Gold Vs. Real Estate: Which Should
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
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
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
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.
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