https://www.quora.com/Is-it-better-t...share=4092cf41

Ryan Thurston, MBA from MIT, 10+ years real estate investor
Written 20 Dec 2015

I bought my first 2 bed, 1 bath condo for $252,500 in 2004 just before the real estate market took off. I still own it today – its a beautiful home in one of the most popular neighborhoods in Seattle overlooking the emerald city skyline.




Since then, my investment has done very well. It has lived through the subprime credit boom and bust. And now that I have it rented, it consistently pays me a nice dividend every month. Obviously the investment could have gone south – and still can. I could have sold it for a loss after I moved away in 2009 (like many others did around that time). But convincing myself to be in the real estate game long term has completely changed my mindset on investing.

That same mindset is what compels me to purchase more homes now. Much like stocks, the value of the real estate asset will always fluctuate over the short term. However, over the long term, real estate – like stocks – will continue to pay dividends to patient and prudent investors.

Why am I so confident about this dividend payment? Our growing population will always need a roof over their heads. In addition, there is only a fixed amount of buildable land. The population is steadily increasing and is expected to grow substantially into the future. This is especially true in urban areas that surround major metropolitan cities like Seattle. And since supply and demand determine the market price for rent, the price of rent will necessarily increase over time. Sure, we could get hit with a major earthquake or our booming technology industry could go bust. Sure, they can always build more skyscrapers and condos. But long term, I’d argue the hypothesis holds. I’m not talking about short 2-3 years of ownership; the investment needs to be held for at least 10-15 years, and sometimes longer.

In addition, when you add the power of leverage – the ability to control a large asset with a smaller investment – I’d argue this form of investing provides superior risk adjusted returns to a portfolio of dividend paying stocks, over the long term.

Lets take a simple example.

Suppose we purchase a 300k home with a 60k down payment using the following assumptions:

15 year fixed loan @ 3.5% (closing costs are added into the rate and spread throughout the loan)
rental income only covers the principal and interest initially (conservative)
rent increases 3% per year (US BLS average inflation since 1913 is 3.22%)
vacancy factor of 10% (again, conservative)
the home appreciates at 2.5% (Case-Schiller average since 1987)
taxes, Insurance and HOA expenses (if any) increase every year at 5%.
set aside $300 per month for any maintenance, which increases 10% every 5 years

As mentioned before, no investment will provide smooth returns year to year. But for simplicity sake we’ll apply these fairly conservative averages to our analysis. Probably our biggest assumption is the fact rent covers our principal and interest after vacancies. In a growing city like Seattle, this is easily achievable.

Making the above assumptions, after 5 years our original 60k investment has grown to 165k. We will ignore the value of the underlying asset, since we are really focused on cash flow (i.e. our dividend payment).

First off, you’ll notice we are actually losing money on this investment. Obviously this isn’t ideal – we would rather have cash flow right off the bat. But for the purposes of this example we’ll let this loss stay put. Its important to note that later we will compare this investment to a similar investment in stocks where we contribute monthly to the stock portfolio. In addition, we are using pretty conservative numbers to further build our case that real estate investing is superior to a portfolio of dividend paying stocks, over the long term.

Moving ahead the results continue to improve. Making the same assumptions, after 10 years, we are still taking a monthly loss on the property although it has decreased since the growth in rent is outpacing the growth in expenses. Again, we are using fairly conservative assumptions to illustrate the point.

Keep in mind, this doesn’t take advantage of the tax benefits such as writing off the loan interest or the depreciation from the building. Other tax write offs include maintenance repairs, insurance, real estate taxes and travel (improvements are not considered tax deductible).