Investing? If not in real estate, then in what?

Comparing investment alternatives.

Examining your choices is almost always a good practice for consumers. This is true whether you are buying a car, a home, a TV or an investment. If you asked me if a certain property were a good investment, I would have to ask, in comparison with what. If you have money to invest, you have a wide range of alternative investments. Let’s look at some.

Current Yield +Appreciation =Total Return
Common stock
(Yield on Dow Jones Industrials) 2.06% 8% est. 10% est.
10 Year Treasury note 4.2% None 4.2%
Mortgage backed securities 2.8% – 4.8% YTM None 2.8% – 4.8%
Four-plex 5% 5% est. 10% est.

Notes:
1. All yields are based on 100% cash purchase, without leverage.
2. Yields on bonds and fixed income securities are calculated at yield to maturity. Actual returns may differ if sold or not held to maturity.
3. The total return from any investment will be the current return plus any appreciation. The amount of appreciation for stocks and real estate is estimated, but the estimated total returns shown are consistent with actual experience over long periods.

Sometimes the effects of borrowing obscure the underlying return from real estate investments. As long as the current yield is less than the cost of borrowed funds, the current yield on leveraged investments will decline, often to the point of being negative. Still, leverage is often productive because it allows an investor to obtain all the appreciation from an asset by only putting up part of the cash to buy it. Usually the total return goes up sharply. More about the power of leverage in another newsletter.

The purpose of this brief comparison is to offer some perspective on the universe of investment choices. All investors have choices. Knowing the choices will help in making intelligent investment decisions.

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