Stocks vs. Real Estate

26 Replies

Excerpt from a post I made on the stock investing forum "The Motley Fool." The audience is stock investors who are equally passionate and successful in stocks as the BP community is in REI. Many of them think going all in on REI is as silly as going all in on stocks would be to Brandon Turner (relax Brandon, it's a joke!)

My goal is to discuss the powerful polarization of investors towards either stocks or real estate. Post begins below. Mind you this was posted behind enemy lines in the forums of the Motley Fool, the stock investing equivalent of BP. Enjoy.

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Below is the start of a saga about Real Estate Investing - wrought with accusations... Against who you might ask? Everybody that is successful in stocks. What a stereotype! Wow! Perhaps I'm biting off more than I can chew, but here goes.


Speaking of buying property, I've noticed something on the Motley Fool boards that has surprised me. The more I read about stock investing, the more I observe that many authors of stock investing articles are utterly averse to real estate investing. I'm reading that houses are often liabilities rather than assets, that they are an anchor that takes away from quality of life and peace of mind, that they don't yield returns that can compare to the equities market.

I've recently read and listened to several real estate books as well as hundreds of forum posts, articles, and podcasts from Bigger Pockets (A wildly successful club - the Motley Fool doppelganger in Real Estate), and finally bought my first house at the ripe age of 22. I myself could hardly hope to be called a "real estate investor" at this point, but it's a start.

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I think a majority of Motley Fool investors would agree that REI is a way to diversify and hedge your portfolio against the equities market, but not much more than that. Most don't seem to really consider it an investment, or at least not a worthwhile one.

Interestingly, our friends at Bigger Pockets have a reciprocal view. The gospel over at Bigger Pockets is that REI is the number one way to achieve financial freedom and long-term wealth. Stocks are nice too I guess, but they are a mere afterthought. Why tie up all that capital in a Roth IRA when you could be using it to buy up, rehab, rent out, and refinance properties, one after another? Real estate has magical properties of leverage, creativity, and scale-ability that you just won't find in stock investing.

Real estate is wildly complex and scary if you don't know what you're doing. Then again, so is stock investing. There are many smart, successful investors on both sides of the aisle. I believe that in a sense, which ever type of investment you think is better, will be. Perhaps it's a self-fulfilling prophecy. Both types of investing require a lifetime of self-education. Whichever class of assets you are better at investing in will probably be a better investment for you. Simple as that.

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In summary, there seems to be a powerful polarization among investors toward either stocks or real estate. I haven't met many people that are passionate/successful with BOTH classes of investments, but perhaps I will meet some investors here who match that description after all. 


Caleb Teachout
Stay Scheming

@Caleb Teachout While It’s easy to have money in both (I do) it’s hard to be “active” in both. I don’t try to “pick stocks” but rather diversify with mutual funds, look at age-specific allocation recommendations, etc. Like a boring ol’ investment automaton. The portfolio grows and shrinks with the general economy and indices.

Real estate is more active for me: pick a market, pick an apartment building, make an offer, get a mortgage, etc. It’s narrow and focused, like picking a single stock but being told it costs a ton to sell. I don’t track the entire US real estate market, just a couple of sectors. And it’s similar to active traders that likely have segments they play in. s

Just like real estate you have growth vs. dividend stocks just like appreciation vs. cash-flow. You’ll hear radio pitches from gurus teaching no-money down real estate and the next commercial break it’s someone pitching day-trading. There are way more parallels to draw than anyone would like :)

But I have money in both and I’ll keep money in both. The only difference is that I steer away from REITs, home builders, home improvement stores, etc. when possible in the stock market. I figure I have enough exposure to that world with my real estate.

@Caleb Teachout  I know that if I try to pick stocks, I will have a very minimal or even negative return on my time.  So I invest in low-fee index funds.  I'm OK with being "average" in the stock market because that's probably the best that I can do in the long run.

With real estate, it's a different story.  I believe that it is easier for me to beat the benchmark (I personally use the S&P 500) with a diversified real estate portfolio of properties that I "picked" than it is with a diversified portfolio of various stocks I picked, especially considering taxes.

Also, in my opinion, past performance is a better indicator of future performance for an individual property than it is for an individual stock (of course you have to take into account the real estate cycle).

And future returns are not guaranteed in real estate.  A local economy might collapse because its major industry had been disrupted by a new technology (but hopefully one wouldn't invest in one-trick economies).  Or your building may have a "surprise" issue that costs you tens of thousands of dollars to fix (but hopefully one has healthy cash reserves to cover these issues when they pop up).

Also, past performance itself is easier to see transparently with a rental property than with a publicly-traded company.

Even as a CPA, sometimes when I read the financial statements and annual reports of publicly-traded companies, I'm left wondering what kind of tricks they're playing on the inside to make themselves look better than they really are.

But with a property, the due diligence is a lot more straightforward.

But of course all these advantages of property come at the cost of investing a significantly larger portion of your wealth into a single, illiquid asset than you would if you wanted to invest in a single, liquid stock.

Anyway I rambled a bit there, but my personal philosophy is that both equities and real estate are incredible wealth-building tools, but similar to @Andrew Johnson I am much more "active" in real estate.

  1. Real estate is not wildly complex and scary...it's income and expenses
  2. Stock investing does not require a lifetime of education
  3. Passive stock investing is not comparable to active real estate investing
  4. Most of the investing discussed on BP is a small minority of the real estate marketplace
  5. The vocal minority is not representative of the masses

Investing is not a one-size-fits-all activity.  Our goals and opportunities are all different.

"Fun factor" weighs heavily on my life decisions - and I've made and lost money in both stocks and real estate.  

I have tons and tons, seriously ridiculous amounts of fun, and I have way more control of the situation doing real estate deals, and have made a great living at it - but I've had some sleepless nights here and there.

Stocks... I worked way harder and made tons LESS money, lost countless nights of sleep, had really very little control, and really didn't have much fun at all playing stocks.  Actually I think I aged about 15 days for every 8 hours of market activity.

I do have to give the disclaimer that I scored 1 phenomenal stock deal in the late 90's, when I was a younger and wilder lad, got me pretty far through my first house, so I really can't bag on either.

Blair Poelman, Broker in Utah (#9299425)
Originally posted by @Andrew Johnson :

Caleb Teachout While It’s easy to have money in both (I do) it’s hard to be “active” in both. I don’t try to “pick stocks” but rather diversify with mutual funds, look at age-specific allocation recommendations, etc. Like a boring ol’ investment automaton. The portfolio grows and shrinks with the general economy and indices.

Real estate is more active for me: pick a market, pick an apartment building, make an offer, get a mortgage, etc. It’s narrow and focused, like picking a single stock but being told it costs a ton to sell. I don’t track the entire US real estate market, just a couple of sectors. And it’s similar to active traders that likely have segments they play in. s

Just like real estate you have growth vs. dividend stocks just like appreciation vs. cash-flow. You’ll hear radio pitches from gurus teaching no-money down real estate and the next commercial break it’s someone pitching day-trading. There are way more parallels to draw than anyone would like :)

But I have money in both and I’ll keep money in both. The only difference is that I steer away from REITs, home builders, home improvement stores, etc. when possible in the stock market. I figure I have enough exposure to that world with my real estate.

 How does one "force appreciation" with stocks? I know how to do that with real estate, but I'm left in somewhat of tizzie trying to dream up ways to force GE Stock to go higher. Also, since my real estate "cash flows" I enjoy that attribute. But, the one that has me, in a "flash crash" am I big enough for a broker to execute my trade to stop my losses before they execute the hedge fund's trades? History and experience say "not on your life" on that one.

@Mike S. You’re not wrong but who was able to “force appreciation” in Riverside back circa 2007/2008? My house here in San Diego has appreciated hundreds of thousands of dollars and I can tell you...I had no hand in that. I’ve love to tell you it was some super savvy real estate genius decision, but it wasn’t. I can’t control my appreciation any more than I can control GE. I can control where I buy a piece of property just like I can control what stock to buy. And, sure, my investment properties cash-flow...I’ve nudged rents to force appreciation...but if there’s an economic downtown I’m not naive enough think I’ll be immune to it.

@Caleb Teachout

I read your post as comparing buying a SFH to live in vs stock investing, which I don't think is the same as investing in RE. I started doing research on investing in general a few years ago, at the time I only had stocks which I was basically day trading and losing money on. Once I started doing a lot of research I learned about value add in RE I started doing that. I also switched to Index funds because I know I can't beat the market. For every netflix there is a GoPro is what I've found. So if you pick great ones you also pick terrible ones. It's the picking that is the problem. I really think that investing in value add RE creates outsized returns and I have a lot more control over that than a company I buy stock in! I still have both but I'm active in RE and passive on the stocks through index funds. I also don't buy REITs since I already have that exposure to RE.

A week ago I went to a Cash Flow meet up group in Glendale, California. It is a great meet up that I’ve gone to twice. Anyway, the guy who runs the meet up invests heavily into the stock market. He explained that it is much easier to scale with stocks than it is with real estate. All you have to do is add a zero to the end of the number of stocks you are buying and then you have 10X your business.

I wasn't trying to be smart with him when I shared that I thought real estate gave me ways of getting a great return with little to none of my own money into the deal. Then I gave him an example of the past year where I bought a property for 193k ($174k was from a hard money lender and 19k was from an investor) then we rehabbed it for 35k, (half of which came from the investor and the other half came from my HELOC). Then we sold the property on a lease option for 320k and it cash flows about $800 a month. On the refinance we were able to pay out the hard money lender, the investor, and pay back my HELOC. The whole process took about 3 months from start to finish. The estimated return over the 5 year period is about 70k for my partner and I each.

Of course this would be more of an active investment where I manage (or my assistant manages) the property over the 5 year period. In my opinion it is hard to get the same types of numbers in the stock market especially if you have properties where you have little to none of your own money into them.

@Caleb Teachout both stocks and real estate can generate massive wealth or totally destroy you. Look at Warren Buffet and countless other people who make it big in stock investing. There are average people that put all their money in one stock and are multi-millionaires today. There are index fund investors who have retired by the age of 30. There are active investors who trade regularly and make over a hundred thousand dollars in a single day.

There are also people who made millions in laundromats, car washes, restaurant franchises, bit coin, timber, farming, cattle, diamonds, oil, you name it people have profited from it.

Of course people on BP think it is the best way to generate wealth. Just like people on laundromatinvestingforum.com think that the laundry business is the way to riches.

Anyone saying there is just a single path to wealth hasn't explored all the options. I have reasons why I believe real estate is the best option for me, but there is no denying the stock market is a huge wealth building machine. The key with any investment is understanding how to profit from it.

I love both stocks and real estate but over time my real estate investments have clearly out performed the S&P 500 and Broad Market ETFs I have bought and held. I have invested roughly the same amount of money in real estate and the stock market and over the years and thanks to appreciation my real estate investments have overtaken my stock market holdings and REI now makes up about 75% off my net worth vs. 25% in stocks. Now I do have to work a lot more with REI then with stocks which is pretty much buy a broad market ETF and forget about it but the extra work I have put into earning "passive" income with REI has clearly paid dividends.

I am not anti-stocks; I consider stocks to be the easier money.  However to significantly beat the indexes takes a lot of time doing research that does not interest me.  To beat the indexes you are not only are competing against investors such as yourself but you are competing against asset managers whose full time job is to try to beat the indexes (and they only have mixed success doing so).  So most of my stock is in index funds.

For me RE is more hands on but I also have more passion in that area.  In my locale of expertise for my selected product I am one of the experts.  The appraisers for example typically have not seen most of the comps; I have.  I can tell when a product in my wheel house in my locale hits the market the amount of time it will take to sell.

Some of my stock assets are due to using stocks to place RE profits waiting for the next RE purchase ...

My ratios: Stock: 43%, RE: 43%, North Dakota Mineral rights: 8%, Cash and bonds: 5%.  For my age I am high risk investments (i.e. my stock holding is much higher than recommended with respect to bonds).  

Basically invested evenly on stocks and RE as percent of our net worth. 

I have made significantly more money from my RE investment per dollar invested but I have also spent significantly more time on RE investments per dollar invested.

It's about investing in what you know and like. If you don't know it or like it don't invest in it. You wont put the effort into it. There are things like economic crashes and appreciation you can't Control in both RE and the stock market but in the end in either market your effort and research matters. One main difference is the initial investment is much smaller in the stock market and getting in and out of it is easier so you have lots of people with a small stake.
Originally posted by @Andrew Johnson :

Mike S. You’re not wrong but who was able to “force appreciation” in Riverside back circa 2007/2008? My house here in San Diego has appreciated hundreds of thousands of dollars and I can tell you...I had no hand in that. I’ve love to tell you it was some super savvy real estate genius decision, but it wasn’t. I can’t control my appreciation any more than I can control GE. I can control where I buy a piece of property just like I can control what stock to buy. And, sure, my investment properties cash-flow...I’ve nudged rents to force appreciation...but if there’s an economic downtown I’m not naive enough think I’ll be immune to it.

 In most (but not all) real estate markets and time periods, one can buy a "fixer" and fix it up, forcing appreciation. I don't know of a single instance where I can force up GE regardless of the market or time period. 

Originally posted by @Mike S. :
Originally posted by @Andrew Johnson:

Mike S. You’re not wrong but who was able to “force appreciation” in Riverside back circa 2007/2008? My house here in San Diego has appreciated hundreds of thousands of dollars and I can tell you...I had no hand in that. I’ve love to tell you it was some super savvy real estate genius decision, but it wasn’t. I can’t control my appreciation any more than I can control GE. I can control where I buy a piece of property just like I can control what stock to buy. And, sure, my investment properties cash-flow...I’ve nudged rents to force appreciation...but if there’s an economic downtown I’m not naive enough think I’ll be immune to it.

 In most (but not all) real estate markets and time periods, one can buy a "fixer" and fix it up, forcing appreciation. I don't know of a single instance where I can force up GE regardless of the market or time period. 

Stock market has other options for situations like GE. You don't need to force GE up, because if you believe it is going down, then you can short the stock and make money that way. 

Let's be honest, there are some markets and times in history where you just can't force appreciation. In some cases people put money into rehab, just to lose more money. 

I agree that real estate affords more control of the asset, but you are still subject to market forces. Stocks have other advantages, like being very liquid. I can cash out a stock in less than 5 minutes through my brokerage account. 

At the end of the day, both can be profitable investment vehicles and both are subject to market forces.

Such different animals....RE has many strings attached sometimes like loans, insurance, tenants, repairs, and other legal liabilities...none of which exist with stocks. Keep in mind stocks are 100% designed for investors returns where as most if not all SFRs were 100% designed to be lived in, excluding the original developer investor. Multis, commercial etc are more designed for investors we can understand.

Stocks are a rich man's pull tabs.  You an value the company however you want and think you are smarter than the world but until you convince everyone else that your value is correct, nothing is going to change.

I think you hit the nail on the head that it just depends how good of an investor you are at stocks vs real estate. Some people (a very small number) will make more at stocks than real estate.

One of the biggest reasons I find that people are more drawn to stocks than RE is the simplicity - no need to look for a property, manage tenants, fix problems etc.

Originally posted by @Joe Splitrock :
Originally posted by @Mike S.:
Originally posted by @Andrew Johnson:

Mike S. You’re not wrong but who was able to “force appreciation” in Riverside back circa 2007/2008? My house here in San Diego has appreciated hundreds of thousands of dollars and I can tell you...I had no hand in that. I’ve love to tell you it was some super savvy real estate genius decision, but it wasn’t. I can’t control my appreciation any more than I can control GE. I can control where I buy a piece of property just like I can control what stock to buy. And, sure, my investment properties cash-flow...I’ve nudged rents to force appreciation...but if there’s an economic downtown I’m not naive enough think I’ll be immune to it.

 In most (but not all) real estate markets and time periods, one can buy a "fixer" and fix it up, forcing appreciation. I don't know of a single instance where I can force up GE regardless of the market or time period. 

Stock market has other options for situations like GE. You don't need to force GE up, because if you believe it is going down, then you can short the stock and make money that way. 

Let's be honest, there are some markets and times in history where you just can't force appreciation. In some cases people put money into rehab, just to lose more money. 

I agree that real estate affords more control of the asset, but you are still subject to market forces. Stocks have other advantages, like being very liquid. I can cash out a stock in less than 5 minutes through my brokerage account. 

At the end of the day, both can be profitable investment vehicles and both are subject to market forces.

 At the end of the day I can't live in my stocks if I need protection from the elements. ;-) I guess I can't rent stocks either. With real estate I can do both. If you want to compare apples to apples.

It is definitely nice to buy a security and know it won't ever call you with a problem. At night. On weekends. It won't get 5 of it's friends together and move out at the same time on you, either. A tree won't fall on it. It won't flood. You can sell it immediately...

But, where else will the seller finance you? Where else can you buy below FMV? Will banks lend you money on your stocks for 30 yrs ridiculously cheap?

Go in to  bank of Americ or chase or wells. Tell them you would like to borrow money to buy their stock.  They will laugh. Leverage and tax benefits and buying with instant equity and cashflow will always allow for better returns in RE if you do it correctly.

But I still like stocks, too.

Originally posted by @Steve Vaughan :

Go in to  bank of Americ or chase or wells. Tell them you would like to borrow money to buy their stock.  They will laugh.

Sounds a lot like buying on margin.  

Originally posted by @John Woodrich :
Originally posted by @Steve Vaughan:

Go in to  bank of Americ or chase or wells. Tell them you would like to borrow money to buy their stock.  They will laugh.

Sounds a lot like buying on margin.  

 Of course you can borrow on margin from a brokerage against a portfolio YOU ALREADY HAVE. Margin in RE would be similar to only being able to borrow against RE you already own free and clear, and they could cash call you if the value drops.

But..why won't banks lend you money to acquire the portfolio? Even if its their own stock?  Yet they love to lend on RE? If stocks are better, why are they unacceptable collateral?

In a stocks vs RE debate, being able to acquire large amounts with leverage is huge and needs to enter the discussion. If we could buy our stocks with only 5-25% down.... you bet it would be a factor in the motley fool analysis and ours, too.

Originally posted by @Mike S. :
Originally posted by @Joe Splitrock:
Originally posted by @Mike S.:
Originally posted by @Andrew Johnson:

Mike S. You’re not wrong but who was able to “force appreciation” in Riverside back circa 2007/2008? My house here in San Diego has appreciated hundreds of thousands of dollars and I can tell you...I had no hand in that. I’ve love to tell you it was some super savvy real estate genius decision, but it wasn’t. I can’t control my appreciation any more than I can control GE. I can control where I buy a piece of property just like I can control what stock to buy. And, sure, my investment properties cash-flow...I’ve nudged rents to force appreciation...but if there’s an economic downtown I’m not naive enough think I’ll be immune to it.

 In most (but not all) real estate markets and time periods, one can buy a "fixer" and fix it up, forcing appreciation. I don't know of a single instance where I can force up GE regardless of the market or time period. 

Stock market has other options for situations like GE. You don't need to force GE up, because if you believe it is going down, then you can short the stock and make money that way. 

Let's be honest, there are some markets and times in history where you just can't force appreciation. In some cases people put money into rehab, just to lose more money. 

I agree that real estate affords more control of the asset, but you are still subject to market forces. Stocks have other advantages, like being very liquid. I can cash out a stock in less than 5 minutes through my brokerage account. 

At the end of the day, both can be profitable investment vehicles and both are subject to market forces.

 At the end of the day I can't live in my stocks if I need protection from the elements. ;-) I guess I can't rent stocks either. With real estate I can do both. If you want to compare apples to apples.

It depends on how you are investing in real estate. The closest comparison to stocks would be investing in a syndication where you only own a piece of the property. In that case you wouldn't be able to sleep in the property. Stocks don't collect rent, but many pay dividends. They are not apples to apples. Two totally different types of investments. I am not arguing I like stocks better, but at the same time I know many people have gotten richer than me in stocks. To each their own.

Originally posted by @Steve Vaughan :
Originally posted by @John Woodrich:
Originally posted by @Steve Vaughan:

Go in to  bank of Americ or chase or wells. Tell them you would like to borrow money to buy their stock.  They will laugh.

Sounds a lot like buying on margin.  

 Of course you can borrow on margin from a brokerage against a portfolio YOU ALREADY HAVE. Margin in RE would be similar to only being able to borrow against RE you already own free and clear.

But..why won't banks lend you money to acquire the portfolio? Even if its their own stock?  Yet they love to lend on RE? If stocks are better, why are they unacceptable collateral?

In a stocks vs RE debate, being able to acquire large amounts with leverage is huge and needs to enter the discussion. If we could buy our stocks with only 5-25% down.... you bet it would be a factor in the motley fool analysis and ours, too.

I agree.  It would seem wise for banks to allow people to purchase stock on a loan if it was issued by the company.  Would have to create some agreement where dividends are reinvested against principle or something though. 

Its a fun academic debate to compare various asset classes against each other and debate the merits of each. 

Stocks vs Bonds

Commodities vs RE

Private Equity vs Collectables 

The list goes on...

At the end of the day the only answer you'll get is: it depends on the person and a host of variables like their knowledge, skills, abilities, capital, and time. On a REI investing forum everyone will focus on the strengths of RE and drawbacks of equities; the opposite holds true on a stock forum. Both groups have self selected to be where they want.

This article talks about the relative size of global RE vs all other asset classes. RE makes up, according to them, 60% of the world's assets. However, in the US, 16% of taxpayers owned investment properties. Over half own stocks.

Point being no asst class is mutually exclusive, at the end of the day you have to view each deal through the lens of what kind of, appreciation, cash flow, tax impact, and debt structure it produces. 

 @Steve Vaughan you can buy stocks every day below FMV, that's a key principle of value investing and how Warren Buffet buys not only stocks but companies.

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