Thomas Stilp, JD, MBA/MM, LLM, MSC
Experience is not what happens to you; it is what you do with what happens to you. To paraphrase Mark Twain, be careful to get out of experience only what you are told and stop there, lest you be like the cat that sits down on a hot stove lid. The cat will never sit down on a hot lid again, but it will never sit down on a cold one either.
What Motivates People to Own Real Estate?
Real estate ownership is founded on the belief each piece of real estate is unique. More than just an investment, real estate is a tangible manifestation of an investor’s worth—ideas that can be seen and felt in the bricks and mortar of the property.
People are motivated to own property by several needs.
People need shelter. In this regard, residential real estate has a fundamental value: everyone must live somewhere.
Looking more long term, as a store of economic value, real estate functions as the nest egg for retirement savings.
For others, property ownership is motivated by financial speculation, buying, and selling for the highest profit.
For others still, real estate offers psychological benefits, a need for security, being rooted in a particular neighborhood, social status, or participation in the ingrained “American Dream.”
How Much is a $1 Worth After 66 Years?
Most of us know it is better to get a 10% rate of return rather than 3.5%, but beyond the general concept, few of us actually think of how much we’ll have if we make different investments.
For purposes of illustration, assume a long investment period in which we invest $1 at the end of each month for sixty-six years.
Under mattress—0-% $ 792.00 (66 years x 12 months x $1)
Money Market 3.5% $ 3,099.64
U.S. Treasuries 5.0% $ 6,222.57
Stocks 10% $ 85,711.69
Real Estate / Business 20% $ 29,079,663.65
Imagine instead of $1, the amount invested was $100. The return on investment in real estate would increase to $2.9 billion. (Calculations are based on the frequently used formula for future worth of $1 per period (1+i/12)(t*12)-1/(i/12).)
Stock and Real Estate Investing Compared
No doubt many investors make money in the stock market, but given the efficient market theory, ordinarily an investor cannot make above average profits (say above 7%) for any extended time.
The Efficient Markets Hypothesis holds an investor can not earn an abnormally high return in the stock market because stock prices reflect all available information; competition among investors guarantees stocks are properly priced in the market, and the market provides a set of efficient arrangements where buyers and sellers are brought together through the price mechanism.
Stocks operate in a highly efficient market where information is electronically and systematically transmitted to many people simultaneously. Thus, barring the use of inside information (which is illegal), what one professional analyst knows is generally known to many others. Through well-established networks of intermediaries, professional analysts enjoy almost instantaneous globalization of information.
Real estate, however, is not typically an efficient market and provides pockets of profit opportunities that experienced real estate purchasers find that “hidden gem.”
Real estate is characterized by inefficient markets, idiosyncratic knowledge known only to a few people, and localization of product. Use of inside information is not only legal but is encouraged.
A net cast in a search for “undervalued” property in the real estate market is far more likely to result in a valuable catch than in the stock market. In real estate, success is highly individual.
Savvy investors work with experienced attorneys who know and have successfully completed many deals – you should too.
