Except you can’t get the same amount of leverage with a stock investment than you can with a mortgage. I put 20% down and got an 80% mortgage. For margin accounts, the SEC requires that you have at least 50% down.
So, if my house cost $250k, that means I would have put $50k down. With a 7% growth rate, that means that the house would be worth $492k after 10 years.
Using that same $50k, I could have purchased, at most, $100k in the S&P 500. Based on an average 10% return for the S&P 500, after 10 years, the stock account would be worth $259k
Of course you can. You can buy the UPRO, the 3× leveraged S&P 500 ETF in a margin account. That gives you 6 to 1 leverage vs. S&P 500 index versus 5 to 1 in a home mortgage with 20% down.
Not that doing anything like that is necessary. The unleverage, skim-fee return on the S&P 500 is more than sufficient to make you wealthy.
What you consider ‘skim’ I consider to be commissions well-earned in most cases. Nearly every one of my real estate sales had issues that needed to be taken care of that would have cost me money and/or time that I didn’t have, but the real estate agent had the contacts and the ability to oversee getting those issues taken care of. And on my purchases, the agents took a lot of time to show me houses. When we moved from TX to WA, we had one week to look at houses in 2 different locations and saw 100 different listings. When looking in DFW area, I once saw 20 houses in one day - that was the highest number in a single day, but I’ve had lots of days where I’ve looked at 8 - 10 houses.
Out of the 25 transactions, I only had one time where I didn’t feel that the agent earned their commission, and that was a corporate paid for relocation purchase where the agent didn’t do a good job, IMO, but I still managed to get a good deal.
As far as I know, most (all?) institutions won’t allow that kind of leverage for an equity investment. Traditionally, and regularly, personal residences are leveraged much more than any brokerage would allow for an S&P500 index fund/etf. Not only that, but a 20% down/80% loan is considered to be relatively “conservative” in most times. People even get 5% down/95% loan quite often. And the FHA offers, with some requirements, loans with 3.5% down!
Now, there are techniques one could use with options and futures to add leverage, BUT the margin requirement still exists, so there would need to be additional cash “on the sidelines” anyway. And the skim is often horrendous (the commissions to a small extent, the bid/ask spreads, and the rollover penalty).
The reason they allow such high leverage for home purchases is twofold. One, because it is considered a long-term purchase, it isn’t something traded every few months, it is usually held for 7+ years and they (the lender) assumes price will recover most of the time if it drops below the leverage level they are comfortable with. I think if someone on Wall Street came out with an instrument that turns a regular S&P500 index etf into a long-term (required long-term), then they might be able to offer higher levels of leverage at reasonable cost. For example, an S&P500 fund that can’t be withdrawn for 10 years, and even at 10 years, can only be withdrawn over the next 10 years, or something like that. If you can guarantee longevity, then perhaps allowing 25/75 leverage or even higher might still be considered prudent.
Yet somehow the results aren’t quite 3X, heck, they’re not even 2X!
Over the past 10 years, UPRO has outperformed SPY with an annualized return of 21.57%, while SPY has yielded a comparatively lower 11.94% annualized return.
And UPRO almost surely would result in a lower safe withdrawal rate than SPY.
The maximum UPRO drawdown for the period was -76.82% , lower than the maximum SPY drawdown of -33.72% . The drawdown chart below compares losses from any high point along the way for UPRO and SPY
As I responded to aj, there are 3X leveraged ETF’s that you could buy in a 50% margin account giving you 6 to 1 leverage vs. the S&P 500. Of course, I’m not recommending that anyone do so. The unleveraged return on the S&P 500 is more than sufficient to make you wealthy over time.
Nope. The brokers have plenty of smart people working in their risk control departments. That’s part of why they need all the skim.
Investors can trade ETFs on margin just like stocks. FINRA rules set a 25% maintenance margin requirement for most securities, including ETFs. The maintenance requirement for leveraged long ETFs is 25% multiplied by the amount of leverage used as long as it doesn’t exceed 100%.
So for UPRO, rather than 50/50 leverage, you can only do a maximum of 75/25 leverage. And I wouldn’t be surprised if in volatile times, the broker doesn’t raise that to 90/10.
OK, so it’s capped at 75/25 vs. 80/20 for a home mortgage. And the S&P 500 returns 10.7% year vs. 4% for the average US home over the past 100 years. And you have much more opportunity to reduce your transaction costs and “skim rate” with the ETF.
For either, the leverage could result in a bust. That’s why my preference would be the unleveraged, skim-free, 10.7% of the S&P 500.
There are houses one can buy/sell on their own, there are properties that are best bought/sold with a licensed agent. I sold 2 FSBO before getting a real estate license, which I let lapse when I realized that loving real estate and loving real estate sales was not the same thing. I preferred more using my time finding my real estate opportunities than helping others find theirs. It is crazy how much time spent a Realtor doesn’t get paid for. I swear I had one buyer I may have made minimum wage from, had I added up all the time spent rehabbing her credit and working through to closing with her.
One property I bought with an agent required getting a gas fracking lease taken off the deed, before we would consider purchasing. It took from mid August to January of the next year for us to close on that property, with many hours of work resulting in at most $1725, or 1.5% of the purchase price for her. She worked with us, sporadically, for 4 years finding that property, while the agent in a neighboring state who also worked with us for years got nothing when we bought with her. We renegotiated purchase price after appraisal, again after inspection, and a third time when we were told that the property would never be given a mortgage, (for correctable reasons which we have dealt with,) and we had to pay cash. That required time on our agents part at every step. She more than earned her commission, in part because of the do nothing listing agent.
The two I sold by owner were high visibility, low to mid cost homes with a huge number of possible buyers. Put up a sign and sold pretty quickly.
The last home we sold, and the one we are selling now, are higher end, higher dollar, less visible. It is unlikely that buyers will not be represented by an agent, or even look at any listings that their agent has not sent them. They tend to be busy professionals who are not likely to spend their limited free time searching for a real estate unicorn, and will likely be from out of state. I could FSBO with buyer’s agent participation at 3%, but have chosen to set the price higher and list with the agent we have a track record with, at a less than conventional commission rate.
For another sale, we were breaking the pricing mode for the neighborhood, with our agent fighting to get us our price. Yes, the agent I had interviewed who insisted we should list the property for 25% less than we sold it for, within weeks of listing, would not have been worth the commission for his very recommended time. Not all agents are created equal.
Sometimes being arms length in a transaction is worth the commission.
The guy who wants to minimize skim recommends buying an ETF with a 0.91% expense ratio compared to the 0.03% that you can get with VOO? HAHAHAHAHA
Not to mention, because of the leverage that already exists in UPRO, my brokerage doesn’t allow me to margin it on a long position, and would require at least 90% coverage on a short position:
Absolutely not! I would never buy a mutual fund with a 0.91% expense ratio. But a real estate investor accustomed to the 10%-12% round trip transaction cost on buying and selling a mortgaged property might find it a bargain. {{ LOL }}
It’s funny. Real estate commissions in the UK were like 1.5% when I lived there in the 1980’s. Don’t know what it is today. Hard to believe that Americans accepted 6%, plus a raft of other costs, for so long.
Minimizing “the skim” – the key to retiring early.
No, you have that backwards. It’s capped at 25/75 vs. 80/20 With a mortgage, you put 20% down and borrow 80% For UPRO, you would have to put down 75% and borrow 25% If you put $50k into a margin account and bought UPRO, you could buy, at most $66,667 of UPRO. And that’s if your broker allowed you to margin UPRO at all. As already shown, my broker doesn’t.
Gee, sure sounded like you were recommending it when you said that’s a way to get as much leverage as a mortgage.
Not that it matters anyway, since, as I said, my broker doesn’t allow me to margin UPRO.
So - my arithmetic still stands: The 7%/year return that I have seen on my house far outstrips what I could have earned by putting my downpayment into the S&P 500, even if I margined VOO
And this statement alone shows that you know absolutely nothing about real estate! Given how free you are with your proclamations, you really should get your facts straight.
It is chalk and cheese. You can’t leverage the S&P 500 the same way you can leverage a house. If I could get a 30-year, fixed rate, non-callable, tax-advantaged loan for the S&P 500 for say, 5%, I’d back up the truck.
But if you were lucky enough to live in the era of 3.5% mortgages and below you were looking at the deal of a lifetime.
Not if you’re only able to invest it in a home with a 100-yr 4% average return vs. 10.7% for the S&P 500, and, of course, half the homes in the country are getting less than 4%.
Oh come on. If the unleveraged return on the S&P 500 is enough to make you wealthy, why would you bother with the risk of leverage? or the burdens and hassles of real estate vs. the “work free” investment in an index fund?
If I take the middle of the range, 3.5% + 9% equals 12.5% in round trip transaction costs to buy and sell a home with a mortgage. Washington State is expensive because of the 1.7% franchise tax on home sales. Maybe you’re doing 10%-12% round trip elsewhere.
{{ The closing cost in Washington State for sellers is approximately 8%–10% of the home’s agreement value, while the buyers are expected to pay around 2%–5% of the home’s purchase price.
Let’s put this in perspective! The median home value in Washington State is $613,674. So, if you are selling a house, you may have to pay $49,093 to $61,376 as closing costs. On the other hand, if you are buying a house in Washington State, your closing costs may range between $12,273 to $30,683. }}
What I’ve learned from this discussion is that real estate investors seem to not understand their costs. Perhaps that’s a prerequisite for real estate investment?
When I bought my mortgage-free home, my only closing costs we’re half the escrow fee, changing the locks on the door, and recording the deed at the courthouse. Less than 0.50% of the purchase price. Plus, I spent a lot less of my valuable time on paperwork.
Minimizing “the skim” – the key to retiring early.
I don’t know. You were the one who recommended UPRO when I disputed your claim that you couldn’t get as much leverage with a stock index as you can with a mortgage. You tell me.
Because sometimes it’s not all about getting rich. I bought my current house because I like watching the cruise ships and container ships go by in my backyard, and watching the whales breach and otters play in my backyard. I like being able to see Victoria BC across the water, saying that Canada is my back door neighbor and having my friends come over for wine and cheese viewing parties on my back deck.
That said, as I already demonstrated, because of leverage, my return on my downpayment far exceeds when I could have gotten with the S&P 500.
Huh. I guess I have learned never to take your word for anything without verifying. You seem to pull your numbers out of your posterior.
That’s OK, though. I have no doubt that you will succeed in being a lousy real estate investor.
IP,
who not only estimates her closing costs, but checks the spreadsheet after the fact to verify those estimates, putting in the actual values to reflect the numbers spent
I don’t think that’s the correct way to view it. The imputed value of rent is be included in the rent or buy calculation. If rent for an equivalent property is lower than the mortgage, taxes, and insurance, then you probably should be buying, as we all know.
Housing is an expense. Since monthly rent and mortgage payments should be roughly equal, we can disregard the expense when calculating the ROI. Same expense either way, right? That means we can look at the return on just the down payment.
If a $500,000 house paid for with cash appreciates by 4%, your investment is now worth $520,000. But if you put 20% down ($100,000), that means you got a 20% return on your investment. And a bit better than that because you also paid down some principle.
I bought a rental property in 2010 right at the bottom of the market. I used a HELOC on my primary for the down payment. I sold it in 2019 after some favorable price appreciation. I did a 1031 exchange into a property in Hawaii, so I haven’t even been taxed on the gains. I’m not sure how to calculate the ROI because I didn’t invest any of my own money. All I know is I wound up with a place on Maui without ever having much skin in the game.
If I knew then what I know now I would have been buying properties like crazy.
