Friday, 17 October 2014

Is Real Estate a Good Investment? (Nope, However…) | Real Estate Investing

Is <b>Real Estate</b> a Good <b>Investment</b>? (Nope, However…) | Real Estate Investing

Is <b>Real Estate</b> a Good <b>Investment</b>? (Nope, However…)

Posted: 13 May 2014 07:26 AM PDT

Is Real Estate a Good Investment?

Is real estate really a good investment?

I mean, sure it's tangible. Yes, it's cool. Yes, it has worked for some, and it's done wonders for me.

In fact, this entire website is dedicated to real estate investing and perfecting the art/science/luck of it. Hundreds of books have been written on the topic (including these, my top 21 favorite real estate books.) Each week on the BiggerPockets Podcast tens of thousands of listeners tune in to hear the best tips, tricks, and strategies for building wealth through real estate.

However, it's rarely discussed – is real estate, itself, a good investment? And if so… why?

Is Real Estate a Good Investment? Nope!

Historically, real estate actually has NOT been a great investment in itself. I know, a lot of you just choked on your lunch hearing that come from me, but bear with me a moment.

As famed economist and Nobel prize winner Robert Shiller has pointed out using the S&P/Case-Shiller Index, home values have actually appreciated, on average, at nearly the same rate as inflation over the past 100 years.

In other words – if you paid $100,000 cash for a home in 1970 and sold it in 2000 for $250,000 it may seem like you made a terrific investment. However, that change is only maintaining a 3% annual appreciation, pretty similar to inflation. They home hasn't actually built them any wealth.

In addition, the home needed new windows, carpet, paint, and other changes throughout those 30 years, so it's very possible that the owner of that home actually LOST money on their home purchase.

So, yes – buying a home with your $100,000 is probably better than tossing it into a bank account earning no interest but in itself, it's really not a great investment. You'd probably be better off sticking that $100,000 in the stock market and earning an average of 8%.

However…

(click to continue reading on BiggerPockets)

About Brandon

has written 84 Awesome posts in this blog.

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director and owner of RealEstateInYourTwenties.com. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

Whither Active Private <b>Real Estate</b> Portfolio Management <b>...</b>

Posted: 14 Oct 2014 07:26 AM PDT

Efficient market theory posits that alpha is just an anomaly and that efficient markets rule and there is no long-term prospect of managers achieving abnormal returns, obviating the possibility of active portfolio management. There are a number of variants of the theory, but the basic idea is this: the market effectively prices in all information that is realistically knowable to market participants.

Thus the market price is always the "right" price, and it is "impossible" to consistently beat the market. Investors who do so, are just lucky and eventually their luck will run out. Hence index funds are the most rational way to invest because they are simply a broad, representative swath of the entire market.

In fact, many empirical studies have borne out that the great majority of stock and bond mutual funds, over time, have only delivered average (beta) returns and, subtracting out fees and expenses, have actually under-performed the market. The stock and bond markets have seen increasing growth and popularity of index funds to the point that many pundits predict that they will be the dominant form of fund for most investors in a few short years. Is private equity real estate destined to become an index fund game eventually? I don't think so and here's why.

There are some limitations to the application of index portfolio management to real estate:

  1. Real estate is lumpy, chunky, location-bound and not easily divisible. Every asset is unique and possesses number of characteristics only found in that property. With skill and work, many properties can be improved through renovations, retenanting and increased rents, thus creating above-average returns. Geographic location also has a profound impact on the performance of real estate, both good and bad. Some of the effects of local economic performance and demographic trends can be anticipated or even predicted to a degree while some of these factors cannot. Few people could have predicted the massive back-to-the-cities movement 20 years ago and the positive impact it has had on global gateway markets returns
  2. There are high frictional costs with searching, buying, and selling real estate that are quite material. This means that property portfolios cannot easily be altered or optimized with a few key strokes of the computer. Properties will always be ineffient to some degree because of the inability to immediately change or rebalance portfolios.
  3. Paucity of publicly available, audited information. Private real estate can never fully be optimized in an index fund environment because there is so much information that can never be known or even if known, made widely available. Though data and information services such as Co-Star and Real Capital Analytics and others have made marvelous inroads into expanding our information base, there is still a long way to go and given the highly unique nature of real estate, the marginal utility of increased information may be insignificant. Many highly important facts about properties are not mandated to be made publicly known.

Index portfolio management assumes moderate to high market efficiency. In an efficient market, information is processed quickly and efficiently disseminated and asset prices adjust according to this new information. In efficient markets, there is little benefit to asset selection, research, or marketing-timing approaches. These factors inhibit the free, optimal portfolio construction and rebalancing that portfolio management entails. This makes real estate a highy inefficient asset class and the paucity of sufficient information, particularly for private real estate, makes indexation and even portfolio management difficult at times. However, as I have tried to highlight, it confers advantages (potentially apha out-peformance) to those participants who can develop positive informational asymmetries.

In active portfolio management, mispriced market segments and properties are worth seeking out. A passive, index portfolio approach assumes moderate to high market efficiency, and the costs of finding mispriced market segments and properties are insignficant. Until properties become uniform in size, shape, quality, independent of specific geographic location, consistent in terms of tenant type, credit quality, lease term and a host of other highly idyiosncratic factors, I'm not holding my breath on the advent of private equity real estate fund indexation. I can't envision a time when a skilled and well-researched active portfolio management strategy cannot add value (alpha) to a private real estate investment strategy.

Part of this column are reprinted with permission from Summit Media and the ULI—"The Advisor's Guide to Commercial Real Estate Investing," Summit Media, 2014 and "The Investor's Guide to Commercial Real Estate Investing," The Urban Land Institute, 2014. 
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