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W hy Y ou Should Invest in Real Esta te

to 16 percent. Net unleveraged rental yields refer to rent collections, less all
cash expenses and mortgage financing. Calculate by dividing the price of

the property into its net income (e.g., $10,000/$100,000 10% yield). In
some areas of the country, such as the Midwest, you can still achieve such
favorable results; more typically, today’s rental properties yield 4 to 8 percent
at the time of purchase. Relative to the past, 4 to 8 percent doesn’t seem
great, but relative to stocks and bonds, properties win hands down. (Remem-
ber, at this point, we’re talking about income, not asset appreciation.)

Rental Properties versus Stocks At present, the annual dividend (income)
yield on the S&P 500 stock index falls below 1.8 percent, and less than 0.40
percent for NASDAQ stocks. The Dow-Jones (DJIA) is somewhat higher, at
around 2.20 percent. If you follow the advice that says you must diversify
across a broad variety of stocks, you might achieve a yearly income of $15,000
to $20,000 (1.5 to 2 percent average yield) from a stock portfolio valued at
$1 million. In contrast, a million dollars in property value would return a
rental income (net of operating expenses) of $40,000 to $80,000 a year.
Accumulate a million dollars in stocks and, to survive above the poverty

level, you’ll need to eat your nest egg (what financial planners call your with-
drawal rate). But accumulate a million dollars in property and, to live an
average-to-above-average lifestyle, you’ll never need to eat your nest egg.
Your net worth doesn’t diminish—it will continue to increase.

Bonds versus Property Currently, long-term investment grade bonds yield

about 5.0 percent to 6.0 percent. Without taking on much default risk, that
means you could count on receiving $50,000 to $60,000 a year from bonds
for each $1 million you invest. Bonds deliver income returns that approach
the level of income offered by high-quality rental properties. Also, compared
with a fully diversified portfolio of stocks, bonds clearly rank superior, but

here’s the rub: your bond income will not increase as the result of infl ation
or economic growth and, as consumer prices go up, the buying power of
your bond income will continuously erode. In terms of purchasing power,
$60,000 of income today will equal $40,000 after just 10 years. In contrast,
over time, both stock dividends and property rents tend to climb each year
to higher levels.

The Verdict on Income So what’s the verdict? Stock income increases over
time, but the puny yield produces too little income. Bonds return a better yield
than stocks, but fail to offer the possibility of growth. Worse, in an infl ationary
economy, the real value of bond income declines. History indicates that you

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