When I compare investing into real estate verses the stock market, I truly do feel the way I suggest in the article title. Don’t get me wrong, the stock market is a great vehicle for the big fish companies to raise cash, fund operations, make acquisitions, etc., but from us little minnow investor’s perspective, there are definitely better options out there. (I know what you’re thinking, “Well I know real estate is an option, but I just don’t have the time to be able to devote to such a task as a rental property.” If you just thought that, KEEP READING).
I should also note that I’m not suggesting you do not diversify, but the thought of having my funds in solely stocks and bonds makes me quiver. You should definitely practice diversification (which includes stocks), but let’s call a spade a spade: the mainstream financial media greatly deceives people by “herding” people towards stocks, bonds and mutual funds as their only investment options.
Don’t believe me? Call up your financial adviser who is in charge of your IRA and/or 401k. Tell them you want to diversify into some private mortgages. Down in the comment section why don’t you tell us their response. I’m only kidding. Assuming you have not set up a truly self-directed IRA/401k, I already know what their response to you will be: that isn’t possible or why don’t you buy some stock of (insert symbol) since they are into real estate.
Why is this the case? Why won’t your adviser sit on the phone and tell you how you can get involved at real estate at vastly discounted prices? Easy. They don’t make any sort of commission or get any kickbacks. Why tell you about something where for them the answer to the “what’s in it for me?” question is “nothing”.
Maybe I don’t hate the stock market, maybe I just hate the way the financial media “herds” people around like cattle, but at this point, I’m not changing the article title, I think it has a nice ring to it
There are many reasons why the real estate market is superior to the stock market, but for this article’s sake, I am only going to talk about one of those reasons for now. In my view, this reason is really the ONLY reason that matters (again, just my opinion), but I’ll concede there are other great reasons.
Loan-to-Value Ratio (LTV)
This is the great concept that separates real estate from the stock market.
In the stock market, you are ALWAYS buying at 100% LTV. If stock xyz currently has the price of $25.18, then THAT is the exact price the market perceives it to be worth.
What if I gave you the opportunity to purchase this same exact stock for $17.63 while others were buying it still for $25.18. Wouldn’t a 30% “cushion” be nice just in case the stock declined in value a bit after you bought it?
The bad news unfortunately is this opportunity does not exist in the stock market (excluding Options; however, while being high reward, they are also high risk).
The good news is that this opportunity DOES exist in the world of real estate. The even better news is that you can STILL BE completely hands-off like you are in the stock market.
How is this possible? If I get involved in real estate doesn’t that mean I need to become a landlord and/or flipper?
Let’s use an example that I personally use within my real estate company.
Example: My company buys an ugly house, fixes it up and then sells it on land contract (owner financing, installment sale, contract-for-deed… all the same thing). To keep things simple, let’s just use nice round numbers:
My company buys it for $45,000 and rehabs it for $25,000 with our line of credit. That puts our total investment at $70,000. We then go on and sell it on land contract for $100,000.
This is where the hands-off person comes in to get involved in real estate. Put simply, you act as a bank does and “buy debt”. You would loan my company $70,000 and be given a mortgage attached to the property in 1st lien position. You would be paid an interest rate on the $70,000 for a predetermined amount of time.
Are you keeping track of the math though? Did you notice that you ONLY loaned 70% of what the asset was worth? $70,000 / $100,000 = .70 x 100% = 70% LTV.
You now have a 30% “cushion” should the real estate market shift. Not to mention, a physical asset (whereas the stock market only gives you a piece of paper).
Upfront Time Required
It would be deceiving if I left you with the impression that there is absolutely zero time involved. You should spend time upfront making sure that the real estate investor and/or company you are working with knows what they’re doing. Don’t blindly hand over a check.
Just as you would research a financial adviser or fund director, do the same for a real estate investor. Ask to see some of their previous deals, ask how long they’ve been in the business, ask if they have a “rainy-day” fund for those rough times. Or to cut straight to the chase, ask to speak with others that have loaned them money. Have they always paid on time?
Do your homework. It should be no different than doing your homework when you are deciding what adviser to hire or what mutual fund to buy.
A Multitude of Options
The example I used with my company assumes you want to take the hassle/headache free path to get involved in real estate. By no means is this the only way to get involved though. If you want to get more hands-on, there are a ton of ways to do so. The two default options that pop into most people’s minds are becoming a landlord or flipper, but you can do wholesaling, become a real estate agent, etc.
If you want to stay “kind-of” hands off, becoming a hard money lender is another option.
Start at BiggerPockets. There are people on this site that are completely “hands-on”, and there are people on this site that are completely “hands-off” as all they do is invest in debt. Find a way that suits your personality and time constraints, and begin to diversify. Stop putting all your hard earned money to work at 100% LTV’s!!!
Note from the Editor: Over the past weeks we’ve had several posts that looked at the value of real estate vs. stocks and other equities. These were not commissioned pieces; our authors write on the topics that interest them. We allow our contributors to share their opinions, and although some may feel that this site is biased against equities, it is not. That said, do note that this is a site of real estate investors, who are obviously going to have their own personal bias towards those investments that they prefer.
Photo: HervalWhy I HATE the Stock Market by Clay Huber