# Is my approach to evaluating real estate investment vs. ETF investment correct?

Someone asked me how well a property investment performs relative to ETFs over the course of 10+ years. My financial literacy is extremely low, and I just became aware of the concept of ETF last week. I tried to analyze the scenario posed to me. Can you guys tell me if my approach below is correct? And if I've overlooked important considerations?

First thing I did was find this formula in Google:

``````CurrentValue = Principal*(1+Rate)^Years
``````

I want to compare different scenarios based on the Rate of growth. So I re-worked the formula to this:

``````Rate = (CurrentValue/Principal)^(1/Years) - 1
``````

Now I want to crunch some numbers for property investment. The value of my house today is \$600k. I bought it for \$250k in 2007. I could have bought it for \$200k in 2008 after the market crash. The rates for these two conditions look like this:

``````House2007 = (600/250)^(1/12) - 1 = 7.57%
House2008 = (600/200)^(1/11) - 1 = 10.50%
``````

Next, I'll compare with a passive investment approach where I consider investing in an ETF that mirrors the Dow Jones. I see that in 2007, the stock value was as high as \$13408, and in 2008 it was as low as 7062. Today it is \$24388. That gives me:

``````DJI2007 = (24388/13408)^(1/12) - 1 = 5.11%
DJI2008 = (24388/7062)^(1/11) - 1 = 11.93%
``````

Doing the same for S&P500, I get these

``````SP2007 = (2633/1526)^(1/12) - 1 = 4.65%
SP2008 = (2633/797)^(1/11) - 1 = 11.48%
``````

Seems the rates for property vs ETF are comparable. Is this the correct way to look at these scenarios from idealized performance criteria? Are there substantial considerations I've omitted? Does this mean that it is quite common for people to expect real estate investment and ETF investments to be comparable?

Side note: I guess with a property investment, your principal capital is not fluid. But with a passive ETF investment, your principal capital is fluid. A property gives you opportunity to generate rental income. Passive ETF investments don't generate income comparable to rental income?

• Your real estate example is very good. For the period 2004 to 2018, some parts of the country have basically had 0% return or worse. – Peter K. Dec 9 '18 at 0:02