REI vs Stock Market
Los Angeles, CA · Member since 2017 · 24 posts · 6 votes
Hey guys, obviously I'm new to REI and trying to understand REI vs investing in the stock market. I have been focusing on SFR to buy and hold and I don't see the returns I do in my stock market portfolio (up 24% YTD). The S&P 500 Index is up 16.23% this year and up 100% in the past 6 years. What am I missing in regards to the BRRRR strategy? The properties I see have a cash flow of $100-$200 for a $150,000 property and I dont see the benefit vs risk. Thanks for any insight or suggested reading (in addition to Brandon's book on rental property investing).
@Desmond Price - you bring up a great point. The returns on the market this past year have been incredible. However, seeing 16%-25% returns on the market is not going to continue. Seeing those returns in real estate are absolutely possible year over year as you have the 4 wealth generators working for you:
1. Cash Flow - Receiving rent from your tenants irregardless of whether the market goes up and down.
2. Appreciation - While year over year, housing prices may fluctuate, in the long term, they will increase. Companies could go out of business leaving you with little or no return. Not to mention, you can always force appreciation into your property. You don't have that type of control in the stock market.
3. Loan Paydown/Leverage - Your tenants are paying down your mortgage AND you can buy a property with as little as 3% down (0% if you're a veteran). That's a very high (or infinite) cash on cash return.
4. Tax Advantages - Uncle Sam rewards homeowners with tax breaks. I am not a CPA, but I know that one of the biggest benefits is being able to deduct depreciation. So your property could actually be cashflowing you month over month, but to the government, it shows that you are losing money. So you will not be taxed on your gains. Those losses carry over to other forms of income as well.
Has buying below market value been mentioned yet? I've never been able to do that in the stock market. You may be able to buy something on a dip, but that's not special to you or your deal. A motivated seller did not call you and beg you to buy their stock because they were behind on their payments or tired of picking up after or evicting another crummy tenant. No instant equity in stocks.
What about control? If the N Koreans practice nuclear stuff or a catastrophe happens somewhere or there is geo-political unrest, my RE doesn't care. The market can panic, though. Think England exiting the euro, Greece bankrupt, terrorism. You have no say in what the stock market does or doesn't do. Trump could tweet something tomorrow that sends your portfolio down double digits.
Then there's leverage, multiple exit strategies, tax benefits and a big *** balance sheet of properties you can pass down to your heirs at the stepped-up basis. Tax-free. Never heard of that with securities- Uncle Sam gets his. (okay- except with a ROTH)
I have stocks/mf's/etf's as well, but hands-down RE kicks the tail out of my paper securities over time. I used to be all in the stock market. Now I'm 94/6 in RE, yet having started REI about 12 yrs later.
There got to be a balance. RE is more lucrative and hard to unload. You can lose all the saving but when you have foreclosures your credit went to hell to. Many clients have a condo or rental as diversification and they are sophisticated enough to do well. Best is actually start one's IRA very early. The law of compounding interest does magic things. Just put 5500 early you can live on based on that $5500. With RE you need to be more financially secured and the fixed assets can be problematic. Those who take big risk fall badly. Assuming you bought a property years ago, it was in a good neighborhood. The demographics, road changes you wish you had unloaded earlier.
Sure! There are tons of people buying Stocks below Market!
Unfortunately, most of it is illegal like that Stock Option Back Dating scam or Insider trading or when an Investment Firm gives away pre-IPO shares to their favorite clients at ridiculous prices.
There is also those fake news to bring the stock price down to get in. Very typical scam.
I'm sure there must be some legitimate way to buy below market!
haha... I was attempting some humor above.
I target Stocks that had good potential Free Cash Flow, Enterprise Value / EBITDA and ROE growth. Stock Prices don't move up if there isn't Equity Growth. Therefore, I only buy properties with Future Value Growth.
I applied the same principles to Real Estate. Since I knew that in certain neighborhoods in Brooklyn will have great Cash Flow Growth, I targeted those properties.
It paid off really well.
I 100% agree with @Mike Dymski. Where in the stock market can you beat the following risk/reward scenario assuming that you can BRRR:
-Get ALL of your money back (and then some in certain circumstances)
-Having a cash flowing, rehabbed property with an infinite return
-That you're in control of
Not saying it doesn't exist, but I'm unaware of how to do that in stocks.
How about a comparison of lets say a $500,000 REIT portfolio vs a $500,000 of actual real estate holdings ?
I compare the two all the time.
$_____ for dividends = $_____ monthly cashflow
vs
$_____ for down payment = $_____ monthly cash flow
I often find the dividends don't return as much, but are easy as a click of the button and require no management. I still love my dividend stocks!
The benefit I see in real estate is using leverage and having the tenant payoff the debt. Think of it as a 401k where you're employer matches the contribution.
In the case of real estate you put forward the down payment (25%) and the tenant puts in the rest (75%). That's better than the 401k your employer applies.
I started buying real estate almost a year ago. I've come to the conclusion that it is a long game, not so much short term cash flow...
I have been considering the strategy as follows:
Short Term:
Medium Term:
Long Term:
As time goes on more cash flow is essentially "unlocked" because the tenants eliminated the good debt.
I think everyone is up 100% in the past 6 years, and that's great. But, I think leverage is the biggest factor in wealth building which real estate is perfect for. Real estate also lags more when crashes/corrections come.
@Desmond Price I think most people here are giving you some quality answers. Some of this, however, does depend on your income level. With real estate cash-flow you can usually end up with that being tax-free thanks to deprecation and the mortgage interest deduction. If you're in a high marginal tax bracket that "extra dollar" of cash-flow gets taxed at 10%+ just in California. Add in the pesky federal tax rate that you could be paying 46%+. So if you look at a $150K property with $37,500 down (25%) and say it cash-flows $200 per month you end up with $2,400 annually. That about 6.5% but if you look at it through the lens of post-tax dollars you effectively have to "earn" $4,444 to net that $2,400 at a 46% tax bracket. Now you have an 11.8% return and the tenants are paying down your mortgage principal and you have the potential for appreciation. And if rents to nudge up over time a large portion of those small increases do hit your bottom line. So that $200 per month turns into $210, then $220, then $250 so if you're in it for the long haul you can look back at the ROI on the original investment and it looks better and better.
Anyway, this is a way to look at REI is a favorable light. There are a ton of risks that most people don't like the bring up. You can end up with a mortgage debt that's more than the property is worth. That doesn't happen with stocks unless you start using options. But a lot of the risks have parallels. A company can hire a bad CEO just like you can (or your PM can) choose a bad tenant. There's an element of cyclicality to real estate and the stock market. A major employer can leave down in real estate and in the stock market a company can lose a major contract or have earnings compressed because oil prices rise. There's no free lunch, there's risk in everything, and I have money in both REI and the stock market.
The biggest thing that makes real estate better than stocks IMO is that you can leverage yourself. We'v been strategic, and leveraged ourselves through the BRRRR process, and are now looking for our 6th property in under 2 years-- sure as heck can't do that with stocks! It's also a matter of perspective.. I look at the $30K loan (again-- leverage OPM!) and that will be making me $1300/mo or $15K/year-- what stock is going to give me that kind of a return-- on borrowed money? Also, depending on your strategy, you really can't lose money, we buy at rock bottom prices, fix them up and rent them out--- the housing market can crash and our worst case scenario is a breaking even/small loss-- try comparing that to a small cap emerging market! Also, a house is a very valuable asset IMO because everyone needs a home! You will always be able to rent your home, regardless of the economy. It's all in your business plan and strategy. I will say, a lot of people fail at real estate because they think it's just a cute "collect a check" game... definitely not that!!
I will say, it also depends on the type of the type of investment you want.. if you want passive money, stick to the stock market. Real estate is A LOT, and I do mean A LOT of work, it's time/money/stress, and a lot of liability-- not for the faint at heart. Did I mention it's really hard work??
Diversify, diversify, diversify.
@Mo Farraj I'm a little confused. How can you say that stock is the most risky and dangerous type of investment? For someone "working in the industry", that's a pretty dangerous mentality to have. Also, not knowing that Toys-R-Us is a private company that isn't publically traded also brings up a red flag.
And yes, a lot of people saw Toys-R-us going bankrupt. Toys-R-Us has been shuttering its locations for at least 20 years, and have lost huge market share to amazon and jet. (to name a few). Anyone investing in Big Box stores at this point in the game are setup for a loss.
Now, if Intel, IBM, Apple, Microsoft, etc go bankrupt then sure you have a point.
People lose wealth in the stock market because they either don't pay attention, don't do research, or don't diversify. If you do all three, you will, more times than not, do well. The same can be said for Real Estate.
@Michael Johnson that is mostly true. If the property goes up 6% then sure that's a 30% return. But that's not your full return on the property. Let's analyze it. We'll analyze over 5 years. Assuming 6% return per year on the stock as well with a 3% dividend. Which are pretty conservative numbers.
Stock first because it's the easiest:
Purchase start: $30,000
Trading fee ($7).
Dividend (3%) = $900 a year or 4500 over 5 years.
6% appreciation over 5 years
your investment is now worth:
=FV(0.06,5,0,-29993,1) = $40,137.40 - $7 for selling so $40,130.4
You've made: ($10,140.4 + dividends) or $14,640.4
So, to come out better, you need to make at least $14,640.
Now Rental:
Purchase price: $150,000
Closing Costs: $4000
Cash Flow: $200
Cash Flow for 5 years ($12,000)
Sell Price: $159,000 (6% appreciation)
Mortgage amount after 5 years (assuming 5% 30 year mortgage): $110,378.75
After RE Commission of 6%: your appreciation is wiped out, so you still sell for about 150K
Cost Basis with depreciation recapture: 130K ($4300/Year)
Taxes owed on Deprecation recapture: 5K
$150000-110.378.75 = $39,621.25 - Taxes for depreciation = $34,621.25 - original amount = 4,621.25 + Cash Flow = $16,621.25
I know my math above is not perfect, but it's to illustrate a point.
So, basically, if you replace absolutely nothing in the property and have no major CapEx expense, then you will come out ahead by about 2K. That also assumes no long vacancies, and no evictions.
The biggest knocks on ETFs and Mutual funds are they aren't sexy and they're not fun to talk about at a dinner party.
More importantly though, stocks offer an avenue for every single market. Just like Real Estate, you can profit in a bull, a bear, or a neutral market. You can get in and out in minutes and not months. You have the flexibility to completely change your strategy daily. You can get involved in stock with a Credit Score of 0 and as little as $10 if you wanted.
Using my example above. What if you needed that money for an unforeseen medical bill or other big ticket expense? Could you liquidate your property within a day and have cash within 3-4? In stocks you can. What if the RE market starts its correction and prices start dropping. Can you weather vacancies and evictions and loss of equity until it comes back up again?
With stocks, unless you're trading on margin and doing speculations trading, the most you can lose is the money you put in. In Real Estate, you can be foreclosed, have judgements levied, and your near-term future can be ruined. Not to mention you can be sued and be forced to file bankruptcy. In my field of work if I had a foreclosure or bankrupty on my record, I would lose my job.
I'm not saying one is bad and the other is good. But there should be a place in everyone's portfolio for both stock and real estate. Solely focusing on one opens you up to too much risk.
I would love it if you could comment on my thread about investing in mutual funds in 401k/IRAs.
https://www.biggerpockets.com/forums/62/topics/493267-401k-scam-or-not-taking-the-plunge
How about a comparison of lets say a $500,000 REIT portfolio vs a $500,000 of actual real estate holdings ?
Good analogy to amplify the power of RE leverage.
I bought a (now) $500k 10-unit apt building in 2003 with $25k down. It's paid off as of last month.
I can pretty easily see that my ROE of about 7% is less than a REIT I have- NRZ- at about 12%.
But.... go back to 2003 and put $25k in each - My 10 unit, and a REIT. Which is worth $500k now and paid sweet dividends ie cash-flow (not reinvested and not really even taxed) along the way? Which is still worth less than $100k?
In your example how did one come to amass the $500k to invest in the REIT in the first place? Years of working 3 jobs and living in a tent.
That's the beauty of leverage, not to mention the tax benefits during ownership and at exit. If you sell your REIT, you are going to pay. Given a dividend? You pay. If I 1031 my apt bld I can defer taxes forever or just let my kids have it at death tax free.
Hey guys, obviously I'm new to REI and trying to understand REI vs investing in the stock market. I have been focusing on SFR to buy and hold and I don't see the returns I do in my stock market portfolio (up 24% YTD). The S&P 500 Index is up 16.23% this year and up 100% in the past 6 years. What am I missing in regards to the BRRRR strategy? The properties I see have a cash flow of $100-$200 for a $150,000 property and I dont see the benefit vs risk. Thanks for any insight or suggested reading (in addition to Brandon's book on rental property investing).
Here's my case for real estate buy and hold: https://www.biggerpockets.com/renewsblog/real-estate-investors-vs-stock-investors/
@Account Closed I'm not a turnkey provider. I don't sell properties to anyone or have any properties to sell to anyone. I just tell people who I've bought my own turnkeys through, who I liked, and what anyone does from there is up to them. If I'm ever answering a turnkey post, I'm answering from the perspective of my experiences buying and owning turnkeys.
@Account Closed I'm not a turnkey provider. I don't sell properties to anyone or have any properties to sell to anyone. I just tell people who I've bought my own turnkeys through, who I liked, and what anyone does from there is up to them. If I'm ever answering a turnkey post, I'm answering from the perspective of my experiences buying and owning turnkeys.
Are you not the founder of Hipster Investments? The front page of your homepage "What do we do? We offer turnkey rental properties" and you have a current deal section lists many properties for sale.
"If you are interested in this property or seeing others like it, contact Melissa at (hipster investments email address) Take the plunge: you won’t regret it!"
http://hipsterinvestments.com/whats-available-wednesday-philadelphia-13/
This is a real estate investment website, so don't expect many people to argue stocks are a better investment. The problem I have with the stock market is the games that investment advisers play with numbers. For example, if you were to meet with an adviser today, they will show you funds that have 20%+ average returns over the last five years. What they don't share with you is that when a fund starts under-performing, it gets closed. Open a new fund and they can magically erase the past.
I think you can do well in the market if you pick individual stocks, but you really have to know what you are doing. Real estate is easier for me to understand and predict, but others may do better in the market.
You can make money in both. It really is about whichever you know will reduce your risk and pay you the most. Risk tolerance and awareness of the market in stocks or real estate have a lot to do with it. End goals are very important as well.
This is a real estate investment website, so don't expect many people to argue stocks are a better investment. The problem I have with the stock market is the games that investment advisers play with numbers. For example, if you were to meet with an adviser today, they will show you funds that have 20%+ average returns over the last five years. What they don't share with you is that when a fund starts under-performing, it gets closed. Open a new fund and they can magically erase the past.
I think you can do well in the market if you pick individual stocks, but you really have to know what you are doing. Real estate is easier for me to understand and predict, but others may do better in the market.
This is the key. Go to a stock forum and people will argue for stocks. Here people will defend RE. On the stocks forum they will tell you all about how their uncle bought a 4units and sold it at a loss because he could not stand going there once a month at 3 am to unclog the toilet.
They are doing it right, they dont know **** about RE, they know stocks, so they invest there.
In reality his uncle bought at market value because his agent told him it was a good deal and he isn't making any cashflow, doesn't have a repair budget and the whole situation is just a nightmare so he cut his losses. Selective memory is a big deal. Everyone has different experiences and opinions and sometimes just a little bit of luck (or badluck) changes a whole situation.
That being said, I don't know much about stocks, I know 10% return is killing it... and to be fair I could wipe my *** with a 10% ROI. The househack I have right now would take 132k capital in stocks to give me the same annualized 10% returns. It cost me around 18k.
My experience and luck has been very positive, I couldve easily been that uncle.
The problem/challenge is actually finding properties that make sense, its damn easy to burn yourself.
Some food for thought. If you had invested in an index fund at any point during the past, you would be positive today without doing anything. Now if you had purchased rental property, this definitely cannot be said. You could have easily lost money and definitely wasted a lot of time. There are many examples of properties being sold for the exact same amount or less after a 5, 10, 15 year+ period. Of course this doesn't include all the fees, maintenance, property taxes, etc. that the investor would have incurred. There are so many ways to lose money in RE and you really need to put in the work if you want to make money.
The problem with these topics is that it's really an apples and oranges comparison. I would say for the average joe, it's better to stick with index funds with dollar cost averaging. Pretty hard to lose over the long haul (even statistically impossible).
@Paul G. Thank you for the comment, I think you should firstly take a step back here and not make too many assumptions. I've traded over 7 years now, you believing I don't know Toys-R-Us is private is absurd. I apologize if I wasn't clear in saying private investors, but I thought you were a bit out of line here. Working in the industry now, I have learned about every single thing that can wrong in your investment, and trust me - some things are just beyond your control. My point here was, random news flashes by me multiple times every day. These random news event can make the market swing at uncontrollable levels. Compare the types of things that can effect your stock investment, as compared to what can effect your property investment, and imo stock investments are much riskier. Algorithms have taken over stock trading, even watching the news cant help you from these millisecond drops and changes in stock prices.
@Desmond Price - you bring up a great point. The returns on the market this past year have been incredible. However, seeing 16%-25% returns on the market is not going to continue. Seeing those returns in real estate are absolutely possible year over year as you have the 4 wealth generators working for you:
1. Cash Flow - Receiving rent from your tenants irregardless of whether the market goes up and down.
2. Appreciation - While year over year, housing prices may fluctuate, in the long term, they will increase. Companies could go out of business leaving you with little or no return. Not to mention, you can always force appreciation into your property. You don't have that type of control in the stock market.
3. Loan Paydown/Leverage - Your tenants are paying down your mortgage AND you can buy a property with as little as 3% down (0% if you're a veteran). That's a very high (or infinite) cash on cash return.
4. Tax Advantages - Uncle Sam rewards homeowners with tax breaks. I am not a CPA, but I know that one of the biggest benefits is being able to deduct depreciation. So your property could actually be cashflowing you month over month, but to the government, it shows that you are losing money. So you will not be taxed on your gains. Those losses carry over to other forms of income as well.
All great points above. In addition, let's say you want to have $100k passively coming in per year. Most stock investors will say then you need 25x (4% rule) what you would like to see come in passively. In this case, $2.5 million invested in stocks to throw off $100,000/year after taxes. However, I can tell you that in my market at least, if I have $2,500,000 invested at 22-32% COC returns (what I am currently getting), I will be making $550,000-$800,000 after taxes.
Just be careful when you calculate the difference in earnings. Earnings in the stock market are pretty exact. You put in $1,000, make $100, you have a 10$ return, no fuss no muss. With real estate, you could have the same "earnings", but you also have mortgage paydown (equity), appreciation, fluctuations in cash flow, etc. Plus, all earnings in the stock market are taxable and with RE typically a portion (if not most) can be tax-free. It's harder to compare because of things like that. IRR calculations are probably the most accurate to get to that number to compare, but even then appreciation can seriously change the landscape over time.
@Account Closed Yep. We offer referrals, but we aren't a provider nor do we sell them. Glad you pointed that out though, hadn't thought about the wording. I might change it to offering "turnkey rental property options", or something like that. Hmm...will have to ponder. Thanks for pointing it out!
Great thread, as I have wondered the same things at times. The calculations really help to paint a picture.
@Paul G. do your calculations figure in investment management fees? I pay 1%.
I am just starting in REI, and am bookmarking a small portion of my funds just for that, but I still feel like I want to keep the bulk of my funds in stocks until/unless I see the results of real estate.