Q4 hedge fund letters, conference, scoops etc
Floridian investors seeking a higher return than those offered by banks, always end up following the same path: real estate, or more specifically rental properties. Investing in real estate has been popular since the 1920s when people from northern states (called snowbirds) started moving down to the sunshine state seduced by its weather, wildlife and beaches. This migration led to a higher demand for real estate, driving prices up. Hence, making it seem like a lucrative investment opportunity.
Unfortunately, disaster then struck with the Miami Hurricane of 1926, causing the bubble to burst and driving many real estate developers into bankruptcy.
Fast forward to 2019, real estate investing remains as popular as ever. According to rented.com’s list of best places to buy a rental property, Florida cities are included nearly three times more versus the next closest state (source).
There are many reasons why real estate attracts many investors, taxes and leverage aside, house prices in the US have been averaging a compounded annual growth rate (CAGR) of close to 4.3% since 2010 according to the Federal Reserve Bank of St. Louis (source) while rent increases have been going in tandem with inflation which is about 3% a year. In total, an investor in rental properties in Florida has been averaging a respected compounded annual growth rate (CAGR) of 7.3% since 2009 ($100,000 initial investment is now worth about $188,540). Another advantage of real estate investing, is the control that the investor has. Unlike stocks, real estate is a tangible asset, something an investor can touch, feel and make modifications to in order to increase value.
Stocks on the other hand are liquid assets, funds settle in 2 days after submitting an order to the broker, and transaction costs are few dollars whereas in real estate these costs range between 5% and 10% and may take months to complete, after finding a seller/buyer which according to Zillow, that’s another 88 average days on the market (source).
Stocks, as measured by the S&P 500 index with dividends included have been averaging a CAGR of 13% since 2009 (source). A 5.7% differential increase over a decade is an additional $111,864 in the investor’s pocket on a $100,000 initial investment without lifting a finger. Real estate on the other hand requires a lot of work, called sweat equity, in managing, collecting rent, fixing appliances, etc.…
Investing in simple terms, is laying out capital today to receive more in the future at a satisfactory rate of return, it’s not a zero-sum game. Despite the many advantages real estate offers, one should bear in mind that it is not a “sure thing” as the 2008 Housing market crash has taught us when home prices across the United States lost more than 50% of their values. Investors should consider stocks as well since they offer higher returns, very low transaction costs while requiring no managerial work.
Article by Lembirik Group
