Investing Analysis: Florida Real Estate vs. Stocks
Many academic studies across the nation will tell you that the stock market is outperforming the Florida housing market when it comes to a return on your investment.
But do these leave out the real estate’s strongest advantage: leverage, or the use of a Florida mortgage loan to amplify the return on your cash?
You know the math: You make a 20% down payment on a $500,000 house. Two years go by and the house increases in value to $550,000, or 10%. The return on your down payment - your real stake in the deal - is a stunning 50%, however.
What about stocks? Well, you can leverage them by buying on margin, but you can borrow no more than 50% of the purchase price. You could also play in the options market, but you risk losing your entire investment.
Of course, a lot of real estate fans who chased a quick buck in recent years are finding out about the other side of leverage. Suppose you put 5% down on a $250,000 condo in Las Vegas in 2005. You planned to rent the unit out for a while, then flip it. Now the condo glut there means that when you sell - if you can sell - you might get $220,000.
Therefore, you’d wind up minus your original investment and owe the bank $17,500 to boot. That’s a sucker punch many people in formerly hot markets are feeling now.
Still, as a way to turn a small stake into a lot of money in a rising Florida housing market (and home prices have generally gone up), you can’t beat the leverage that real estate offers.
Costs …
What leverage gives you, transaction costs take away. When you buy, you shell out for mortgage processing, credit reports, title insurance, appraisals, a lawyer for the bank, a lawyer for you, local transfer taxes and other charges. You may also pay a percentage point or more of the loan up front to lower your interest rate.
All in all, closing costs can run 2% to 4% of your purchase price. Sellers have to lay out a 6% commission for their agent, prepare a place for sale and, if it’s their home, pay to move. Buying and selling can total about 10% of the purchase price.
Such costs make real estate a tough game. That $550,000 house (the one that gained 10% in two years) just turned into roughly a break-even proposition. And that total doesn’t include the cost of maintenance and refurbishing, Florida mortgage interest, taxes or insurance, which may add up to more than what you’d have laid out to rent a similar property.
Expenses run even higher if you are the owner of an investment property. You have to add the cost of advertising for tenants, evicting those who mess with you and carrying empty apartments.
In recent studies, experts didn’t deduct such costs when they calculated returns. Had they, real estate would have fared worse. Stocks, by comparison, are incredibly cheap to own and sell. At a discount brokerage such as Scottrade, you can pay anywhere from $7 for an online purchase to $27 for one that is broker assisted.
Same when you want to dump your stock. A mutual fund that tracks a broad index of stocks can cost you as little as 0.09% of assets a year.
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