Real Estate vs Other Investments
Real Estate Agent · Mansfield, OH · Member since 2016 · 37 posts · 27 votes
Hi all!
So I've been talking with my wife about the benefits to real estate investing vs. other forms of investing (stocks, bonds, annuities, etc.). She leans very much towards those forms of investing because it is what her parents have done and so it's what she knows. I've been trying to explain to her why I feel real estate has more benefits than the stock market and I was wondering if any of you could help me out.
Why do you pick real estate over other forms of investing? How can I better explain why real estate is a better vehicle for building wealth over stocks, bonds, annuities, etc.
Thanks for the help!
Leverage, tax benefits, and most importantly to me, control. What say do you have in the performance of a mutual fund or stock? Will banks lend you 20:1 to buy them? Why not?
If her parents are multi-miillionaires, I'd heed their advice. If their house is their largest asset? Probably not so much.
90% of annuities are horrible BTW. A variable one might be ok in certain situations but overall the returns are horrible and they are riddled with fees. Cheers!
I will give you the biggest reason of all. RE is the only investment where you can gain compounded returns, without having to spend any money.
I don't know that it has to be mutually exclusive; i.e. one or the other. A solid investment portfolio typically includes a diverse set of investments which could include hard assets such as real estate, gold/ silver, cash and intangibles such as stocks, bonds, currencies. And then you can diversify even further within each of those asset classes. For instance, passive vs active. In fact, that is how my current portfolio looks, a mixture of several things. In terms of RE I have a significant number of passive RE investments but am now interested in expanding into active real estate. Each asset class has its own unique pros and cons that when combined together offers a lot of downside protection.
Leverage, tax benefits, and most importantly to me, control. What say do you have in the performance of a mutual fund or stock? Will banks lend you 20:1 to buy them? Why not?
If her parents are multi-miillionaires, I'd heed their advice. If their house is their largest asset? Probably not so much.
90% of annuities are horrible BTW. A variable one might be ok in certain situations but overall the returns are horrible and they are riddled with fees. Cheers!
Hi all!
So I've been talking with my wife about the benefits to real estate investing vs. other forms of investing (stocks, bonds, annuities, etc.). She leans very much towards those forms of investing because it is what her parents have done and so it's what she knows. I've been trying to explain to her why I feel real estate has more benefits than the stock market and I was wondering if any of you could help me out.
Why do you pick real estate over other forms of investing? How can I better explain why real estate is a better vehicle for building wealth over stocks, bonds, annuities, etc.
Thanks for the help!
We all know that the Stock Market never goes down . . .
OOPS! WRONG SLIDE, Sorry here it is . . .
OOOPS, THAT"S NOT IT EITHER . . .
What, me Worry?
Sorry folks, having a bit of trouble here. Nothing to see, move along.
Thanks for all the responses, guys!
@Jim Grutkowski I agree with you that it doesn't necessarily have to be one or the other. There is definitely a benefit to diversifying your portfolio, having high risk/high yield and low risk/low yield investments, and then diversifying within asset classes as you said. I'm personally not convinced that some of those types of investments are worth it, but each person will have their perspective.
@Steve Vaughan All the points you mentioned are what I feel most strongly about as well. Leverage and taxes are two enormous benefits to growing a strong portfolio and doing it without needing to have all/sometimes any of the money up front and also keeping my money in my pocket. But I think what you said about control is the most important thing to me as well. I don't have any influence on what happens at any of the companies involved in a mutual fund and as @Mike M. has shown below, look at what just happened to Facebook just a few weeks ago. And that wasn't even in a period of recession, just poor choices on their part that cost a large number of people millions of dollars.
I also like that you mentioned the fees that come with annuities. There are also a ridiculous amount of fees that come with trading stocks, and unless you're somewhat informed about it and keep an eye on the fees that you're charged, someone else can walk away with a large chunk of your profit.
Thanks again for the input everyone and please keep it coming. I'm interested in hearing any other information you may have!
@Jesse Houser There are many benefits of real estate including:
- Depreciation expense: Not a real cash-out, yet it reduces your income and, hence, your taxes. You take this deduction year after year, even though your property appraises in value (in the long run)!
- Borrowning/refinancing: You can refinance your appreciated property and take money out to buy more properties. A property can appreciate in as little as a few months.
- 1031 exchange: You can sell your property and buy another one without paying taxes. This process can be repeated over and over (certain rules apply).
- Operating expenses: You can deduct business expenses including miles, memberships, books, home office costs.
- You can use many strategies to make your property gain value and make more money (BRRR strategy, dividing the property, etc.). You can rent all of your property, or part of it, you could do short term rental.
Should I keep going? I am a fan of real estate, what else can I say?
someone on here said tax benefits but the real tax benefits are in a ira or 401k as it isn't taxed til you retrie. w/ real estate (let's say rentals), you are taxed each year. you do get a depreciation expense so that helps a little.
someone on here said control, that is very true.
someone on here said the stock market goes down; real estate can go down too. and since the depression, stocks have average 10% return while real estate is 2-3%.
quite a few say leverage and that totally can boost your returns to a crazy amount. but w/ a 401k or ira, you have no debt. also, you can leverage in the stock market thru margin.
and, a lot more stress/aggrevation in rentals vs dumping it into a 401k each week. but risk comes reward.
Hmmm, how much can one put into an IRA and 401K? (it's not much!) Also, you get hit with UBTI when using leverage in a self-directed IRA. And in a 401K, you're very limited in what you can invest. I agree that the tax deferment and employee matching is great, but no one is going to get rich off it unless you contribute at or near the max for most of your life...and only once you reach retirement age will you be able to take distributions. That does not appeal to me at all. I want financial independence now...not when I'm old.
Also, to say that returns on real estate is 2-3% is, while technically true, would not apply to a saavy investor. A properly set up portfolio of real estate holdings will smoke the pants off equities.
I'm pretty sure real estate has made a lot more mega-wealthy people than stocks.
with financing, your 25K becomes 100K with leverage. in stock market, your 25K goes up and down and all around, staying close to 25K. Kind of like one of those Indian casino's. You rarely gain, sometimes you might win, but you always loose your time sitting on those stools in front of a boring machine.
Once you raise enough cash in realistate, you can BRRRR to obtain homes that you have no money into them yet they cash flow and appreciate too.
Try that with a stock!
@Tony Kim, you are correct - contributions to an IRA are limited to $5,500/yr, however limit on contributions to a truly self-directed Solo 401k plan is 10X higher: up to $55,000/yr.
You are also correct that when you use leverage inside of an IRA portion of the income will be subject to UBIT, however leveraged real estate inside of a 401k is exempt from UBIT.
Self-directed Solo 401k plan has unlimited investment options.
@Ana Garcia Thanks for spelling all of those benefits out. It's helpful seeing them listed out like that because although I know of them and know them as a benefit, it's easy to forget some of them when trying to explain the benefits to another person. I honestly cannot disagree with anything that you said. Really good post!
@Scott W. While I agree with you that some tax benefits come with a 401k and IRAs, I'm not sure it's the best option unless you go with a Roth. If you have company matching it's an entirely different story as you want to take advantage of the matching. I have a hard time imagining that taxes are going to be lower when I decide to retire vs. where they are now (granted I have a while to go before I'm retiring from a 9-5 job). I think I would prefer to pay the tax now rather than later. But again, I'm don't think it matches the tax benefits you can get from owning real estate (namely rental properties). You also mentioned the higher returns that stocks have had over the returns on real estate. You can't argue with the numbers, but I think it also has to be considered how much more volatile stocks can be. Of course, with risk comes reward, but if I'm trying to build long-term wealth for the future, I can't play super risky. A large part of this for me is the lack of control. Something I have almost no control over feels way more risky to me than owning rental properties, and I use what happened to Facebook in the past would weeks as the example. Because of poor decisions within their company, their stock plummeted, and there wasn't a single thing their investors could do about other than get out while they still could.
@Tony Kim Thanks for sharing the article. Was a pretty interesting read. I agree with you about the savvy investor being able to average much better returns.
I'm not able to look up the stats right now, but I think the majority of the wealthiest people in the world own real estate and have made a large portion of their money in this field (I think I read this in Tony Robbins book Money Master the Game). Maybe worth looking that information up again.
You can contribute up to $55,000 to a Solo 401k ($61,000 if over age 50). Married couples can contribute over $120,000 per year to a plan depending on their age and income.
While you're correct that the plans aren't designed to give you income now, they're a great way to maximize any retirement savings for the future while you're working to create non-retirement income.
@Jesse Houser There are many benefits of real estate including:
- Depreciation expense: Not a real cash-out, yet it reduces your income and, hence, your taxes. You take this deduction year after year, even though your property appraises in value (in the long run)!
- Borrowning/refinancing: You can refinance your appreciated property and take money out to buy more properties. A property can appreciate in as little as a few months.
- 1031 exchange: You can sell your property and buy another one without paying taxes. This process can be repeated over and over (certain rules apply).
- Operating expenses: You can deduct business expenses including miles, memberships, books, home office costs.
- You can use many strategies to make your property gain value and make more money (BRRR strategy, dividing the property, etc.). You can rent all of your property, or part of it, you could do short term rental.
Should I keep going? I am a fan of real estate, what else can I say?
Couple notes.
-Depreciation expense isn't free money. The house will whither away over time and become dilapidated if you don't replace the roof, paint the house, etc. So that money you are getting back from the IRS is money you will eventually have to spend if you hold the house long enough.
-The thing people also don't realize is that being a landlord isn't just an investment, it's a business. Deductible expenses of your landlord business is akin to deducting them from any other business. Business can also be an investment in and of itself. But comparing being a landlord invested in real estate rentals to stock investing is comparing apples to steaks. One is a business, the other is purely an investment that is NOT a business.
@Jack B. You're correct, being a landlord does have considerably more responsibility to it than just dumping money into a 401k and letting it grow. However, there are many other ways to get involved in real estate that don't necessarily require you to be a landlord (syndication/crowdfunding, notes, having a property management company handle the care of the property). There is still work involved with each of these, mostly keeping an eye on your investment or the company managing it. But I would argue that the same care should be taken with investments that don't include real estate.
I've seen it mentioned a few times here but Leverage in real estate is key. I'd take 2-3% yearly returns on my $415,000 home over the few thousand I may have has in the stock market.
Real World Example: my wife and I bought our first home on FHA loan with roughly $20K out of pocket plus or minus fees etc. Our home was $413K. Two years later we sold for $501K and none of our proceeds were taxed. That same $20K in the bank MIGHT have earned me what? $4,200 (20K x 2 years of 10% avg growth)
someone on here said tax benefits but the real tax benefits are in a ira or 401k as it isn't taxed til you retrie. w/ real estate (let's say rentals), you are taxed each year. you do get a depreciation expense so that helps a little.
someone on here said control, that is very true.
someone on here said the stock market goes down; real estate can go down too. and since the depression, stocks have average 10% return while real estate is 2-3%.
quite a few say leverage and that totally can boost your returns to a crazy amount. but w/ a 401k or ira, you have no debt. also, you can leverage in the stock market thru margin.
and, a lot more stress/aggrevation in rentals vs dumping it into a 401k each week. but risk comes reward.
You say there's no stress when you "dump" money into a 410k each week? Really?
@Jesse Houser many of us on BP built our RE portfolio using very little of our own money, turning that into millions of dollars and 6-7 figure passive income. With a little bit of work and creativity many of us have created financial freedom. Traditional investing done right will make you comfortable.
Advantages:
Leverage
Refinancing all you capital out to buy more RE
Control
Cash flow
Forced appreciation with renovations and other value add
One of the safest investments (much more so than stocks)
Jesse, I know what you're going through. I just put up a very similar post about a week ago. And I don't have an answer that works yet.
Real estate is--real. A share of stock is a billionth share of the ownership of a company somewhere else. A bond is a loan to that company, and not much. A share of a mutual fund is a millionth of a billionth of ownership of a company. These seem more comfortable to my wife because of conventionality.
A house is something we live in. The very reality of real estate makes it scarier to some. It's present. It's easy to grasp a big loss because the market went to hell, easy to imagine a tenant tearing a house apart, because we're in a house every day and we pay a mortgage every day, and go through buying and selling homes every decade or so.
The numbers you can use to illustrate, though, they aren't real and they aren't certain. Not like a torn up kitchen because the tenant got angry you evicted them.
If you figure it out, let me know what works for you.
Disclaimer: I am a Boglehead junkie.
As @William Jenkins said, "any prudent person would have part of their net worth in both."
I do not own any RE, but I'm looking at my first SFH via turnkey. I would love to toss my downpayment into Vanguard Total Stock Market, but I have already committed to REI. So, I will test the waters.
If I had more access to tax-advantaged accounts I would definitely take advantage of those prior to touching RE.
@Andrew Neal, I agree. The ability to leverage your property and turn that into more returns is the key to building wealth in real estate. Thanks for sharing the example of your home. We're in the same boat with our house. Currently finishing renovations and will be able to list for $50k more than we paid and will probably be netting $35k all without being hit with capital gains taxes. Putting money in a savings account in a bank is about as useful as burying it in the ground. With inflation, it's just losing more and more value over time. And the piddly of interest banks give you anymore is a complete joke.
@Todd Dexheimer, I like that you mention the creativity that comes with real estate. There are so many different avenues you can take to not only invest in real estate but also with a property you own (rent it, 1031 exchange, lease option, seller finance, etc.). In a way, I feel like there is more protection in holding property just because there are so many different exit strategies I can take. And that's not even taking into account all the advantages you and the other posters have shared. Like your final point says, it's one of the safest investment you can make, especially if you know what you're doing and educate yourself.
@David Stewart Sounds like you know what I'm going through. I think the biggest thing is not taking the easy way out. Real estate takes work and I would argue is way more difficult than just putting money into your retirement and trusting that it's going to be invested wisely. I honestly think that's one of the largest hurdles some people have. They don't know enough about investing in real estate (other than the horror stories of calls at 2 AM) and at the moment feels less painful to just dump money into a retirement account. If there's one thing I know, I want to be in charge of my financial future because I know I'm going to look out for my best interest. No one else is going to have the same care for it that I have.
@William Jenkins, I don't necessarily feel that it's a bad thing to have some diversity between real estate and the stock market. My concern comes from what is the better option and why do people choose one over the other. You can build wealth and make loads of money in the market, but I think the lack of control is the most challenging aspect for me. And honestly, the theoretical pay off of a $5k invest in 1960 does none of us any good right now. You're going to be hard pressed to find anyone who can make that same type of investment today and get similar returns. Sure, maybe Buffet, Bogle, or any of the other guys who just seems like freaks when it comes to making investments. I would argue that the market is way more volatile now than it ever has been just due to the nature of the world we live in. I feel like it's almost impossible to invest into anything with much certainty.
The one thing I will say about investing in the market is that I particularly like the All Weather approach by Ray Dalio. The approach that he takes to investing has produced positive returns or broke even all but three years since the 1960s. If you haven't heard of it, I would recommend checking into it. And I would also highly recommended Tony Robbin's book Money Master the Game. He actually sat down with some of the iconic investors I mentioned above and discussed their approach to investing. Ray Dalio lays out a simple and easy to understand version of his All Weather approach for today's market. It's a huge book and a long read, but so much valuable information within.
It is a misconception that equities cannot be levered. Interactive Brokers allows you to margin at sub 3% rates (floating of course) and they allow more leverage then you might think. Dont bet the house though.
I’ve actually been deploying more into the market than in RE lately due to a lack of RE deals. Some good bargains in the market if you are looking for dividend growth. PM, T, and many others.
And for those that say you can’t become rich in the market. Go to a historic dividend calculator and put in $5k investment in 1960 into MO (Altria) and see what it would be worth with reinvested dividends. Yea.... No midnight calls and much better than most on here will ever do in RE.
How about taking $20k in 2008 and turning that into over $10mm by 2016 with real estate? Oh and no mid-night phone calls. Much better than most will ever do in the market in 50 years.
Benefits of RE...
Appreciation: your appreciation will multiply because of leverage. If you buy 100K house with 20% down, increase in value of 5% will give you 25% appreciation benefits. There is no long term leverage in stock market.
Depreciation: Even value always appreciate over time, you will get depreciation on your profit.
Cash Flow: Rental income will provide you cash flow.
Tax: There are multiple TAX benefits of real estate like 1031 Exchange... you can not get that in stock.
Hi all!
So I've been talking with my wife about the benefits to real estate investing vs. other forms of investing (stocks, bonds, annuities, etc.). She leans very much towards those forms of investing because it is what her parents have done and so it's what she knows. I've been trying to explain to her why I feel real estate has more benefits than the stock market and I was wondering if any of you could help me out.
Why do you pick real estate over other forms of investing? How can I better explain why real estate is a better vehicle for building wealth over stocks, bonds, annuities, etc.
Thanks for the help!
You don't need her permission.. "MAN!" Don't let anyone hold you back from achieving your goals. Even your wife or friends. If they try, they are the wrong wife and friends.. ;)