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Six Reasons Why Real Estate Trumps Investing in Stocks and Mutual Funds

by McKellar Newsom on September 9, 2012 · 51 comments

  
real estate vs stocks

I experienced a drug induced hallucination when I was 10. Laughing gas from my dentist caused me to visualize colorful puzzle pieces crawling all over the ceiling of the exam room. Hopefully, you have never endured this “wacky awake dreamlike state” but take my word for it, you feel out of control.

To this day, I still feel a lack of control when I’m in the dental chair. Someone else is put in charge of my mouth and calls all the shots. I just sit there trying to “open wider.”

If you haven’t guessed, I like to be in control. I like choice and I like to feel responsible for my own mistakes. With real estate, you can be more in control than when investing in stocks, bonds or mutual funds. Below are a few reasons I choose real estate over securities every time.

Six Reasons Why I Prefer to Invest in Real Estate Over Stocks and Mutual Funds

1 – Control Freak

Let’s look at rentals. Say you have a unit that is not renting quickly. You have direct control. You can decrease the rent. You can market more creatively. You can offer incentives to potential renters.

With stocks, you are at the mercy of a board of directors, portfolio managers and corporate executives. You can’t even distribute your own funds. Does that P&G Stock take your personal financial situation into account whenever they make decisions? Do they know that you pay extra property tax in February so it might be good to distribute more in the month of January. In a worst case scenario, what do you think the Enron folks could have done?

2 – Options upon Options

With a real estate purchase, you have a ton of options. For me, I take a three-prong approach. I like to find property that is cheap enough to wholesale. If I can’t wholesale immediately, I can rehab it for a flip. If the flip takes too long, I can put a renter in the unit. With stocks, well, I guess I can buy or sell or well, sell or buy. But in either case, I don’t even control the daily price.

3 – It’s Not All Greek to Me

The economy in Greece is not going to affect my rent rates here. Worldwide or even U.S. collective emotional shock is just not going to affect my little building that brings in cash flow every month. Granted national issues might affect my property values long-term, but only more localized trends that I can anticipate will affect my monthly bottom lines. My rental incomes have leases attached to them that don’t change overnight because China test fired some weaponry in the Taiwan Strait. If I buy right, I don’t have to worry about “malaise,” market “hysteria,” or even another 911.

4 – Pass the Coke

If you own stock in Coca Cola, how can you better your stock’s price? Drink cases of the soda every day? With real estate, you can up your appraisal values and equity by changing the flooring, adding a garage, buying & updating more houses in the area or even convincing other investors to consider your investment neighborhood. You aren’t guaranteed to inflate your property value, but you can certainly help your chances much more than anything you can do to increase any stock prices.

5 – A Rock Solid Building

Let’s say I wanted to invest in stocks for ‘Trust Me Company.’ To get a feel for Trust Me Company, I’d visit the Trust Me headquarters, manufacturing centers and office buildings. I’d meet Trust Me owners, board members and managing staff. How difficult would it be to do my due diligence on Trust Me Company? If I invest in real estate, however, due diligence is simple. The asset is tangible; I can actually touch it. I can go check out the building in one location or area. I can touch the foundation, drive around the neighborhood, double check area crime records, do a rent analysis and bring in a professional inspector. In a handful of hours, I can get an excellent feel for the viability of a rental property.

6 – Managing the Managers

I can opt to have a property manager handle a lot of the day to day stuff with my rentals. But even with a property manager, I still have control. I can make decisions and even fire the property manager. How do I fire the CEO of my stock? Can I renegotiate terms with the managing members of my mutual fund? How much weight does my little proxy vote have for my bond fund?

Real estate brings investors a sense of control. With that control, you can be creative and have fun with your investment. When I invested in securities, I did like updating my portfolio but I didn’t get to do anything other than buy and sell. I know some people like to have others control their destiny and of course real estate is probably not for you. But for those who want control of their finances, real estate tops stocks hands down.

Photo: Alan Cleaver

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{ 51 comments… read them below or add one }

Dale Osborn September 9, 2012 at 1:38 pm

I have to agree with you that real estate is a much better arena to invest in. Some may enjoy the ups and downs of the market, but it is just too volatile for the average investor. Real estate has been good for building up the retirement fund so will stick to the tried and true route to success.

Dale

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McKellar Newsom September 10, 2012 at 11:22 am

Hi Dale,
Me too! I’m glad I got out of the market when I did. I just didn’t have to go through the stress of the ups and downs. I still have the occasional HVAC or bad turn but overall I’ll take real estate any day. Thanks! mck

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Brandon Turner September 9, 2012 at 2:04 pm

Nicely written McKeller. I, too, am a control freak and love real estate for all those reasons listed. Thanks!

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Brandon Turner September 9, 2012 at 2:05 pm

Oops …I mean “McKellar” ! Pressed “submit” before proof-reading!

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McKellar Newsom September 10, 2012 at 11:25 am

Nice of you to notice but I’ll respond to McAnything. I’ve been called McGyver, McGillicutty, etc. mck

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Mike September 11, 2012 at 5:53 am

Where is McGiver now anyway??? He’d make a fabulous real estate investor….

McKellar Newsom September 10, 2012 at 11:24 am

Hi Brandon,

Thanks for the compliment. Glad to meet another control freak :) Do you have long term rentals? mck

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Michael LaCava September 12, 2012 at 6:36 pm

I have a few houses I rent but mostly straight house flips now.

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Lenny September 9, 2012 at 3:30 pm

Great article! Nicely written!

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McKellar Newsom September 10, 2012 at 11:26 am

Hi Lenny,

Thanks so much! Do you do mostly real estate or securities as well? mck

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Greg September 9, 2012 at 9:30 pm

Whereas my primary investment approach is real estate, I do like collecting a few (just 4) stocks.

Two of them have a long history of paying dividends as well as increasing dividend payouts, so I plan to reinvest the dividends. Overtime, I hope to build up a nice position from them to receive payments in retirement, and not be subject to daily ups and down. The other two have a long history of growth, which means I am prepared to let them rise and fall, and accept that risk. My game plan is to not sell those two, but ride the stormy winds. Because the risk of my stocks is bigger than real estate, almost all my money is going into my RE portfolio.

I don’t see this as an either/or situation.

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McKellar Newsom September 10, 2012 at 11:29 am

Hi Greg,

I prefer stocks to mutual funds because you can at least study the 4 better than understand a big mutual fund portfolio. I also like dividends better for the steady income. But of course, like you, my preference is real estate.

What prompted you to choose your 4 stocks? What type of real estate investing do you do? mck

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Greg September 10, 2012 at 11:45 am

Hey MCK,

Actually, I own five stocks. I don’t like mutual funds at all. They are based on faulty assumptions and historically don’t work as expected.

My first criteria is to pick stocks that have been paying consistent and increasing dividends for at least 10-20 years. My second criteria is to find ones that don’t pay out too much of their earnings, so they have room to grow (except for REITs and MLPs). Finally, I read as much as I can so I can understand their business. If I don’t understand it, I don’t want it.

Three of the stocks I picked are dividends earners, two pay no dividend (AAPL and BRK-B). The two that don’t pay dividends have a LONG history of growth. But…it’s still a risk. The fact that most of my investment is in RE, which I feel has a nice, long history of success when done right, empowers me to take that risk with Apple and Berkshire Hathaway.

Regarding RE, I currently buy rental duplexes and use a property management company to manager tenants, etc. so I can hold down my day job. Every nickel of rent is focused on paying down the mortgages, waiting for the market to signal me when to sell any of my holdings and re-leverage into more property. Hopefully, as I approach retirement, I can shift over to cash only purchases and live off the cash flow.

P.S. Don’t pick what I picked just cause I mentioned them. Do your own research.

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McKellar Newsom September 12, 2012 at 2:44 pm

Hi Greg,
Thanks for sharing your investment strategy. I liked your “ps” as well. mck

Rishi Palriwala September 10, 2012 at 7:14 am

Great article McKellar Newsom!

Though you alluded to it, I would add the ability to forecast. Since in real estate investing you have more control, I have found the ability to forecast financials to generally be very straightforward.

I could not agree with you more your reasoning, in fact many of the reasons which you have spoken about have led my partners and I to start a venture called Collaperty (www.collaperty.com), to collaborate on properties.

We are providing a new way for more individuals to invest in real estate (single assets) through a web platform which brings together investors and what we call dealers- those who are real estate enthusiasts and have potentially profitable opportunities, but are looking for equity partners. We are planning a launch by the end of this year, please stay tuned!

Thanks

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McKellar Newsom September 10, 2012 at 11:31 am

Hi Rishi,

I agree that you can forecast much better with real estate.

Good luck with your Collaperty Venture. I’ll check out your website. Where are you planning to invest and in what type of properties? mck

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Rishi Palriwala September 12, 2012 at 11:41 am

Apologies for the late reply. The venture is not actually investing, however, we are the meeting place which allows those who have opportunities to meet those who want to invest. The types of investments we plan to see come onto the platform will range the entire spectrum… flips, new construction, land, cash flow props and will eventually be nationwide!
Certainly stay-tuned…

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McKellar Newsom September 12, 2012 at 2:45 pm

Hi Rishi,

Please keep me posted regarding your venture. mck

Nathan September 10, 2012 at 8:00 am

People ask why real estate… my first response is generally “I’m a control freak”. With Real Estate, I know what I’m getting into, the risks I’m taking. With a 401(k), you’re essentially trusting some guy on Wall Street to provide a retirement for you. I went to school with Wall Street, trusting them isn’t wise ;)

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McKellar Newsom September 10, 2012 at 11:33 am

Hi Nathan,

I’m with you on wanting to know the risks and being in more control of my investments! I’d like to think most people are trustworthy but I like to verify. I find it easier to verify with properties than with securities. Do you own rentals? mck

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Nathan September 11, 2012 at 7:02 am

Yes ma’am… if this darn 4plex will ever close I’ll be at 8 buildings, 23 units. Maybe I should include my last name in my comments.

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McKellar Newsom September 12, 2012 at 2:47 pm

Hi Nathan,

We met in Denver at the Summit. You should add a picture too through gravitor or something like that. I’ll keep my fingers crossed re your 4 plex. mck

Mike LaCava September 10, 2012 at 9:56 am

It is the great debate isn’t it? Wall Street vs. Main Street. I too love the control as well, although not all things are always under our control with banks, building inspectors, flaky buyers, flaky sellers, etc. But there are far more factors in control when investing in real estate for sure. Well written!

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Greg September 10, 2012 at 10:05 am

Don’t forget, some of the best investors aren’t “on” Wall Street. Warren Buffett is in Omaha, and has a spartan office, not an expensive, come-and-by-our-funds type of office as shown in the Millionaire Next Door.

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McKellar Newsom September 10, 2012 at 11:36 am

Hi Greg,
True. And didn’t I read somewhere that Warren Buffett invests heavily in mobile home parks?

Great book by the way! mck

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Mike September 10, 2012 at 3:33 pm

He is the consummate millionaire next door. Although his millions are billions!

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McKellar Newsom September 10, 2012 at 11:35 am

Hi Mike,
I wish I could have more control over the banks, appraisers, criminals who target properties, tenants, etc. Alas, we can’t control everything.

Do you invest in securities and real estate? mck

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Mike LaCava September 10, 2012 at 4:02 pm

I do, but I tend to stick with what I really know (flipping houses) and can control to a certain degree :-). How about you?

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Dale Douglas September 10, 2012 at 11:14 am

Say what?

The standard understanding in finance is that real estate is a poor investment. The main problem with investing in real estate is that, yes, some people do make a killing in real estate, but it’s very hard to make a living. Whereas the people who think they’re clever in the stock market “only” have to figure out the right timing to get in and out, people who think they’re clever in real estate have to figure out both “when” and “where” — two uncorrelated variables.

There’s a famous study (sorry, don’t have a reference handy) that followed a house in Amsterdam that has been in an upper middle class neighborhood for over 600 years — the neighborhood never went to the dogs any time in that period. During that period, an investment in the house would have returned 0.6% over real. You’re only slightly better than stuffing your money in your mattress.

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Greg September 10, 2012 at 11:36 am

It’s amusing, but I have seen people that favor stocks point out all the flaws with RE. Then, I have seen people that favor RE point out the flaws with stocks. It seems rare to find someone that favors a mixture of both.

One place where I think RE kills stocks is usage of leverage. It seems easier to use what you deem as the “right” amount of leverage. I know, not everyone in RE likes leverage, but for those that do, it seems much safer and more manageable than opening a margin trading account. If you are on a margin stock trading account, and the market moves against you, your broker can call up requiring you to put in more money. RE doesn’t have that type of requirement.

But long term dividends aren’t unheard of. There are companies that have been paying increasing dividends for 50+ years.

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McKellar Newsom September 10, 2012 at 11:44 am

Hi Greg,

I agree that real estate investment leverage beats buying on margin any day. And could someone please sell me some insurance for my stocks? I’m going to write my next blog about the numbers and stocks and real estate.

For stocks, I do believe dividend ones are the way to go. Anyone prefer other types over dividends?

Thanks! mck

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Kevin Yeats September 12, 2012 at 10:55 am

A little knowledge can be a dangerous thing.

McKeller, insurance for your stocks has been around for decades.

First, let’s say the you buy a new rental property and begin rehabbing that same day. Overnight, lightening strikes and sparks a fire burning your new property to the ground. Fortunately, you purchased property insurance the same day that you closed on the new house. You call the agent and a few days later and adjuster hands a check to you for the full amount of the insurance coverage.

You can do the same for your stocks. They are called put options. You purchase 1000 shares of Microsoft stock at $30.85 but you fear that the stock could crash. Solution: you buy a put option with a strike price of $25. If something bad happens to Microsoft and the stock drops below $25 before the option expires you can “put” the stock to someone else … forcing that person to buy it from you for $25 per share. That works much the same as the insurance policy that you bought on the rental property.

PLEASE NOTE: this is NOT investment advice. Consult a qualified professional before undertaking such a strategy.

For the bigger picture, you have simplified the investment side of your discussion.

I have made this statement before. Most people will do will to discuss their financial goals with qualified professional – investments, insurance and legal issues.

McKellar Newsom September 10, 2012 at 11:41 am

Hi Dale,

My next blog will be on the difference between securities and real estate as it relates to the numbers. I’ll address your questions in it but in the meantime, any appreciation I get is purely gravy. I love the depreciation (what a concept!), the monthly cash flow, the buying of equity, the leverage capacity and the insurance coverage.

I’ll never go back to stocks, bonds and mutual funds.

Please share some insight as to how you do your timing. Thanks for your comments. mck

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Al Williamson September 11, 2012 at 1:08 pm

Let me join the chorus – Nice work McKellar! May I expand on your great list?

Want to throw in that with RE an investor can cash in on their keen understanding of their local market. If you’re a good speculator, you will be rewarded.

For example, if you know a major employer is coming to town, you can go out and control a piece of property near the employer’s future location and capture the potential pop in value.

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McKellar Newsom September 12, 2012 at 2:59 pm

Hi Kevin,

Thanks for mentioning put options. What are the costs associated with put options? Can you add them on for every stock or do you just add when you think there is a problem?

I’ll have to look into put options to see more about how they differ from insurance.

mck

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Kevin Yeats September 12, 2012 at 9:28 pm

McKellar, I STRONGLY suggest that you speak with an investment professional about using options.

The cost of the put options (and call options … the opposite of puts) depends on the price of the stock, the volatility of the stock in questions, how close the strike price is to the current price and how soon the option expires (yes the options become worthless eventually but then again so do insurance policies unless renewed by both the insurance company and the policy holder).

You can look up stock option prices on most stock quote sites. I know Yahoo has them. (Yahoo Finance). Just click on the options link with each stock quote.

Again …. talk to a professional

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McKellar Newsom September 13, 2012 at 6:03 am

Hi Kevin,
Don’t worry. I won’t use put options or call options. I don’t buy stocks, bonds or mutual funds; I only invest in real estate. I used to buy securities from a broker, but I never felt like I had any control over the outcomes and the returns, including dividend producing stocks and bonds.

Since you say you would need a professional to use put options or call options, I don’t think I would compare them to insurance for houses. I think most people have an excellent grasp of the concept of insurance. Even though options and insure might be similar, per your response, I don’t think it’s quite the same.

I love properties that can be insured the minute I sign the HUD statement because I always pay for my insurance on the HUD. I renew every October 10th for every house to make it easy not to forget. Even better with loans, the insurance is escrowed and I don’t even have to think about it.

I will say one advantage of securities is that you don’t have to worry about personal liability. Thanks for your comments, Kevin.

Robert Steele January 7, 2013 at 1:16 pm

Only problem with comparing options to RE insurance is the cost. Insuring a property for a year costs a hell of a lot less than buying LEAPs (yearly options).

The cost to buy 1 year ATM (at the money) options today on MSFT is $2 on a $27 stock. That is 7%. In other words that would be $7000 insurance a year on a $100K property!

So it’s not exactly a valid comparison is it? Why the difference, because stocks go up and down by huge amounts all the time, or disappear altogether. As a percentage of the total RE stock, RE rarely burns to the ground or suffers 25% or 50% losses.

McKellar Newsom September 12, 2012 at 3:01 pm

Hi Al,

Good point regarding knowing your market! Another way to help investors make choices.

McK

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Kevin Yeats September 13, 2012 at 2:47 pm

McKellar, I still feel that you have left out A LOT of the positives with investing in stocks and bonds and mutual funds.

For instance your state that your only choices with stocks and bonds are to “buy and sell or sell and buy.” A few other choices would include, buying call options, selling call options, buying put options, selling put options, shorting the security, lending the security to someone else so that investor can short the security (while I, the lender, collect interest from the borrower), use the securities and collateral for a margin loan, more importantly you left out a key adverb …. investors can buy or sell their securities QUICKLY.

One of the key aspects of the securities markets is their liquidity. If investors feel that a stock or bond will increase or decrease, investors can buy some on any trading day (many with extended trading hours and can even buy/sell some stocks on overseas markets). Can’t be done with real estate.

And on the sell side, if the need for a large amount of cash arises suddenly, holders of Coca-Cola stock can sell that stock one day and have the funds available within a few days. Can’t be done with real estate without a HUGE mark down in the value.

That liquidity in the securities market also yields one other benefit to securities … the ability to use them as collateral for loans. To get a securities loan, the lender needs the name of the underlying securities … no need for a third party to appraise the value of that collateral thus the loan can fund relatively quickly. Obviously, not true with real estate and real estate loans.

My disclaimer: this is not intended nor should be used as investment advice. I merely state my observations and opinions.

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McKellar Newsom September 14, 2012 at 11:37 am

Hi Kevin,

Thanks for the email. I was glad to get one that sticks up for securities. Overall, I prefer real estate over securities for the reasons stated in my blog. In my next blog, I’ll write about the numbers and differences between securities and real estate.

What do I like about stocks over real estate? Three things. Most importantly, stocks don’t come with as much “personal” liability. Fortunately, real estate insurance has liability coverage but you just don’t hear about people suing “public” shareholders of stock. Anyone heard of this or have anything to add here? Just because I haven’t heard about this doesn’t mean it doesn’t happen. Even if a stockholder were sued, they stockholder would have entire shareholders in with the stockholder.

Secondly, stocks have less paperwork. I do think securities have to be watched more vigilantly than properties but as far as true paperwork, real estate is not for the lazy.

The third aspect of stocks that some like is what you mentioned, Kevin. The liquidity. I personally don’t like the liquidity but I know most people do like liquidity. Let’s say you get a windfall like flipping a house or a job bonus. Instead of leaving the cash in a place where you can easily make it liquid or spend it, you can put the cash as a down payment of a property. The cash is tied up in an income producing asset and can’t be spent. I prefer to keep my cash working in assets that I can’t fall back on to spend on a new car for instance.

I do sell some real estate assets nearly immediately but I buy them with the intention of wholeselling. Other longer term assets, I’d prefer to keep them illiquid.

Thanks, Kevin. BTW, I posted a question on the BP forum based on a question you asked regarding reverse deposits. mck

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Kevin Yeats September 16, 2012 at 3:52 pm

Reverse Deposits?????

Where is the question?

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McKellar Newsom September 17, 2012 at 9:54 am

Hi Kevin,

I think the question was posted on my article regarding the Disadvantages of Section 8. Didn’t you make a comment about the reverse deposit idea? Thanks. mck

Eddie Bodkin September 14, 2012 at 2:47 pm

Very good!

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McKellar Newsom September 17, 2012 at 9:52 am

Thanks Eddie! mck

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Matty September 16, 2012 at 11:51 am

Nice article, McKellar –
I love reading your articles!

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McKellar Newsom September 17, 2012 at 9:53 am

Hi Matty,

Thanks so much! mck

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Brian Levredge September 18, 2012 at 5:18 pm

Good read. I of course favor RE to stocks but own a few stocks myself. I favor owning them inside an IRA and using a DRIP. In this scenario you actually want the price of the stock to stay flat as that means compounding will get you more and more shares each quarter. If you use a trailing stop loss, you can protect your gains and limit your downside exposure. There are some companies (like Coke) that have huge market share and have paid a strong dividend for decades. I don’t think there is a right or wrong answer with RE vs. stocks. There is only level of comfort based on one’s own knowledge. Good debate it sparked though.

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Greg September 25, 2012 at 10:50 am

The comments section is also as informative as your post! Kevin has raised important points to consider before making any decision on where to invest your money. Although, I would be biased in investing it on real estate esp. now that more and more families are becoming renters than home owners which means more opportunities to earn a stable monthly income from rentals.

I agree with Kevin, it is best to consult with a professional. Keep us posted

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Rene Lapp February 19, 2013 at 11:09 am

Very good points. Real estate is always going to be a better investment over the longer term. It’s down to supply and demand. After all, they ain’t making any more land!!!

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Akhalil January 17, 2014 at 2:00 pm

Although you make some good points on how safe you feel when investing in realestate you never mention what is your rate of return. Investing in strong companies can give you a return of 20-500 plus % a year. How much can you make from rentals?
If I invest 100k in rental propery or any realestate what will my rate of return be in 1 year? I know a couple mutual funds that have been moving at 20% a year consistantly. Show me any rental propery that can even come close.

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