Stocks vs Real Estate
Generally, it can be very difficult to Google a comparison of these asset classes because most real estate funds are private and do not provide return information to the public.
Luckily for you, you’ve reached a private real estate company’s website, so we can provide you with a bit more of a look behind the curtain.
Over the next 3 weeks we’re going to send a series of emails comparing stocks vs private real estate funds like what Rust Belt Capital offers.
Here’s what we’re going to compare:
- Appreciation
- Dividends
- Investment Duration
Comparison of appreciation
When most people think of investing this is the first place their mind goes to…
Buy an asset at one value and sell it at another which is ideally higher than where it started.
For the vast majority of “normal” people the asset above is “the stock market”, a generalized phrase for the S&P 500 (i.e. look at ticker “SPY”).We’ll do that for you, here’s four-time snapshots of the S&P 500:
Year to date: +16.78%1 Year: +11.62%2 Year: (-.52%)5 Year: + 54.69%NOT BAD returns…
The last 5 years’ compound annual growth rate (CAGR) is approximately 7.8% adjusted for inflation but before ANY advisor fees.
If you choose this as an investment vehicle (or stocks in general), the vast majority of investment gains are likely locked up in appreciation.
To realize that appreciation, you must sell the asset.
And, when you sell, you incur capital gains tax plus exit your investment.
It’s now gone…
HOW DOES THIS COMPARE to private real estate funds like those offered by Rust Belt Capital (RBC)?
While compliance does not give us the green light to publicly publish fund returns…
What we can disclose is that our general investment criteria call for a minimum of a 15+% internal rate of return (IRR -roughly similar to CAGR) NET OF ALL FEES.
YES, that is significantly higher than the historical returns of the stock market at large.
But why?
One reason is leverage. That is, we use debt to help acquire properties BUT a major benefit limited partner investors have by investing in funds like those offered by RBC is that RBC signs for the debt, not the investor.
Sure, the objective of a 15+% IRR net of fees is nice.
Yet what I would argue is the best part of these types of assets is the re-fi.
That is, for investors to “realize” some or even all of their investment appreciation, they do not necessarily need to SELL their investment.
Instead.
The fund can simply restructure the debt to either:
- Pull out the “appreciation” of the asset.
- Lower monthly debt payments to increase dividends.
In either event, the fund’s investors can often defer capital gains taxes when using the moves above since these are technically loans…
Being able to realize an investment’s capital appreciation without having to sell the investment is a MAJOR reason RBC likes this investment vehicle.
Let this be food for thought this week.
Next on the docket… dividend comparison between these two asset types.