Real Estate Technology?

[Oynas]

I have an economist friend who told me that investing in property is almost the same as investing in shares via a mutual fund. If you have a property that you rent, you own a business. Your business is simply to rent that property out to others.

The main difference is that shares in the general share market is often exposed to high technology that can produce greater profits from lower inputs. That is, due to continuing innovation from companies like e.g. Google, profits rise. This, according to the economist, is why expected returns from shares, as measured by economic indices like the S&P500 and the All Ords, is higher than the expected return from property. With property, at the end of the day you are only selling land. There is no innovation or technological improvement in that.

However, this is not a downside as it provides stability and steady growth.

Do you think this is a valid theory?

 

[The Y-man]

One of the big differences I see between realestate and the publicly traded share market is liquidity (or lack thereof) and capital requirements.

A closer parallel might be private businesses (unlisted) and real estate.

Remember properties can be improved (built upon, developed) and changed (zoning changes) in innovative ways.

Cheers,

The Y-man

 

[Rob Williams]

Sounds like an interesting viewpoint.
The shares vs property agrument has been going on for years and will continue to do so.
I believe it is an argument that is without foundation. The best investment is the one that best suits your strengths, risk profile, objectives and circumstances.
Having said that, I would suggest that many property investors like property because, among other reasons, in can provide higher leverage. You can borrow up to 95% or even 100% against a piece of real estate. Sometimes more.
I've invested in and traded gold and silver bullion, futures, shares and property since I was 16 years of age. It's taken me a long time to learn to play my strengths rather than improve my weaknesses. Now I'm almost totally into property investment as it works for me better than things I've done previously.
Another thing I've learned is that economists, accountants and the like have no better chance of becoming wealthy than anyone else. It's all about mindset.
Someone might have a good theory on the financial or property markets, but it's the runs on the board that really count. I'll listen to the advice of anyone who has proven success, not just an interesting theory.

 

[Xenia]

Properties, businesses, shares are vehicles of wealth through leverage.

Wealthy people have always carved a niche and do either well!!!

wannabe wealthy people debate about which one is better

Your friend is right Oynas they are similar and playing to your strengths is what will make you successful as Rob stated!!!

 

[Dazz]

The main difference

....IMHO, is the level of control the individual investor has in the direction of their investing vehicle.

Is the investor at the wheel driving the thing, or are they down the back of the bus on seat # 324,519.

Your business is simply to rent that property out to others.

...and that can be a fine and sturdy business model, especially in uncertain times. Nothing wrong with being a rent collector. Simple is often the best.

 

[landlubber]

Oh ..please ...don't make me laugh so hard..

G'day Oynas ...Try this fact on your economist mate if he reckons property is like mutual funds ....

The wonderful USA S&P500 had an "high" in March 2000 of 1552

The "all time high" for the S&P was in Oct 07 and it was 1576. …i.e. so it did just pip the 2000 level by a mere 24 points !! ( Manipulation to save face ?? hmmm )

So, TODAY ...9 years after 2000 were in 2009... the index is NOW about 900 ....i.e. it's more than 40% under the March 2000 high.

So, if you’re a mug US index investor you need a 75% increase just to get back to where you were 8 years ago.

I'll take my dumb ol' houses any day!
LL

PS ...and for all those (economist?) idiots still singing the mantra... " but the stock market ALWAYS surpasses it's previous highs" ...tell them to take a look at the Japanese Nikkei. It's all on the net! Check it out.

 

[sparky23]

Hi Onyas

Does your friend also invest in real estate personally?

I don't invest in shares so I wouldn't venture my opinion but I can't help seeing that a lot more people seem to have been hurt by what has happened in the share market recently than in real estate if thats any measure, especially with the news that so many people now have to turn to pensions as their super has gone bung!

 

[Timeshift]

PS ...and for all those (economist?) idiots still singing the mantra... " but the stock market ALWAYS surpasses it's previous highs" ...tell them to take a look at the Japanese Nikkei. It's all on the net! Check it out.

Yes and while there take note of there long term property prices.

 

[landlubber]

Yes and while there take note of there long term property prices.

Agreed Timeshift, another bubble. Don't know who would have got the worse deal....the Japanese share market investor or the Japanese IP investor... But it's the share-market fraternity who continually "recites the mantra".
LL

 

[Oynas]

Agreed Timeshift, another bubble. Don't know who would have got the worse deal....the Japanese share market investor or the Japanese IP investor... But it's the share-market fraternity who continually "recites the mantra".

To clarify, the economist was not saying that shares are better than property. He was just saying that owning property is a lot like owning shares in that you own a business. The service you provide to others is accommodation. This can be good because accommodation is a necessity, but owning property is like owning necessity shares like those in the utility sector.

As for Japan, below is a graph of house prices.

Clearly in Japan there was overconfidence. This led to a stock market and property market bubble. Both simultaneously crashed in 1990 and 18 years later they both are still far from their peaks.

The graph shows that house prices in Japan went down with CPI, so it went down as the economy entered a deflationary phase. We are seeing similar deflation today after the US property market crashed. Notice how cheap petrol has become.

 

[lizzie]

He was just saying that owning property is a lot like owning shares in that you own a business. The service you provide to others is accommodation.

yes and no - asides from having initial choice over what share to buy, with buying shares in a company you basically have no say in any aspect of the operation of the company, so you have no control over the profitability (or not) of the company and have to place all your trust in the directors of the company ... managed share funds are even worse because then you have no say over what actual companies you buy shares in. also, shares cannot be geared to the extent of property - and probably even less so now.

with real estate you have total control over intial choice, how your money is spent increasing the value, development of the asset etc.

not saying shares are good or not - but i personally prefer something that i can buy for $60k of my own money, immediately add $100k in value, and then either hold at an increased profit margin (higher rent) or sell and take my gains.

 

[Oynas]

yes and no - asides from having initial choice over what share to buy, with buying shares in a company you basically have no say in any aspect of the operation of the company, so you have no control over the profitability (or not) of the company and have to place all your trust in the directors of the company ... managed share funds are even worse because then you have no say over what actual companies you buy shares in. also, shares cannot be geared to the extent of property - and probably even less so now.

Yes, that's true. So it's better then to compare shares through a mutual fund with owning property through a mutual fund. Owning land directly and renting it out is like running your own business, e.g. if you run a restaurant.

When you take out a margin loan, different shares have different LVRs. The riskier ones tend to have lower LVRs. General shares including high-risk sectors like the tech sector are riskier than property and so I would expect more limits on the degree to which general shares could be levered.