Real Estate

Investing in Homes: Look at the Price-to-Rent Ratio

Similar to the assured income provided by dividends on stocks, rental income provides real estate investors with a defined cash flow for return on investment, as opposed to capital appreciation (i.e. praying that real estate values increase).  Stock investors prefer higher yields to lower ones, so as a real estate investor, wouldn’t you also like a higher yield?  Yes. And the yield can be measured by the Price-to-Rent Ratio.  Trulia, a real estate search engine, has created an interesting map of the U.S. which displays its Rent vs. Buy Index for 50 of the largest cities by population.  Here is a snapshot.

Trulia’s Rent vs. Buy map relies on its calculation of the Price-to-Rent Ratio, which Trulia more fully explains as follows: (more…)

Houses as a Better Hedge Against Inflation Than Gold

I’m sitting in my entrepreneurial finance class taught by Duke Bristow.  We have been discussing the “gold bug” that everyone has caught over the past few years.  When asked whether inflation is better hedged with houses or gold, my professor, a Financial Economics PhD, argues the case of homes on the following points:

  1. With inflation, house prices go up;
  2. By owning a home, one can either rent it for cash flow, or live in it for avoided rent;
  3. There is a tax benefit to owning a home; and
  4. By financing the home loan with a fixed-rate loan, you (as the borrower) can put the inflation risk on the lender (i.e. the bank).

I’ve never been sold on the case for gold, particularly because it doesn’t throw off any cash. These four points are the nail in the coffin for me (for the time being).

If you want to read more about the merits of gold as a store of value, I suggest reading this memo by Howard Marks at Oaktree Capital.