Steve D Valentine compares real estate and mutual funds over 20 years. Mutual funds averaged 4.67% returns versus the S&P 500's 7.19%. He bought a $107,000 home that became worth $400,000, and argues real estate's leverage and tax breaks beat stocks. His strategy: buy a primary home, convert it to a rental, repeat.
Questions this video answers
4.67% over 20 years.
3.52% less than the average S&P 500 index return.
About $50 million worth of single-family homes.
Purchased for $107,000 (~22 years ago) and later worth about $400,000 (≈300% appreciation).
$7,500 down payment invested in either a house or mutual funds.
Chapters
Real estate or mutual funds, which has the better rate of return. So I'm not by any means an expert in mutual funds, but I was just doing some research looking at. Do you know that the average rate of return over 20 years in a mutual fund, this is like your 401k, your Roth IRA, all those things is 4.67% over 20 years. That's the average. This is, it's actually 3.52% less than the average S&P 500 index return. But just kind of interesting when you compare what you can invest in and what the rates return are and what the tax benefits are. So hey, I'm Steve Valentine, real estate investor, problem solver, team owner, all the things real estate here in Phoenix, Arizona. I'm not a CPA and I am not a stock advisor, so I'm just doing some comparisons based on what I see, what I know and what, what we've done over the years. I currently own about $50 million worth of single family homes. And you know, we're just looking at the rates of return and the benefits of owning real estate versus putting things into mutual funds, which seems to be the safe place for some people. But I don't know that it's the perfect place. I think there's a combination of doing different things. But let me just go through a couple of things. So when you invest in your 401k, yes, it's tax deferred. You're going to be taxed on it on the way out. Real estate, when you buy it, there's not a tax consequence until you sell it. And there's tax benefits of owning it, such as depreciation, the expenses on it. Here's what I'm talking about. So if we take 20 years and actually this is a great example, so 20 years time, which was about 22 years ago when I bought my first home, I paid $107,000 for it. Let's say I had the same $107,000 to put in the stock market, by the way, into a mutual fund, by the way. I would have to have that $107,000 at 20 years old, which I didn't. What I did have was $3,500 or $7,500 to put down on a home when I was 20. So same investment. The only difference is I only had the $7,500 to put down. And that same, let's say I put the same $7,500 in my mutual fund at the same time I bought a house and I invested $7,500 in both investments. Where would those be? Okay, now we've seen the stock market go up and down. We worry about it. We don't have any control over it. Right. We also don't really have any control over the real estate market, except for what we invest in and the fact that we can borrow money to buy the asset. Okay, I can't borrow $107,000 put in my mutual fund at 20 years old. It's just not going to happen. That would be a risky investment for the bank. Right. There's no security, no collateral. So I bought that house when I was 20. And even with the market ebb and flow up and down over the last 22 years, here is what has happened with that. Okay, it went up to $200,000. It went down to about 140 during the bottom of the market, and then in 2021, it shot back up. So my return over a 20 year period of time was like 300% on that property because it went from 107 to $400,000. Now, still no tax consequence. I can pull $200,000 of equity out of that property and go invest it into something else while the tenant is still paying for that property, for that loan and I still have the asset. And by the way, I pulled that $200,000, which is like pulling it out of your retirement. The only difference is there was no tax consequence. And if your intention is to keep real estate forever and to pass it off to the, the next generation or your family, whatever that looks like for you, and how you're going to create your legacy, there's no tax consequence as long as you own it. Now, the mutual fund, 4% on the same $7,500 investment 20 years ago, I don't even know. I don't even have my calculator in front of me. But if I go through it, you might be 4%, you know, so 7,500 bucks, 4%. I was making a whopping $300 a year in return. Probably not going to be able to retire on that, to be honest with you. So over that time period, that investment, that same $7,500 I put into a house, I put into a mutual fund, I would have made a whopping $10,000 over 20 years and my house returned 300% rate of return on that 7,500 bucks. Actually, it's probably more than that if I really go back and dig into the numbers. But my point is, is that real estate gives you that advantage of going through that. So sometimes people are like, oh, you need to play it safe. And you know, you just put into good mutual funds. I know our good friend Dave Ramsey talks about, you know, find you a good index or mutual fund that pays out 10%. Those are pretty hard to find, right? You've got to be pretty savvy to find those ones that are going to pay you out of 10% return over time. And it's not always going to be that same return. Now, real estate, the value doesn't matter as much as knowing that somebody else is living there and paying off the mortgage over time. So if I'm in your situation and I'm considering, you know, where do I start? What does it look like? Okay. I would start by buying my first home. Okay. And then I would keep that home and I would make it a rental property and I would move into my next one because this is the cheapest house hack possible. You can do this over and over again if you're willing to maybe live below your means, live in smaller homes. Go back and check out my buy box video because it really talks about the great things to buy in a real estate purchase if you're going to keep it for investment, which would be the same thing you want to keep in mind if you're going to go buy something to live in if your long term plan is to keep it. So go back and check out that video. It's really important as you're starting your investment journey. I would do that over and over again and I would probably, if I could afford to maybe put a little bit in some mutual funds because we want to diversify. Without a doubt. I didn't when I was earlier. I wished I would have. Things might have been a little different right now, but I'm grateful that I had the education on real estate and what it does and what it does for my future and the leverage that I have by owning it and all the tax benefits from it. And again, I can keep pulling money out of a house and a tenant will keep paying the payment for that money and I get to use it over and over again without any of the tax consequences. Now if you have a mutual fund or your 401k, if you decide to pull money out of it, yes, you can borrow against it and pay it back. But if you pull it out, you are going to be taxed on it and then you got to pay the taxes on top of the money you took out. So your rate of return is going to like zero pretty much when it comes down to it. So my advice, start thinking about real estate, understanding what the benefits are of it. Finding a good real estate agent that can guide you through the process of how to create a strategy. That's what I do for my clients is I build rental strategies for people and show them how to create wealth and generational wealth as a matter of fact and just showing them the ins and outs and the benefits of owning real estate versus maybe investing in the stock market. And if you want to invest in the stock market I suggest same thing, go find a good financial planner or somebody that is going to help you with strategies to help you accomplish the things that you want and you need to know what you want at the end of the day. So if you're liking these videos please like subscribe and make sure you go back and check out that buy box video that that you can see and really show you what that strategy looks like.
