I can't say how many times people have told me this once I tell them I work in real estate. I've done my research and I think I have a pretty good comeback especially when they throw articles from CNN like this at me:
http://money.cnn.com/galleries/2007/real_estate/0704/gallery.stocks_v_realestate.moneymag/index.html
Just wanted to see if anyone had a good answer they wanted to share! :D
If someone actually referenced that specific article, my comeback would be the fact that that article ONLY considered market appreciation levels in RE and not all the other factors that could contribute to a higher return.
For instance, in addition to market appreciation, you have forced appreciation, tax advantages, leverage advantages, and the fact that you can buy RE at a discount at acquisition and you can not with stocks. The price you pay for a stock is 100% retail market price that day whereas, in RE, I can buy something that is currently valuated at $100k in it's existing condition and only pay $60k for it. I just got a 40% return on day one - how much did the stock buyer gain that same day?
Lastly, buy and hold is not the only way to make money investing in RE. You can flip as I do and make 100% annual returns very easily if you know how. Show me any stock broker that can consistantly do that year in and year out.
Though I had always wanted to invest in the RE market, I am fairly new to actively investing in RE.
I have however been investing in the stock market for a while.
I love both sides and they are both significantly different. I do pick individual stocks and I have two seperate portfolios, one for buy and hold and one to trade.
My buy and hold has been crushing the S&P ever since I got started, in peaks and troughs. My trade is up and down, I was up 41% in one month and then I was down about 15% in another.
It depends on what a person enjoys doing. I am a technical trader and look at numbers more than anything else if I am trading. I have been on the right side of the market several times (F @2.02, FITB@ 2.69 etc) and I have been on the wrong side of the market also (MT @ 97 ouch). But as long as I am right more often than I am wrong I can live with that.
Just like RE, if someone wants to seriously invest in the stock market, they have to research and find a mentor (No, I don't mean one of the gurus). I was fortunate to have found a person who is an active investor (Buy and Hold) with years of experience who was willing to take me under his wing.
I would not compare the two like someone else mentioned, they are two distinctly different types of investment vehicles.
This is a very complex question... It really depends on the individuals desires, strengths, and weaknesses...
Arguments can be made for both sides. As an investor, I believe in diversification -as a result, I actively invest in both the stock market and real estate.
They are both different types of investments..but I would still argue that many more people generally become wealthy through real estate rather than stocks. The key factor is leverage. Of course there is leverage in the stock market too (options) , but it's much different.
Purchasing re is much more TIME intensive though, dealing with people , contracts, contractors, renters,etc.
Over the long run, your investment returns are going to depend on your expertise and hard work. You can make a lot of money both in stocks and in RE - there are plenty of people who have become billionaires by investing in stocks and real estate.
The investments do have very different characteristics, though. Stocks are much more liquid but also more volatile. I also think that investing in stocks takes greater knowledge and emotional discipline. (That's not to say that being a good RE investor is easy - I am learning this the hard way!)
It would really make more sense to compare a real estate "business", such as a buy and hold operation, to another business that produces cash flow. The only difference is that the real estate is a more tangible asset than the book of business that, for example, a plumbing company might have.
To me it would make more sense to compare a stock market investment to the purchase of art, jewelry, or a collectible with the expectation that it is going to go increase in value.
I have, on several occasions, recommended to newbies that they invest in the stock market instead of RE. This is because they were considering buying a rental where the rent would barely cover the mortgage, and would get a much lower return than the market with much more work.
On the other hand, my properties are in the 1.5-2.1 percent range. I projected that they'll earn an estimated 20.6 percent IRR over the next 30 years, and guestimated the stock market's return will be 9 percent. The roughly $150K or so I've invested at 9 percent should yield about $1.8M after 30 years when I'm ready to retire. However, at 20.6 percent, it will be worth about $34M. Of course, these are estimates with a lot of assumptions, but you get the idea.
@Will & Carlton: Great points. Just wanted to point out that Efficient Market Theory (EMT) assumes all discounts are factored into the price, so the worth of a stock is the market value. Assuming a set period of time (instead of an indefinite period), while it may be a "discount" in hindsight, there not as assured a method to predict if the market will go up and you will make a profit.
However, say for a short sale flip, since the span of time is so limited (avg 30 days) and the projected market value remains more constant than a volatile stock that changes one day to the next, it is more probable that a 30-35% (depending on the area, of course) can be accomplished on a more consistent basis. In contrast to stocks, the worth of a property is not necessarily what a smart investor will pay for it--investors get below market value in order to make a profit.
Real estate, because it is a tangible asset, is more predictable and easily priced while stocks are much more difficult to value (cash flow, product potential, management, etc.)
@Mariah-- Good call. Most beginning investors don't even bother looking at GRM for the area, which is ridiculous. Why do some people think just because they purchase a rental property they'll have automatic profit, especially of the GRM is twice of what it should be when looking at comps?
Having started out in stocks (namely, my 401k and IRA) and real estate (including notes secured by real estate), my thought is this:
The analysis by which the individual investor has to perform is much easier to do and understand when it comes to real estate.
I remember reading about asset allocation (US vs. foreign stocks, small vs. mid- vs. large caps companies, value vs. growth, % dedicated to REITs, precious metals/commodities, TIPS, bonds (short, mid- and long term, high quality vs. junk) and thinking "where do I start?" Every "investor" with a book to sell has a formula or portfolio to sell you. I think there are just as many "portfolios" to mimic as there are fad diets or exercise routines out there.
Of course, I haven't even gone into individual stocks, ETFs, etc.
With real estate, the rules of thumb are pretty simple. It's much easier for me to understand what I'm getting into, where I'm at as soon as escrow closes, and what my exit strategy is.
@Will
From a lender's perspective, a property is worth what it sells for. It doesn't matter what the comps come in at if the property is selling for less. If you buy a property for 60k, it is worth 60k because nobody is willing to pay more for it. If there was someone willing to pay 65k for it, why would someone sell it to you for 60k (unless the property isn't on the open market).
There are also different investment vehicles for the stock market that do allow purchases at values other than market. Options contracts are one such vehicle.
The stock market also allows investors to sell short. Although it is risky, tons of money can be made by betting on a stock going down. This is a strategy that I cannot see a comparison available in RE.
Taking it further, in the FX market (I know that this isn't stock), you can employ leverage (a favorite strategy by many on this board) like nowhere else. Again, it is very risky, but you can leverage your money over 100x in some instances (depending on your investment among other things). Its nice to come to the table with 10k, and be able to invest 1MM worth.
Even in a declining market my house would still sell for more with renovations than without. I still have some control over the value in real estate. I don't have that control in stocks.
I haven't added my $.02 worth yet
Real Estate benefits
1. Principal reduction
2. Cash flow
3. tax benefits due to depreciation
4. Appreciation
All this done with a smuck(lender) loaning you the majority of the money to buy it and another smuck(renter) making the payments for you!! Eventually a free and clear asset worth X dollars.
Stocks benefit
1. Liquidity
Remember, liquidity is the form of matter as it goes down a drain. Rich
I respect that Rich. Haven't seen someone put it quite that way before.
Thanks James.
@James, regarding there being no corollary to selling short in REI, wouldn't you say that savvy investors selling off their properties while they were still appreciating into a bubble be somewhat the same idea? When everyone else is convinced the sky is the limit, they know that the trend can't continue....
I agree with the points you made in regards to real estate being more stable in terms of pricing. But what you gain in price stability you lose in terms of liquidity. As many sellers are finding out in todays real estate market.
You bring up another good point. Real Estate is extremely capital intensive in terms of startup cost. Yes, you can start out wholesaling with maybe a couple of thousand dollars but you can't actually own property unless your are buying extremely cheap rehabs but then you need capital to fix them up, pay taxes on them etc. In a stock once you buy a stock there are no cost or taxes incurred until you sell it at profit. In an FX trade if you buy a currency with a higher interest rate then the one you are selling you can essentially make a small profit for time you hold on to the currency and it appreciates in value, hence the carry trade which was VERY popular prior to 2007 and it still popular to some extent in todays market. But that is subject for die hard currency traders. :lol: :lol:
That is the beauty of beware aware of the different investment vehicles out there. At the end of the day find the investement that suits your risk appetite, time requirements and temperment and then gain as much knowledge and experience as possible to become successful at it. :D
There is one difference that has not been addressed as of yet!!!!!!!
Real Estate is a necessity and will be highly valued by everyone as a place of protection from the elements. It will never go out of style, even if the controlling governments were to fail.
But stocks quality are dependant upon the stability of the company AND the controlling governments (as is money values).
This is the basic reason that Real Estate has produced more millionaires than any other source.
Several responses were directed back at me and I would just like to say this to all of them: I do not intend to actually debate which is better to invest in, stocks or RE, I simply posted my "opinion" of why I personally think RE is the better avenue for ME. In addition to that, every investor is different and every investor has different traits, strehgts, and weaknesses. What is profitable and effective for one, may not be for another.
All in all, I feel RE is a better choice for me because I can buy at a large discount to the current fair market value, can improve that value through improvements, can use leverage and apply it responsibly, can live in it if I had to or needed to, and have found it to be the most profitabel and safest investment for me. That said, it is true RE is less liquid than stocks, but the way I buy, I can fire sale it and still come out ahead.
As to jawsette's last comment, I am not sure if that is the real reason why RE has produced more millionaires, but not sure if it is not either. It is definately my choice and there are no stocks, options, forex trading, or anything elese that can compare to the returns I am producing right now.
I think it might have been mentioned, but I wanted to sum it up concisely--Your stock cannot offer you shelter, and you cannot live in your stock.
Comparatively, if you're a smart investor, there are less unknown variables RE investors face compared to stocks. Companies consistently have IP and leadership that invariably influence stock price beyond an investor's control. Doing due diligence on a home can reveal electrical/structural problems that are documented, giving the investor the decision to fix them or walk away. You can't "fix" existing leadership on an individual basis.
@workerdrone
Buying a stock short is actually selling shares that you don't own. They belong to someone else. So say you sell these shares that you don't own for 100 dollars apiece, with the guarantee of replacing all of those shares at some future time. You are betting on the stock going down. Say it drops to 70 dollars a share, you buy it at that price, and give it back to the guy who's shares you sold to replace his shares. You make the spread of 30 dollars per share.
I don't see anything like that in RE.