I’m new to real estate investing and was hoping some of you would share your thoughts on why it is better to invest in real estate over the stock market.
So far, I’ve only invested in stocks and the idea of investing in real estate seems somewhat risky to me.
- largest RE expense (principle & interest) is typically fixed for long duration (often 30 years). This virtually guarantees increased cash flow.
- equity pay down is guaranteed. The equity pay down in many RE classes (residential, storage, hotel/motel, office space, industrial, etc) ispaidby the tenant.
- there are ways to never pay tax on gains (1031, owe until death, etc)
- cost segregation can in effect have RE acquired at no cost
- sweat equity can produce additional return. If part of BRRRR can acquire RE at no cost
My thoughts for stocks
- stocks are more passive than residential RE
- lots of diversification options in stocks
- more liquid with lower liquidation costs
Note owning both RE and stocks is a great option. I have made a lot of money in both. I have made more in RE, but it required more work.
I feel like with the stock market you can at least buy something like the s&p 500 which gives you some diversification. With real estate, you have to make sure each property is functioning at full capacity or you’ll be losing money.
I feel like with the stock market you can at least buy something like the s&p 500 which gives you some diversification. With real estate, you have to make sure each property is functioning at full capacity or you’ll be losing money.
You can analyze properties and be pretty sure (as long as you don't rationalize bad deals into good ones) what your numbers will be. The stock market rises and drops daily (hourly). RE is much more stable. You can't leverage the SM, you can with RE. That's the number one reason. When you buy a stock worth $100k, you pay 100k. When you take that same 100k and buy RE, you can buy $500k worth of RE value. When that 100k value in R=the SM goes up 15%, your stock is worth 115k. When that 500k RE value goes up only 5%, you now have 525k in value. That 5% appreciation in RE is better than the 15% in the SM, starting with the same 100k. There's more, but what I just wrote should be enough.
- largest RE expense (principle & interest) is typically fixed for long duration (often 30 years). This virtually guarantees increased cash flow.
- equity pay down is guaranteed. The equity pay down in many RE classes (residential, storage, hotel/motel, office space, industrial, etc) ispaidby the tenant.
- there are ways to never pay tax on gains (1031, owe until death, etc)
- cost segregation can in effect have RE acquired at no cost
- sweat equity can produce additional return. If part of BRRRR can acquire RE at no cost
My thoughts for stocks
- stocks are more passive than residential RE
- lots of diversification options in stocks
- more liquid with lower liquidation costs
Note owning both RE and stocks is a great option. I have made a lot of money in both. I have made more in RE, but it required more work.
I’m new to real estate investing and was hoping some of you would share your thoughts on why it is better to invest in real estate over the stock market.
So far, I’ve only invested in stocks and the idea of investing in real estate seems somewhat risky to me.
With this being a real estate forum, of course there will be bias as it relates to the stock market vs. real estate. But the truth of the matter is you should be in both. It is not "one over the other" but its more about having a diverse portfolio. Its like having a jelly sandwich or peanut butter sandwich. We all know the best sandwich is peanut butter and jelly (or if you are from the northeast its a fluffernutter).
To answer your question question about real estate being risky, it is. Do not fall for the "its easy" responses from people and you can wave a magic wand and go out and invest in real estate (you can but will you make money). Real estate just like stocks and other strategies requires intelligence and a plan. Without it, chances are it could cost you money.
The cool thing is that you can do both. My whole life I have invested in stocks and real estate. I was more aggressive with stocks when I was younger, but now leave half(ish) in index funds and then use the other half for real estate investing. I also invest in startups. You don't have to balance them against each other. You use them to diversify your overall wealth profile.
In regard to being risky, that's a bit scared to me. Real estate you can buy and it will appreciate without you doing anything or you can add value yourself and get a windfall. You have control. Stocks you have no control at all over your own asset.
I'm plenty deep in that. I added RE into the portfolio as a way to really stash cash; there's an inflection point of a lack of homebuilding, laws against it, a devaluing dollar, and population not necessarily growth but saturation. Also owning RE you have way more control and inherently less risk by that. I'm not saying riskless, but full control usually means less risk.
Physical assets do come with their lists of headaches. Honestly, they do not bother me much at all. I got way bigger fish to fry. For others, and most of the population as in well over 2/3rds, they cannot handle it. That is perfectly fine, stick to REI exposure via private lending, O etf, maybe syndications, and be largely invested in domestic & intl equities.
Either strategy can work. I began considering real estate after the 2008 market downturn, and started investing several years later. I like both, but real estate allows you to control your investments much more personally. Most of us buy funds for investments. This means you have an investment manager of the fund buying stocks that are managed by managing teams. Your investment is not in your control. Real estate allows you to be directly responsible for your gains and losses. Make a good choice, reap the rewards. Make a bad choice, pay the price.
It all comes down to preferences. To me for example, the stock market is much more risky than real estate. I would diversify and decide where you want to put your money. Same as you wouldn't only invest in one stock (or the stock market), diversifying allows you a bit of a safety net in case one goes down.
With real estate a lot of people focus on cash flow, but remember tenants are paying down your mortgage for you and helping you build equity and over time (eg 5-10 years) your house will also appreciate in value.
The power of leverage will make you very wealthy in a much shorter time period with RE. I’m a fan of the SM, but tax free leveraged investing with RE is clearly much better over time.
I also do both. And since I don't know anything about you, I wouldn't try to convince you of anything. If you want to invest in real estate, that's fine. If you don't, that's fine too.
Real estate presents options for more time, more hands-on, gnarlier stuff. That's what lets you get better returns. I've done a few BRRRRs where I got all my capital back and my tenants are now paying down the mortgage.
But would I tell a person I don't know to find and buy a severely distressed property, take out a hard money loan to buy it, perform a monster rehab, and then refinance and hope for the best? I would not. But again, that kind of thing is where the returns are. Can't do that with stocks.
Kyle, I do both. My portfolio is heavily weighted towards real estate, largely because of California appreciation. I'm now putting a lot more into public markets (index funds, stocks, Master Limited Partnerships, Business Development Companies, bonds). You can also own REITs, which are shares of real estate (ex: apartment complexes, self storage, etc). This is what I'm doing, not advising anyone to do this.
Pros of RE:
- leverage (can house hack and put 3.5% down FHA, 5% or 10% down conventional loan if you live in one of the units, 2 to 4 unit or buy single family, live in it and rent out each room and buy a $500,000 or $1 million asset). Can't buy $500k worth of stock (for most people) at one time.
- tax benefits, can 1031 exchange (kick the capital gains tax can down the road for years until you die)
- generational wealth and step up basis (if you die, the value of the property is stepped up to current market value for your heirs. Ex: if I bought a CA property in 2008 for $200,000. If I die in 2024 and it's worth $2 million and my kids can keep the property, live in it or rent it out or they sell it for $2.5 million in 2026. They pay capital gains tax on the difference between $2.5 million and $2 million, not what I purchased the home for at $200,000). I'm not sure if there's a step up basis with liquid forms of investment.
- more control with selecting properties, property management, can value add with bathrooms, updated kitchen, adding an ADU (more of West Coast thing).
Cons of RE:
- it takes a lot more work to get good at analyzing deals and you will make mistakes that may question your sanity. Some investors decide to push forward and others decide RE isn't for them - it's entirely individual, no right answer. And it's perfectly fine whatever decision someone makes. The market in 2023 to 2024 is a lot more challenging than buying in 2008 (or going back before that) to 2021.
- very illiquid, had buyers remorse with Class C property (Indianapolis). Takes a lot more work to course correct and stop the money bleed than selling off a stock the next day that I changed my mind on. Do I proceed with continuing to rent it out and sell later, or sell now? I chose the 2nd choice since it was vacant.
- if buying out of state, this brings about more risk since you're not there on site. This is even more so if you attempt to do a major renovation from far away. If you pick a random OOS city to buy in, based on numbers an agent or wholesaler is telling you or "it's a great market to invest in" and don't know the area, prepare to have lots of cash reserves and to lose money especially Class C.
- what's a great market to invest in for one person isn't for another investor. For me it's CA since I live here but the prices are extremely high for a new investor. I've had the most headaches with my Indiana properties since I'm 2000 miles away. Other people love OOS investing and do well with it.
My own personal experience is that a huge stressor has been lifted since I've stopped spending hours looking for and analyzing deals and my index funds/stocks are doing well (just hope it doesn't decline in value when retire from my W2 job). In my circle of family and friends, I will say that anyone that owns RE especially in CA has over at least several million in networth and they weren't high W2 earners (no surgeons or attorneys, but librarians, accountants, etc) but this takes years 15 to 30+ years.. The few lucky were able to scale quickly, meaning 7 to 10 years.
Real estate is a great investment because of the tax deductions, making it so you hardly pay tax on your revenue. Then again, I have had leaky roofs and tenants who clog sewer pipes which all take away from the bottom line.
That said, I think what has gone unsaid here is the location where a person lives. I live in Northern New Jersey and the properties are really expensive, taxes are high, insurance premiums are up, and despite the recent action by the Fed, interest rates are high.
You cannot make money here buying and renting single-family homes like you can in parts of the midwest or the south.
Any decent multi-families that come on the market are snapped up, and they, too, are hard to make economical.
I bought a couple multi-families in great areas back in 2017 and 2018 and they have increased in value by half and generate monthly income. But I just do not see the opening for how I can make a profit buying another multifamily that makes it worth it considering the headaches and work of being a landlord.
Real estate, you can see feel touch, stocks are hypothitcal instruments thst you dont even own, see the 2008 Lehman Bros collapse, all the indovidual stock owners lost everything.
My 2 cents. Don't do real estate over the Stock market. Instead, diversify. Instead of 100% stock may be put 20% in real estate. As everyone correctly says Real estate is 4X leveraged return but you pay 5% per year to stay invested. (My market has 2.5% property tax and I am assuming 2.5% for maintenance) and a 6+% APY for an investment property. If you run the number most of the properties are not going to beat the S&P500 return in the next 30 years. Please run the numbers yourself before deciding to invest. If your estimated rent from a property pays off the Mortgage + Maintenance + Property Tax + Insurance. It is a good deal.
It seems that you are just talking about cashflow though. Wouldn't we have to consider the loan pay down and appreciation of your properties over time as well? This would all be included on your ROI.
Investing in real estate can get you stable cash flow through rental income, appreciation, tax benefits. Stock market is liable to change rapidly and high risk.
It seems that you are just talking about cashflow though. Wouldn't we have to consider the loan pay down and appreciation of your properties over time as well? This would all be included on your ROI.
I said real estate is 4X leveraged investment (assuming a down payment of 25%). So if the property gives 6% annualized over 30 year. It's effective rate is 24%. This is true if the rent pays for maintenance, taxes & Interest. If the rent pays for maintenance, taxes, interest and some part of mortgage then it's better than 24%. If the rent pays for maintenance, taxes and you have to pay for mortgage and interest the return will be close to 6%. Property taxes and Maintenance are not fixed cost they increase with time like rent. So In my calculations I expect all three to rise.
I think we were saying the same thing. We have to include everything to calculate the ROI
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