Real Estate Experiment
Updated: Feb 22, 2019
Is anyone else skeptical about compound growth on index funds? Is it just me? I know that, so far, index funds have returned an average of 10.8% and that if that sort of thing continues, money you put in will grow at a solid rate. But here's my problem: I can see that the value of the index funds I own increases, on average. It just seems totally ephemeral to me. If the value of the market drops, all those gains just vanish. Let's say, like we've been having, we have a years long bull market, up 10% every year for 4 years. Then, in the 5th year, we have a crash. It happens. The market loses 40%. All the gains you've gotten over the past 4 years are pretty much gone. You're starting over from scratch. How does compound growth help you there?
Index funds also have pretty low dividends. The one I primarily own, VTI, has a dividend rate of 1.65%, so most of your "growth" isn't in the number of shares you buy through your dividends, but just through the increase in value (which again, can evaporate very easily). When I've looked back at this year in the market, it's easy to see this in action. It started like a rocket ship, then dropped, then has just kind of slowly climbed back up to its previous levels. It's made me want something that gives returns that are a little more, well, REAL.
And what could be more real than Real Estate? The more I read, the more it seemed like there were tons of people out there getting great returns on their investments, and in a way that seemed much more tangible than index funds. For starters, you can pay a down payment on a rental property, and then have the renters pay off the mortgage. With each month, the tenant increases your equity, your net worth, and hopefully even gives you some positive cash flow. If I invested $20,000 into a house worth $100,000, each month the tenant would increase my net worth by maybe $1,000! A year of that would increase my net worth by like $12,000, even if the house's value didn't go up! All I would have to do is collect the checks!
But then, I kept hearing from owners who had nightmarish experiences with real estate. One's house was turned into a meth lab. Another was sued by the tenant for $100,000. A third had tenants who just stopped paying rent and the laws in their state made eviction a huge hassle.
Add to those nightmares the fact that I'd have to do the whole process of buying the house from overseas, and I wouldn't even really SEE the house or meet the tenants, and it just seemed like a recipe for potential disaster.
So, I put a pin in that plan, for when I know more and am in a better position to go down that road. I don't know how long that will be, but I bought a book "Building Wealth One House At A Time" that was highly recommended, and I'm going to read it and come back to this plan later.
This still left me with my original problem: Index funds are closely tied to the value of the stock market, and a major correction can wipe out years of gains and discipline. There is a third way though: REITs.
Real Estate Investment Trusts are basically companies that hold a whole bunch of properties and are legally required to pass on 90% of their profits to theirs shareholders. There are MANY different REITs out there, and even index funds for REITs like Vanguard's popular VNQ. As in so many things Finance, Andrew Hallam has a great break down on what REITs are, and how they compare to normal index funds.
The one that caught my eye, however, is NRO, which is a REIT that invests across the Real Estate space, and has a dividend of 10.42%. What's even more attractive to me is that for the last almost 10 years, they've kept the value of the REIT almost constant around $5 per share.
So this will be my experiment. In 3 weeks, I will have money to put in the market. It should be about $12,000- $14,000 depending on a few factors. I'm going to put $10,000 into NRO and see what happens with the compound interest growth just from dividends.
I know, I'm breaking my strategy of just investing in index funds. This blog is to keep me honest, and my concerns about index funds and compound growth are such that I think this experiment will help me financially. I may be wrong. Let the experiment begin!
If you liked this post, come join the discussion over at The Happiest Teacher Facebook Group! I would love to have your voice added to the discussion! Also, if you're into that Twitter life, come follow me!
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.