Stock market versus Real Estate Investment

13 Replies

I have been looking at the pros and cons of investing in RE versus placing money into the stock market (example JNJ) and enjoying the dividend and appreciation of that stock. Clearly there are risks in both approaches, but I would appreciate everyone's views. What do you think is the right approach and why?

I own some JNJ, I'm actually waiting for it to tap 94 again, so I can sell and put it in RE.

It's been a wonderful year to be a FA, but I have more faith in RE then the market.

John

Interesting...when I run the numbers, the cash flow is clearly better with renting a house/condo (monthly rent versus annualized dividend), but the appreciation in RE doesn't seem to be as high as what we have seen the last one (1), five (5) and ten (10) years in the market. In addition, the headache of dealing with a tenant concerns me.

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Account Closed ,

I've often struggled with the same question, and I think it really boils down to which particular opportunity is more attractive at any given time. Certainly there are times when the stock market is fully valued and there are still opportunities in real estate, and vice versa. And times when the best thing is to move to cash and sit on the sidelines until sanity returns to an overpriced market. This is what Buffett did in 2007 before the crash...but easier said than done.

Also, it would be foolish to hold a stock until you achieve an arbitrary sell price target if other more favorable opportunities exist in real estate.

Another thing to consider: You may not need to sell your stock to put the money to work in real estate. You could borrow against the shares at 7-8% through a margin account. Just need to be very conservative here to reduce the possibility of a margin call in a big market decline.

-Matt

Bob, as Jeff Brown would say, "my crystal ball is cracked and hasn't come back from the repair shop" or something along those lines. No one can tell you which is the better investment over the long haul. Everyone has their own opinion, but what it comes down to is make a decision, go with that decision and when the situation changes (it will!) in the future, be flexible enough to be able to change with whatever the market (any market) will give you.

If I HAD to be in one or the other, it would be real estate. In the stock market everyone is generally using the same information, and while there are market inefficiencies that create opportunities, there is little that gives small investors an edge over the big players (hedge funds, mutual funds, and private equity).

In real estate, the big players are simply not interested in the $200k investment because it won't even move the needle for their massive funds...it's not worth their time. The small investor can get an information edge by knowing a market street-by-street and by performing the due diligence no one else bothers with.

-Matt

I can tell you I hardly know anything about stocks.

I do know a fair amount about real estate.......... : )

What I do not like about stocks.

It's paper plain and simple. It's not tangible and can be worth 100 a share today and tomorrow be worth using the stock for toilet paper.

Some people say diversify into both. I might eventually hold a few safe plays for long term holds of stable companies but not invest much money. I can tell you my clients that I have their mentality has been this. Over and over again they are telling me that they enjoyed the gains of the past few years in the stock market but see it long term as volatile and want to cash out the gains and put into something with a more reliable income stream where they know what they are getting.

As far as having a headache with a tenant it depends on what you are talking about. If you are cashing out say 30k in stock then yes generally you will be dealing with a residential tenant with a house and all of their life issues for the return.

If on the other hand you are talking about larger amounts of money such as a few hundred k or more you can look into commercial real estate investments. Triple net leasing as well as other types of commercial can be hands off if you structure correctly. Triple net you have no involvement at all. The credit tenant will make the payment on time to preserve credit and borrowing power. I am talking about national companies and not mom and pop type stuff.

Apartment buildings, self storage etc. you can put systems in place where you look over the books online one or two times a month from pm company and that's it with the right size and scale.

Investors have made and lost fortunes in both.

They both have pro's and con's. Stocks are subject to faster swings

but can be bought and sold in a heart beat. RE is tangible and more practicle

( if you buy in the right place) but buying and selling is much slower. I like both for diversity. It annoys me to listen to stock investors say its the best investment and RE investors giving the same argument. Buy what you know, diversify and you should be fine.

I am definitely a big proponent of both investments. Both are good and all things being equal both will build wealth in the long term. Here are a few pros and cons of both.

Stock Market Pros:

Diversification in the stock mkt doesn't require much money at all thanks to mutual funds and index funds. It's hard to diversify in RE as a beginner if your not already independently wealthy.

Investing can consume as little or as much time as you choose. Your efforts aren't needed in operating the co. so the only decision you have to make is which ones to buy. If you go the route of a mutual fund or index fund you don't even need to spend time on this one.

Liquidity. Stocks can be bought and sold almost instantaneously.

Stock Market Cons:

Though in the long run it is safe to expect consistent profit, in the short term there is volatility and money can be lost quickly.

Leverage. For a small investor it's hard to establish much leverage. Though you can trade on margin, it is risky and expensive and even still doesn't offer nearly the same level or leverage that can be created with a 3.5% down payment mortgage.

Cash Flow: Cash flow is a lot more predictable in real estate than the stock mkt

Mkt Efficiency: The stock mkt tends to be more efficient making it harder to find profitable outlier stocks than it would be to find outlier real estate since as someone eluded to earlier you have so many people in the stock mkt all looking at the same thing the mkt tends to be efficient.

Misconception: Stocks are just paper investments and aren't tangible. This is utter non-sense. The deed to your house is a piece of paper too but it represents ownership of a literal house. In like manner a stock symbolizes ownership in a company that usually owns real factories and inventories of real products with real patents, real employees, real customers, real patents, real branding. Legitimate companies are at zero risk of going bankrupt over night.

Moral of the story: Buy both. As many of both as you can. Invest.

Account Closed I don't think either investment is "better". It really comes down to how active you want to be. With stocks, it's easy to buy an index fund and wait. You'll get about 8% over the long term (you can't beat the market long term unless your name is Buffett). With REI, you have the potential for much higher returns, but there will be a lot more work involved, depending on what strategy you use, but any will involve more work than stocks. REI, with careful planning, can also provide some great tax beneifts.

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To me, it depends on how you're trying to start out. If you are starting from zero and only have $100-$200/month to invest, definitely stock market (assuming you already have an emergency fund). You can add that amount each month to no-load mutual funds and be diversified without incurring any expenses. Keep adding monthly until it becomes an amount you can work with for starting real estate. If you have at least enough for a down payment on real estate, I would switch to that. I saved & invested in stocks for years and then in 2008-2009 sold my stocks, which were down at the time, to invest in real estate. From then until now I have invested everything into real estate. I am now at the point where my tenants are going to start fully funding our Roth IRAs this year and going forward. I will be buying mutual funds & ETFs for additional long term retirement funds. My tax advantaged investments are going to be funding my tax free investment accounts-how cool is that!

Irregardless of which you choose to start with, go in knowing they both suck in the beginning. Stock portfolios won't be showing much gains and you will be at the whim of the markets for possible losses right off the bat. Your first real estate purchase isn't that great either as you just have that little bit of rent coming in and expenses going out-with the potential of large expenses occurring. Think about the $100/door goal: you only have $100/month left over after paying for everything. That doesn't add up very fast. I bought two properties for cash to start off. Even with putting rents into a separate account and paying expenses out of that, the balance didn't seem to be moving at all. Then I started buying more properties, rolling all rents received into purchasing and rehabbing more. It was hard to tell how things were going until I got #9 rented last November and have been taking a breather since. The account balance is now going up quite nicely every month! The middle was all a blur so I can't say which rental made things seem worthwhile, but I definitely remember thinking things sucked in the beginning.