Recently, an article in Money Magazine has rekindled the old “Real Estate vs Stock Market” debate. It declares stocks to be the clear winner. I think they’re wrong. It seems to me that their comparison is not really “Real Estate Investment vs Stocks,” but “Home Ownership vs Stocks.” There are a zillion different ways to invest in real estate and home ownership doesn’t give all of the same benefits that some others give. Let’s go over the categories the article used to judge the competition, but this time let’s consider a different real estate investment - apartments.
#1. Performance
The article gave this category to stocks, stating that stocks have appreciated more than real estate over the long haul. Maybe it has. But that is all that stocks have; appreciation, and maybe some measly pittance of a yearly distribution.
Real estate offers much more than just appreciation as a return. If you purchase wisely, you will also have cash flow. That adds to your return.
But that’s not all. You are also gaining equity. Not just that equity from appreciation, but from the paydown of your loan. And you’re not even paying it. Your tenants are.
There are also tax benefits that put additional new found cash in your pocket, but in the article, it’s treated as a separate category.
So even if you leave out the tax benefits, real estate still gets appreciation + cash flow + equity build up. Exactly what kind of ROI or performance that translates to varies depending on the property, but 15% or more is not uncommon.
#2. Leverage
Money gives the edge to Real Estate, and I agree.
#3. Costs
Commissions can be the biggest issue in this category. Commission costs can be huge. But they don’t have to be. Commissions are negotiable. Also, you can represent yourself in a transaction. There are plenty of investors out there who refuse to go through an agent. An important way to look at it is that those costs are rolled into the loan, which your tenants pay off for you anyway.
Money Magazine even mentions standard expenses, such as advertising and evictions as costs. True, they do cost money, but they also should have been budgeted for when you bought the property, and thus they would come out of income from the property (once again: your tenants pay for it). Does that mean an investor might sometime have to come up with some cash out of pocket? Sure, sometimes things happen. But it doesn’t have to be nearly as dire as the article would have you believe.
#4. Taxes
The article names real estate as being better.
One thing I would like to mention is that the article brings up the capital gains tax when you sell your investment property. If you are just “moving up” to a larger investment property, you can defer those taxes via a 1031 exchange. A 1031 means you don’t have to pay the taxes until you sell the property that you exchanged into, unless you do another 1031 at that time.
There’s actually a lot to this that I don’t want to go into right now, but the point is this; if you are planning on keeping the real estate until you die, you will never have to pay those taxes. Your tenants will continue to give you money for your retirement. When you pass on, your heirs will inherit the property on a “stepped up” basis, meaning they don’t have to pay the capital gains tax, either.
#5. Transparency
The article states that neither real estate or stocks are better or worse as far a transparency goes. Basically, that means how well you can see exactly what you’re getting into. I’d have a hard time arguing differently.
You just need to make sure you do all the research necessary before you get in to any investment.
#6. Effort
I agree that buying and owning stocks requires less effort. They are super easy to own. You just buy them and hope for the best.
Yes, there is more effort in real estate, but that effort should directly translate into greater profits for you.
(You would have to drink a lot of Coke to get it’s stock price to go up due to your efforts alone.)
#7. Volatility
I agree with the article that real estate is less volatile than stock. Especially the real estate where people have to live, like apartments and houses.
#8. Diversification
The article starts this category with, “Mama told you not to put all your eggs in one basket.”
Well, Andrew Carnegie said, “Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket.”
Now, I don’t know this for certain, but I’m pretty sure Andrew Carnegie did better financially than Mama.
I think the reason we hear so much about diversification is because diversification is the only reasonable way to make stock investments safer. With real estate, your own skill in negotiation, property management, or even maintenance can make a huge difference.
And you can do something about your own skill set.
Conclusion
Does all of this mean that you should never invest in stock, or that you should rush out and buy some real estate? No. Wherever you invest, you need to know the pros and cons. You need to take a look at your situation and see what works for you.
Hopefully you understand there is a little more to “real estate” than just owning a house and hoping it goes up in price. It can be a terrific investment.
Good luck in whatever investment you choose to make.