Personal Finance

5 Ways Real Estate Wins Big Where Stocks Fall Short

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Personal Development, Flipping Houses, Landlording & Rental Properties, Personal Finance
103 Articles Written
medium to large sized homes on neighborhood street with well manicured lawns

It is just absolutely impossible (and foolish) to predict the stock market. And when it starts to drop, your hands are tied. You don’t have options.

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And who knows when it will stop? Ask five investing “experts,” and you will get at least five different answers.

What is much easier to anticipate are real estate returns. You have much more control over how the story ends.

If you’re buying property to rent out, you control who lives there. You either choose them yourself, or you delegate that decision making to someone you trust. If that person doesn’t perform, you can choose to remove them and get another person in there.

Your hands aren’t tied. And if renting doesn’t work out for you, you can choose to sell the property. You have options.

Related: Are You Still Picking Stocks? You Are Ridiculous. Here’s Why.

If you are purchasing property to fix and flip, you control who does the work, what finishes are installed, and the timeline for the project, for the most part. And if the market changes during the course of your rehab, you can choose to rent it out until the market corrects itself. Your hands aren’t tied. You have options.

Real estate is an excellent way to diversify your portfolio for several reasons.

5 Ways Real Estate Wins Big Where Stocks Fall Short

People will always need a place to live.

There will always be a strong demand for rental properties, whether temporary or long-term, provided you choose the right area. Not everyone has the desire or the means to own their own property.

Since the 2008 crash—caused in large part by shady lending practices—loan requirements have tightened considerably. It's a lot more difficult to get a loan, and not everyone can qualify through the new, stricter rules, even if they can afford the monthly payments.

keep-primary-residence

Rental property provides great cash flow.

Owning $200,000 in Apple stock will give you an annual dividend of around $3,400. If you abide by the 1% rule (and you should), owning a $200,000 rental property will give you $24,000 of income annually.

Also, will Apple still be around in 20 years? Maybe, but I’ll bet your rental still will be.

Real estate is less volatile.

Real estate has its ups and downs, just like everything else. But almost every local market, over time, trends up. Historically, the 2008 crash was an anomaly because it was caused by real estate itself.

Yes, there will always be pockets of land that don’t follow the trend—Detroit immediately comes to mind. Detroit has been steadily losing population since its 1960’s heyday. Property values cannot go up when population goes down, and Detroit is down by more than half. However…

The population is growing, but the earth isn’t.

As more and more people inhabit this planet, land will become more and more precious. Granted, this isn’t a huge dilemma currently—the world has many places where you can go miles without seeing another human or anything remotely related to civilization. But the most popular areas will continue to grow, and land is becoming more and more precious in many parts of the world.

If you’re a property investor in the United States, you have an extra advantage. Lots of folks from around the world see value in owning American property. It isn’t unusual for Canadians, Chinese, or Middle Easterners to buy property here in the states. They realize that the stability and strong American economy makes it a great place to invest.

Female hand with smartphone trading stock online in coffee shop

Leverage, baby.

If you have a Margin Account, you can use leverage to buy your stocks. But the most you can borrow is 50% of the stock purchase price. Not every stock is marginable, either.

Related: 9 Reasons Why Investing in Real Estate is Awesome (And Better Than Stocks!)

Real estate is up to 100% leveragable, using a mortgage to purchase your property. One hundred percent financing is usually available for owner-occupants—investments are more typically 75%-80% financed—but a far larger percentage of the purchase price can be financed than with stocks and other investments.

Real estate is a solid way to invest in your future and your retirement. A diversified portfolio can help guard against losses when one another asset class loses value. Unlike other investments, real estate can return money over the lifespan of the asset. It’s kind of a no-brainer.

Why do YOU love to invest in real estate? (And if you don’t, what’s your investment of choice—and why?)

Don’t forget to leave a comment below.

Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
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    Jinhee Park from Tucson, AZ
    Replied over 2 years ago
    I bought TESLA stocks 2 years ago and had a 67% ROI then sold them when they were about to fall, and I used those funds to put down a down payment for a rental which is producing 10.3% cash on cash return and 12.3% annual appreciation. I think I made a smart move to switch from stocks to real estate. Regarding the power of leverage, I’m using an FHA loan to put down only 3.5% of a $250,000 value 4-plex so I’m using $8750 out of my pocket to control an asset that will produce $9000 of monthly cash flow for the next 7-10 years as I will be using this 4-plex as a primary residence and medical airbnb. This really is a great ROI! I’ll be getting my money back within a few months after purchase. This is the power of leverage only possible in real estate. You didn’t mention the tax benefits of investing in real estate. The depreciation and mortgage interest deduction will save you so much money in taxes for years down the road while you hold the real estate property.
    Jinhee Park from Tucson, AZ
    Replied over 2 years ago
    I bought TESLA stocks 2 years ago and had a 67% ROI then sold them when they were about to fall, and I used those funds to put down a down payment for a rental which is producing 10.3% cash on cash return and 12.3% annual appreciation. I think I made a smart move to switch from stocks to real estate. Regarding the power of leverage, I’m using an FHA loan to put down only 3.5% of a $250,000 value 4-plex so I’m using $8750 out of my pocket to control an asset that will produce $9000 of monthly cash flow for the next 7-10 years as I will be using this 4-plex as a primary residence and medical airbnb. This really is a great ROI! I’ll be getting my money back within a few months after purchase. This is the power of leverage only possible in real estate. You didn’t mention the tax benefits of investing in real estate. The depreciation and mortgage interest deduction will save you so much money in taxes for years down the road while you hold the real estate property.
    Scott S. from Tacoma, Washington
    Replied over 2 years ago
    Using the $200,000 of Apple stock example and the timeline of 20 yrs, had one purchased $200k of AAPL in 1998 it would now be worth $42 million! At $200k house in 1998 might be worth $1M today in a high appreciation area. Not bad, but it certainly wasn’t a hands-off, passive investment like a stock purchase.
    Derrick Shannonhouse Investor from Spring, Texas
    Replied over 2 years ago
    Lot of great points made on both sides throughout this thread; one of the better threads I’ve read here. The one positive to real estate that I haven’t seen come up yet though (unless I missed it somewhere) is that most people accumulate stock market wealth in qualified plans (401k & IRA), unless they are really high earners (top 5% or higher) and have additional money to invest above and beyond qualified plans. While there are positives to qualified plans, the fact that your money tied up until 59.5 for me is a huge disadvantage. Sure, you can take money out before that time, but it’s obviously extremely inefficient with the 10% penalty, and especially if your a high earner already paying a high tax rate. This is probably the primary reason I lean towards real estate because I can plow most of my savings into real estate and stand a decent chance of having enough cash flow by age 50 to walk away from my current job, and it’s very tax efficient since I will be paying very little tax with depreciation expenses factored in. Being able to potentially retire at 50 with a tax efficient portfolio versus having to wait until I’m 59.5 to start withdrawing from 401k is a big advantage in my mind.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 2 years ago
    I don’t want to give it all away, but we just recorded an episode of the BiggerPockets Money Podcast with The Mad Fientist who shares 3 ways to access your retirement funds early. It releases on 4/30/18.
    Vaughn K. from Seattle, WA
    Replied over 2 years ago
    So most of this has already been said, but I don’t think anybody stated it quite explicitly enough… Of all the high net worth people I have known in my life, not ONE has ever become wealthy primarily via investing in stocks. That’s because they just don’t grow fast enough to turn almost nothing into a fortune. They will just modestly grow an already there amount of money. They all owned businesses or made their money in real estate. Business is its own crazy deal, and many people are not cut out for it, but real estate for the long haul is about as simple as it gets. Perhaps not easy, but simple. What makes your average person be able to make so much money from real estate is simple… Leverage. Period. Leverage is always inherently risky in a certain sense, but with cash flowing real estate it is as risk free as anything can get in this crazy world. This is what makes it magical for growing wealth fairly quickly. For a typical 20% down situation let us say you put 20K down on a 100K property. Now let us assume incredibly mediocre returns. Let’s say it appreciates over the long haul at a mere 2% a year, basically just keeping up with inflation. That alone is now netting you 10% return a year. Your positive cash flow will vary, but let’s pretend it is a measly 2% as well. Now you’re at 20% return. Almost as good as Buffett! If both of those were at 3% a year, your return is now 30% cash on cash. Lord help you if you bought at 5% or 10% down, then the numbers get real crazy! Even though that’s totally doable for the first couple properties if you want to live in a duplex or quadplex for awhile. Pull out equity to expand and buy more properties as often as makes sense and you can keep those cash on cash numbers at those rates indefinitely. Those numbers aren’t scalable to multi billion dollar skyscrapers or anything, but for somebody that just wants to make a few million, or low decamillions there are plenty of properties to do that with. THIS is the main reason people build wealthy faster in real estate. Period. That’s not accounting for forcing appreciation, buying below market, or anything else. You could pull that off buying already remodeled houses/complexes and just letting them do their thing. You throw even a touch of creativity into it and it can only go up. Margin loans on stocks are A LOT more risky, and most people just don’t do it. Which is probably wise. Comparing 100% paid of real estate to stocks is a moronic way to compare, because unless you’re deleveraging at the tail end of your life there’s just no reason to do real estate like that. 20% down, if not less, is perfectly safe and secure. And that’s it. It is as simple as that. Using leverage in real estate is super easy and relatively safe over the long haul. That’s why IN THE REAL WORLD so many people make a lot better returns on RE. Nothing more or less to it. How this isn’t obvious to some people is beyond me. Hypotheticals are one thing, but real world to real world this is how it plays out for most people.
    Jack Chambers
    Replied over 2 years ago
    I invested $93K the first year Apple came out and I lost all of it. I had no money to reinvest
    Gregory Hiban Real Estate Agent from Philadelphia, Pennsylvania
    Replied over 2 years ago
    Jack Chambers, did you sell when it went down, or are you just being sarcastic? An initial investment in Apple of $93K would be worth approximately $37 million dollars today with dividends reinvested …