DailyWealth:
Gold vs. Real Estate: Which Should You Own?
Dr. Steve Sjuggerud
Jul 4, 2006
Gold pays no interest. At least properties pay you rent. Therefore
you should own properties.
That's the conventional wisdom.
Yes the first two statements are true. But we need to be careful
about drawing the conclusion that you should own rental properties.
Now is one of those rare times in history where - even after
collecting rent - holding real estate will cost you more than
holding gold.
Let me explain:
Yes, gold pays no interest. It's one of the many knocks against
gold. But don't forget, the cost of owning gold is darn near
zero.
Meanwhile, Marc Faber gave an example of a typical home speculator
in his newsletter last month, concluding that, right now: "a
home buyer / speculator has a negative cash flow of more than
5%."
The assumptions Faber used to come up with that negative five
percent cash flow figure were conservative For example, maintenance
costs were assumed to be 1% of the value of the home (sounds
low to me). And annual property taxes were assumed to be 1.1%
(mine are nearly twice that).
If you can earn a rent yield of 8% or more of a home's value,
these numbers aren't so bad. But you can't get that kind of rent
anymore
Steve Leuthold, a legendary investment analyst, looked at rental
yields over the last 45 years (as long as he has data). He found
that rental yields are lower now than at any time in history
- by a wide margin.
Steve puts the current level of rental yield (after expenses)
as a percentage of the home price, at about 2.5%. That's abysmal.
I'm not sure, but I think that figure does NOT include property
taxes (which are about two percent where I live), or insurance
(which eats up the rest of the yield). Also, importantly, that
figure does NOT cover interest on a mortgage. Lastly, this figure
does NOT take into account the high cost of buying and selling
a house.
If Leuthold is right, and landlords are willing to accept rent
(after maintenance costs) of just 2.5% of the value of a home,
then most rental property owners are losing money And lots of
it, if they've got big mortgages on these properties.
So let's go back to the question at the start Which real asset
would you rather own right now? You've got gold - which pays
no interest, but has virtually no cost of ownership. Or you have
real estate - which pays 2.5% interest (after home maintenance
costs) but loses money when you add up the cost of ownership
Everyone owns real estate. Nobody owns gold.
Sure, you can earn rent in real estate. But right now, according
to some great analysts, all that rent and then some is eaten
up, leaving you with a negative cash flow.
I prefer to own assets that nobody owns, like gold. And it's
more attractive than real estate, on a yield basis.
You sure don't get that opportunity every day.
Our DailyWealth advice... sell your second home if it's
costing you money. Get rid of that mortgage. And use what's left
over to buy gold, the hated asset that hardly costs a thing to
hold.
Good investing
Steve
P.S. You know, it's kind of
funny... a few years ago, you couldn't convince anyone to buy
gold. Now folks are clamoring to get in. That's why we had to
write our free research report, Investing in Gold: 2006 How to
Make a Fortune in the Coming Gold Boom.
Inside this report, you'll find out the real reason gold prices
rise... why gold should move much higher in next few years...
and the two best ways to play it in 2006. To read this free report,
click
here.
Dr. Steve
Sjuggerud is the founder and editor of one of the largest financial
newsletters in the world, True Wealth.
Steve did his
Ph.D. dissertation on international currencies, he's traveled
to dozens of countries looking at investment ideas, and he's run
mutual funds, hedge funds, and investment research departments.
Steve's investment
philosophy is simple: "You buy something of extraordinary
value at a time when nobody else wants it. And you sell it at
a time when people are willing to pay any price to get it."
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