Five Not So Common Reasons Real Estate Beats Stocks
Great news! You just got your yearly bonus or your Aunt Marge left you a tidy sum. The problem is that those extra dollars sitting in your account can add some stress. The stress typically revolves around needing to invest the money into something that earns you cash returns. For many of us, extra dollars left in a bank account get spent on things like the flat screen tv that you ‘can’t live without’ instead of on an investment. And, when making a decision of where to spend their investment dollars, many people buy “convenient” stocks, bonds and mutual funds and don’t even consider real estate rentals.
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Below are Five Not So Common Reasons to Consider Real Estate Investments Over Securities
The Illiquidity Gift
I know most people look at illiquidity as a negative but I just love my properties not being liquid. Whenever I get a windfall, say, from a flip, I reinvest the earnings as fast as possible. I find if I put my money somewhere that is hard to touch, I won’t spend it; the money is growing and working and I can’t get any cash back out of it at the snap of my fingers. I’m less likely to make an impulsive purchase knowing a lot of action is needed to get my money back. How much better off would the pro ball players, estate inheritors and lottery winners be if they bought harder to sell assets that bring in income month after month?
It is easy for the business school majors out there to glean a clear picture of a company and its books from reading it’s annual report. For me though, I read an annual report and I have a gazillion questions. If I were to invest in a stock, I’d like to be able to understand all the annual report numbers.
I love real estate numbers; they are easy to understand. Give me a quick spreadsheet over an annual report any day. And, being easy to understand means I can ask good questions and make improvements on the performance of my investment. Without being an insider, how can I improve the numbers or even completely understand the numbers for that oil pipeline stock that my stock broker touted?
Gotta Love Insurance
A huge tree fell through the ceiling of one of my friend’s rentals last year. Her insurance gave her an $80K check for a property that she bought for $40K-ish. If you want to sell me stocks, please offer me some insurance if the investment goes bad. And make the insurance easy to get, easy to understand and include the cost into my final returns. If anyone knows a reputable stock insurance company, please send me the contact info.
Even my worst property mistake had an 11 percent return last year. With properties, mistakes can be more forgiving than with securities because you have more options if you are creative and a good problem solver.
I know you can buy on margin for stocks. Anyone remember the Great Depression? I daresay even with the difficulty getting loans on investment property in today's market, getting a loan is a lot easier and with better terms than buying stocks on margin. With leverage, returns can escalate too. I wonder why banks won't easily loan money to purchase stocks?
Real estate offers some not so well known advantages over stocks, bonds and mutual funds. Nearly everyone would initially say the liquidity of securities makes investing in real estate not as desirable. But for those who need a stable investment that helps protect them from frivolous and easily accessible cash for spending, real estate illiquidity is a gift. The easier to understand financials, the readily available insurance, the ability to fix mistakes, and the use of leverage, are all reasons to focus a bit more on real estate rentals over simply handing over your portfolio to stock, bond and mutual fund managers. Try some rentals and get some more “stress” from the extra money in your bank account.