that costs money. the economics and logistics of printing homes is far from revolutionary from anything i can see. im confident trades will have printers in their trucks spitting out parts long before we replace construction or have some sort of cost effective revolution. its possible that drones are picking up and dropping off houses but i dont see it

someone could have sold me on the idea that the internet would crush the office market. people can work from home. its more economical and efficient for both the employer and employee. it hasnt happened

you talk about population growth and demographics. bingo. if population stagnates in an area so will demand. if wages stagnate in an area, so will prices. i agree. forget about printers. if populations stagnate along with income growth, id rather own real estate in that area than a 3d house printer

what graphs? in billy bobs blog?

real estate graphs are produced from real estate transactions, which demonstrate market value. there isnt some massive leak in the valuation of real estate because the market doesnt understand toothsayers theory of depreciation.

i will simplify things for you. you seem to be getting tangled up and distracted


land is scarce. land is what appreciates not the improvements. they arent going to be able to print more land afaik. nobody is going to give away new land for free. its expensive to connect people to the existing grid and upgrade the current services to have the capacity for rapid growth. its all possible but it all costs money. most countries plumbing cant even handle toilet paper. think about it

look at population growth in a city. it works in two ways. by sprawling it expands outward making surrounding areas more valuable with the core being more desirable and expensive, generally speaking. the other way is density. if you own a home/land and population grows then so does demand. this gets relieved by density. if they want to tear down your home and put a tower on it, the value of your land skyrockets. if they tear down other homes and not yours then single family homes have become in less supply and the value still goes up. if people build beautiful 3d homes on your street, the value of your home and entire neighborhood goes up. these are general statements of course but we are talking the rule, not the exception. this isnt some wild theory, its basic supply and demand
my previous comments on real estate in major north american cities slaughtering an investment in the S&P 500 index fund was based on some evidence. someone else posted a canadian banks research showing that major canadian cities did 4-6% + growth over the past 25 or 30 years. a graph itt shows new york real estate index. i stated that new york prices reflect a massive meltdown in the economy and that new york employed the industry hit hardest. im guessing new york employed most of the people employed by the companies right in the middle of the meltdown. i theorized that the strength of the housing market in new york over this time speaks to the strength of owning real estate in major cities. we saw priced drop in the index. how were rental rates of 1 and 2 bedroom apartments affected during this meltdown in new york? how about vacancy rates in this city?

we have seen growth of new york and major canadian cities. i have suggested people google the 20 biggest cities in the usa in 1990 and pick a few random ones. how have those markets done? how many out of 20 did not do well?

here is a much more simple way to scrutinize my claims. it is very possible to get an average of 4% net return on rental real estate property. if you want to use a lower number, go ahead. when you factor in leverage, what rate of growth in value do you need to beat the 10% benchmark of the index? you may have a different opinion about how things will go moving forward but lets be honest about the past

if im off, id like to see it. and it wont be hard to grab a couple indexes and stick the numbers in excel. so far im right about large canadian cities and new york. im sure we dont need to look at a place like san fransisco. pick a few random spots from the top 20 in 1990 and start to paint an honest picture about the past

This isn't evidence of anything. You're just saying stuff and moving goalposts whenever evidence is actually presented.

We get it. Massively levering up on low yields makes money when stuff rises. Nothing can ever go wrong with this plan.

Sorry for the n00b question (legit not trying to be a dick)....but are you saying that real estate has low yields? Is that your position?

Some does, some doesn't - it's a very diverse field.

London passive property of the nature the OP discussed has very, very low yields at the moment. In many places sub 1%, and that's on the public offered numbers - 'true' rents for a landlord are nearly always even lower than this due to good tenants' rates generally rising slower than the new tenant market (effectively the risk premium of taking on unknowns each time is in the public numbers, but not in the actuals).

Active RE management generally has negative yields for most investors. A smattering beat a respective REIT, and the vast bulk of those buy property at below market values.

But that is akin to saying that most investors trail the market. It is obviously true, but doesn't really give any insight into how someone should go about making better decisions.

All in all I think there are better things to quibble about.

NB: The handful that don't buy at below market values have some strategy that is either structural ( rezoning scams being the most noteworthy) or operational (full time handyman vs contractors, etc).

Thanks for the clarification. I totally forgot about OP and it being related to London.

I agree...leveraging property with London style yields = a horrible idea.

decent bloomberg read about the ongoing shift to indexing in the financial world. Still about 70/30 active vs passive but if it continues on this pace, will the market become more inefficient as there is more passive indexing? At what market share would this take place? 50%, 65% 80%?

Getting harder and harder to talk people into paying you 1% + fees to manage their money.

http://finance.yahoo.com/news/vangua...145617972.html

Regardless if its a bubble or not, your ROI estimations for both RE and stocks seem high. Your overall investment strategy seems unnecessarily aggressive.

Do you have any experience in real estate investment? What makes you think you can capture that 7%? I think the broad market index is a better option.

It seems the overwhelming consensus itt is that London RE like the type OP is talking about is a terrible idea. For the people who are stating this is a terrible investment, I'm curious to hear opinions on what explains such a massive inefficiency. Why is the market not correcting itself as owners discover that ROIs are not what they expected?

Are shares now a better bet than buy-to-let?

Terrible analysis in the article:

* Assumes let 12 months per year and no chance of non-paying, scumbag tenants.
* Doesn't account for any maintenance nor periodic refurbishments.
* Massive leveraging on the house purchase but none on the shares.
* Unnecessary high level of fees for fund and fund supermarket.
* Halved the 25 year historical FTSE 100 growth rate for projection.
.
.
.

BUT even after all this, buy-to-let still only comes out marginally better!!!

Juk

ToothSayer, your post seems to have been deleted but yeah there was no reinvestment of dividends either:

Juk

Yeah I was going to add some analysis. lol, what a joke.

There's also the issue of the house becoming less valuable relative to the index over time, as the house falls below the index standard (which is used to price return). I'm talking about simple aging relative to the market norm, which include new and rebuilds. Not relevant for century old apartments, but relevant for a lot of real estate. None of the return calculations take that into account - it's completely hidden, but very very relevant for the long term when the building value is larger than the land value.

Well it's certainly not the worst article they've written recently: American-style fridges 'may raise risk of cancer'


Juk

lol the mail!!! what a joke!! Always angle shooting something. Did you see the ads below article, ha!

I take it your from York Juk? If your anywhere near southeast/London then its quite the no brainer to have at least 1 BTL, especially if you lived in it at some stage and can prove this - based on the 40K private letting relief per named mortgagee on the CGT.

Wouldn't be suprised if that 40K allowance is revoked come 16th March 2016!!

Will be interesting to see what the market does in terms of valuations in 2016, especially in January and again in April. Anything below 300K has been flying off the portals for last 12months in southeast. I do wonder how things playout given these changes + an interest rate change.

is this another "thesis"?

its actually nowhere near very very relevant. to even call it sort of relevant would be way off

afaik know you have no reason to think youre knowledgeable in this area and you continue to confidently drop completely false and irrelevant claims. it would be one thing to have an opinion or an idea but you seem to make these posts as if people have something to learn from them. its kind of weird. i think discussion is great, sharing ideas is great, debating ideas is great, but pretending you have some sort of expertise in an area you clearly do not is kind of strange

it starts to come across like someone making up "facts" and coming up with theories to get the answer they want. if you thought more about this "thesis" you would probably start to realize how wrong it is on your own. for some reason though, im confident that wont happen and even if this "thesis" is clearly broken down and dispelled for you, you wouldnt be able accept and acknowledge that your "theory" is wrong like a balanced person

again my frustration stems from reading this section to pick up a bit of info but also to connect me to other sources of good info. i read your posts on finance and they look well-written and informative but im very green in that area so its tough to tell between good info and bad. then i see your posts about real estate written in the same tone yet you clearly have little clue about what you are talking about. your response to being corrected on a topic you clearly have no expertise in is also strange

I didn't even bother responding to you earlier because you're an idiot. Everything I've said in that paragraph is correct. Perhaps someone can be kind enough to explain it to you.

Actually, since I don't want anyone else to waste their time trying to educate you, let me explain it to you myself.

The real estate index is the price of the average property, with all improvements. It's what properties sell for in an area. Houses rarely go up in value, while land tends to be what appreciates.

When you buy a property, it's xx% for the house, and yy% for the land. This can vary from 5/90 to maybe 80/20. Let's take an 70/30 house/land value, which is probably average in many areas.

The house will eventually go to zero. How long this will take will depend on a lot of things, but it's somewhere between 30 and 100 years in most (non old Europe) places. Here's a data point on the UK for example, which is what the OP was talking about:
Meanwhile, the index (which is also roughly 70% building/30% land), will be pricing the average of 70% building price as the price of average age and quality structure.

Thus:
- The 30% land will appreciate like all other land
- The 70% building will fall further and further behind the average quality, and hence the house component of the index

Thus if you use the average sale price of houses to price an index, you're not capturing the true gains of the property you're holding. It's actually silently losing maybe 2%/year in value (much higher in some areas, lower in others).

You can see this by looking at basic symmetry, which is what I tried to explain to you, but went right over your head. A vast amount of money is being constantly poured into construction, demolition and rebuilding. Where does that money end up? In the average sale price of a house. This is a hidden cost that's in the index. It's the source of the differential. It's like owning stocks but having to pay 70% of their value every 50 years just to keep up with the index.

But, you say, it doesn't matter, because as cities get bigger, land value will go up in the more inner suburbs that were bought earlier. Well, no. Your argument sucks. This was true 100 years ago, or in new towns, but now, most towns and cities have reached decent size. Supply of near-comparable land quality to existing outer rim increases as O(R^2), where R is the radius of the town. Migration patterns, Western breeding rates and urbanization swamped R for a long time, because they were large and R was small. It's different, now. Thus the kind of historical demand vs supply appreciations you see in city properties are asymptoting to a square root (after inflation).

Get it? You really shouldn't invest in this space if you don't understand the very fundamentals. It's just hilarious that you think you have some expertise - and bag out someone who's correct - when you can't even understand basics when painfully explained to you.

As a bit of a noob, I would love to see a rebuttal post to this. The debate here is quite interesting if everyone can keep from getting emotionally attached.

No one can refute it, because it's true. In terms of EV, property returns are:

Inflation + rent yield - transaction/upkeep costs - borrowing costs - long run rebuild costs **

In comparison, stocks with reinvested dividends have an EV of

Infation + 6.7%/year

The things is, (rent yield - transaction/upkeep costs), even ignoring the biggest cost of borrowing costs, is nowhere near close to 6.7%/year. Not in the ballpark. Compared as straight lump sum cash investments, real estate is a horrible, horrible investment. People will try to convince you that it isn't; just smile and nod and know that you should never listen to anything they say about money ever again.

The only advantage that real estate gives is that it is one of the few ways in which poorer people can get access to non margin-called leverage (this means the lender doesn't force you to sell if the value drops say 50%). You can obtain this leverage with nothing but some cash and a reliable source of income, like a job. With borrowing costs low enough and rent yields high enough, you can turn $30K into an initial 20%/year return on investment in a good case. Unlike stocks, that return unfortunately isn't compounding, so you only have such nice leveraged returns until your cash pile starts growing larger. At which time you have to leverage that cash into another property, if the bank will let you, if you still want to beat the stock market. If the bank won't let you then you will underperform the stock market. If the bank does let you, you've got a growing pile of debt requiring payment of unstable rates of interest, backed by illiquid assets with unstable values, where your cashflow return on investment and ability to pack back your lender is somewhat correlated with those values.

Is that a good idea? It depends. If you're poor with an income, maybe. If you can time it right, and find cheap property likely to appreciate, with low borrowing costs and high rent yields, it probably is a good idea. However, these conditions also tend to correlate with times when the stock market gives outsized returns. For example, cheap(er) property in 2009 corresponded with market 200% lower than now. The real estate run from 2003 to 2007 corresponded with a large market runup. The 97-2001 runup corresponded the one of the largest market runups in history.

The last 20 years in real estate has been highly abnormal. Given that property values and rent yields are bound absolutely by fundamentals (inflation and wages), there is no room for this to compound.

When you take that into account, it is much better, and about the same risk, to get leveraged 100% or more on stocks and indexes. Nearly all brokers will give you at least this, in most situations up to 200% with a margin cushion. Then you can enjoy wonderful returns with zero work or liquidity problems.

Most poor people don't do this though, which is why the wealth gap widens (intelligence, not unfairness).

**
It's very obvious that house prices merely track inflation, as has to be the case if you think about it:

Oh and I should add that taxes complicate matters. The numbers can shift depending on mortgage deduction rules, capital gains rules, property taxes, etc depending on your country, jurisdiction and even what you do with the property or how much money you earn in your job. There are places where heavily leveraged property can have better returns after tax when you don't have much cash but have a well paying job.

I hope that's helpful. I liked your name.

Can we compare owning physical property to owning REITs? Old people always tell me to buy real estate, but I always ask if wanted that exposure why wouldn't I just buy REITs? My impression is lots of people understand the process of owning a property and collecting from a renter, but the equity/debt markets are over their head, so they stick to real estate.

Toothsayer absolutely nails it.

It is fair to point out though to achieve inflation+6.7% from equities you have to accept some substantial short to medium term variance. Even long term although it is near certain you will beat inflation to what degree will vary from generation to generation.

Why has the last 20-30 years been so abnormal for RE price growth?

As far as I can tell it is because of white flight to the burbs, boomers buying property and 2nd homes in droves and cost to service debt becoming much cheaper.

this thread seems to look at it as all indexing or all real estate. What about using rental property as an alternate investment when the rest of my investments are in stocks? Instead of putting everything in indexes having some real estate could smooth out the variance even if slightly less ev.

It's six months later and thedude wants to discuss this further, so I'm bumping it for his benefit.