Investment Real Estate vs.
The Stock Market... Which Offers Greater Returns For The Average
Why do I love investment real estate? Two words... inefficient markets.
Conversely, why is it so difficult to "beat" the stock market? Efficient markets.
the past 15 years, I have built my real estate investing business on
the belief that some markets for investment properties are inefficient, and
therefore, it is possible to earn extraordinary returns.
(By the way, inefficient real estate markets make for the
best real estate markets.) Have I been right?
Well, my first
investment in commercial real estate earned me a profit of over $2
million dollars. And much of this profit was, in my opinion, due to my
ability to recognize and exploit inefficiencies in certain investment
real estate markets.
Does one example prove my theory? Of course
not. But for the past 14 years I have been developing and executing a
strategy for investing in real estate that has consistently earned my
What Are Efficient/Inefficient Markets?
"Efficient Market Hypothesis" was first put forth by Professor Eugene
Fama of the University of Chicago Business School. The basic theory is
that prices of assets in an efficient market will always fully reflect the available
information, and therefore, earning extraordinary returns is not
the most part this theory has been attributed to stock markets, or more
precisely, individual publicly traded stocks. But it can (and is)
applied to other asset classes such as bonds and investment real estate.
bottom line? No market is 100% efficient. And on the flip side, no
market is 100% inefficient. But the reality is that some asset markets are
less efficient than others. For example, real estate markets, and
certainly the market for more specialized investment properties, are
certainly more inefficient than say the market for government bonds.
Why is this?
are a number of reasons,
but here is the main one. The active
participants in investment real estate markets do not all posses the
and/or quality of information.
And as I alluded to above, the more specialized a market is, the more
this is likely to be the case.
example, the market for a basic single family home in a large city will
be more efficient than say the market for a large distribution
warehouse, in a small community. The information required in order to
analyze the warehouse investment is simply much more specialized and
difficult to quantify than that of the single family home in this
Aside: If you are interested learning more about commercial real estate
cash flows and how to capitalize on "inefficient markets", here
is an "e-course" I recommend that will get you started in that
What Is Considered An Extraordinary Return In
Investment Real Estate?
general, an extraordinary return is defined as a return greater than
the market average. In the stock market for example, if your stock
portfolio were to outperform the return of the S&P 500 for example,
those returns would be considered extraordinary. With real estate
however, it is a little more difficult to determine what the average
return is, and hence determine what "extraordinary" returns might be.
So how do I know that my investment real estate returns are
extraordinary? I'll let you decide...
years ago I purchased an apartment property which I still own to this
day. Without going into too much detail, here is a summary of my
returns from this investment property.
- I purchased the property for $625,000 (which I knew
was below market value)
- I originally assumed the existing financing and
refinanced another property in order to come up with the down payment
purchasing the apartment complex, and using the investment real estate
system I had developed, I identified opportunities to immediately add
value to the property once I owned it
- Within 8 months of the purchase, the property was
appraised at $850,000
that point in time, I refinanced the property (which was my original
plan) and "took out" close to 100% of the money I had originally
invested. For this discussion we'll assume it was 100%, although I
believe it was in the 98-99% range.
- For the past ten years I
have earned, on average, $35-$45,000 per in net income from the
property. And that is completely passive income as I have professional
managers in place who handle all of the day to day operations of the
- The value of the property itself has double over the
past ten years to approximately $1,250,000
1. After refinancing the mortgage ten years ago I have none of my own
money invested in this property.
2. Over those ten years I have earned a total of over $1 million from that one property alone.
This works out to approximately $100,000 per year for the life of this
To calculate my average annual return on his piece of investment real
estate I would divide $100,000 by the amount that I have invested in
ie. $100,000 / $0 = AN INFINITE RETURN
this, do I need to know (or even care) what the average return in the
real estate market has been over the past ten years to know whether or
not I have in fact earned an extraordinary return? Of course not.
How Did An Inefficient Market Play A Role In This?
property is located in a smaller city for starters. Therefore there
will typically be less market participants. Secondly, the property was
woefully marketed, which exacerbated the inefficiency in the market for
real estate can be a great way to create wealth and passive income.
However, it can also be wrought with pitfalls. My advice to you, if you
are interested in real estate as a possible investment, is to educate
yourself thoroughly. This includes studying both your geographical
market(s), along with investment real estate theory in general. And to
do this you do not need to spend $1,000's of dollars on a seminar.
There are good courses available online for under $100. Start with this one.
may also wish to sign up for my free investment real estate newsletter.
I am constantly adding information to this site that covers many
aspects of the real estate investment business, but with a focus on
revenue/apartment properties. You can sign
up here if you wish.
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