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Thought Experiment - REITs vs Investment Property

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An interactive chart on Google Docs.

Trying to answer the question, "Which would have been a better investment - property or REITS?"

I took the Case-Shiller set of indices for the 20 largest property markets in the US. On the sheet labelled "Main" you can select a city from the list of 20, in cell B5.

Assumptions were - 10% down payment, 1.5% expenses for insurance, taxes, maintenance, etc.

For the REIT proxy, I used the Vanguard REIT Index Fund. I assumed 100% leverage (VNQ is the ETF equivalent, and can be held on margin), a 2% broker financing rate, and 2% earned when in cash. The only wrinkle to Buy-and-Hold is that I assumed the Kalenjin trend following methods would be applied to this position. This results in a flat line 2007-2009, which would have saved a lot of people a lot of pain.

About half of the covered markets would have done better than our theoretical REIT position. The other half did worse, and in some cases like Detroit, far worse.

The lesson - if you would not speculate with 2x leverage in the stock market, why would you do so in the property market?

Please take a look. Any and all comments are always welcome.

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Guest Wednesday, 17 April 2024