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!
Here's my take on RE versus Other Investments:
If Shi* hits the Fan, you can always live in your RE Investment, but you can never live in your Stock!
I love that saying... either case, you get the point.
Other that that, I agree with the others.
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.
Your Comment: "since the depression, stocks have average 10% return while real estate is 2-3%." I would like to point out that few of us have been investing since the depression. ;-)
Threads on this topic almost always devolve from "which investment vehicle do you choose and why" to a "Real Estate Rules, Stocks Drool!!" echo chamber.
Not all stocks are the same just like not all REI is the same, so making a broad comparisons is functionally useless. Would anyone say owning two SFRs and a portfolio of light industrial CRE are the same? Of course not. REI has subcategories, and so goes equities investing. Just because one doesn't know about them does not mean they don't exist. People post here on BP every single day saying that through the podcast, blogs, and forums, they learned more about REI than they ever knew. Is there a possibility the same paradigm exists in stock investing?
Every asset class has their own unique pros and cons that can be tailored to help the individual investor meet their end goals. At the end of the day the endstate is what matters, not so much the methods used to get there. Plus, trying to declare a final 'best one' is like trying to pick the fastest tortoise.
@Todd Dexheimer is that your share of your syndications or the funds as a whole? If its your share maybe you are the outlier and did better than most will do in the market in 50 years?
Either way, congratulations on success. You give the rest of use here something to aim for.
There is money to be made in all kinds of investments, but I have found the ones that return the most and are the safest are the one's I know the best. I am intimately aware of the vehicles I place my money in and understand the investments at the core of what they are. If I don't know my investment to this level, I keep my money safe in a cash position. You can make money in both real estate and stocks. You can also lose money in both.
@Jesse Houser you came to a real estate forum, so of course there is going to be major bias here towards real estate. Your wife could go to Bogleheads forum and she would have her own points on why stock investing may be better. The truth is both real estate and the stock market have created billionaires and both have also financially destroyed people. Lots of good points where raised on the advantages of real estate by others, which I agree with.
The one thing people fail to consider is risk and effort. Many people are not cut out for real estate investing. First time a tenant trashes their property, they run scared and sell it. Or they let a tenant go months without paying rent. Or they don't property budget reserves. The list goes on and on. Ultimately owning rental property is more of a business, then it is an investment. Make sure you and your wife know what you are signing up for before you take the leap. Real estate can be great or it can be a nightmare. It is not passive like owning stocks.
Roller coasters are fun for a little while as is being out of control...but not when it comes to my family's financial future.
Threads on this topic almost always devolve from "which investment vehicle do you choose and why" to a "Real Estate Rules, Stocks Drool!!" echo chamber.
Not all stocks are the same just like not all REI is the same, so making a broad comparisons is functionally useless. Would anyone say owning two SFRs and a portfolio of light industrial CRE are the same? Of course not. REI has subcategories, and so goes equities investing. Just because one doesn't know about them does not mean they don't exist. People post here on BP every single day saying that through the podcast, blogs, and forums, they learned more about REI than they ever knew. Is there a possibility the same paradigm exists in stock investing?
Every asset class has their own unique pros and cons that can be tailored to help the individual investor meet their end goals. At the end of the day the endstate is what matters, not so much the methods used to get there. Plus, trying to declare a final 'best one' is like trying to pick the fastest tortoise.
@Todd Dexheimer is that your share of your syndications or the funds as a whole? If its your share maybe you are the outlier and did better than most will do in the market in 50 years?
Either way, congratulations on success. You give the rest of use here something to aim for.
Stocks and other investments are ok, but active RE investing should out perform passive stock investing all day long. I own my share of stocks and other investments and don’t discount them as valuable.
To me the real question is can you personally control the value of the asset? If you own the business, then you can. If you own some stocks, then no. There is value in both and it really depends on your goals.
I'm not sure where the 2-3% average on real estate is coming from? Possibly, certain markets and types of real estate but that is not the average return (see below). I don't look at any deals that aren't over 10% PRR (Preferred Rate Return) and most deals have an 18-22% IRR (Internal Rate of Return) at the end of the deal. Typically 5-8 years.
My opinion is you should be diversified in your investments between the stock market and alternative investments like real estate. There is a risk in both asset classes but they have always corrected themselves in the long run. Diversifying is the key, do your own research, and be patient. If you're getting 2-3% on real estate look for other real estates deals. There are other ways to invest in real estate besides flips and rentals.
From Investopedia:
Average annual returns in long-term real estate investing vary by the area of concentration in the sector. Average 10-year returns in the commercial real estate sector underperformed the S&P 500 Index, running at around 6.1%. Residential and diversified real estate investments do a bit better, averaging 7.5%. The S&P 500 Index's average annual return over the past 10 years is approximately 9.14%.
Real estate investment trusts (REITs) or private equity perform best, with an average annual return of 10%.
The best way is to diversify your investments; it is too risky to put all your savings in just one place. The richest people in the world invest part of their fortune in the real estate. Maybe you can inspire her to invest in RE telling successful stories. Ask her to read about McDonald’s story, the CFO's of the company even quoted as saying “we are not technically in the food business. We are in the real estate business."
The biggest one is CASH FLOW! What other investment lets you buy it, cash flow enough so that you can pull 100% of your money out and repeat? Definitely not Stocks or Bonds. In fact, you cannot leverage stocks or bonds based on cash flow alone because the cash flow of those investments suck!
@Todd Dexheimer - I like @Bill F. am curious if the $10M you referenced is
1. The total equity value you personally have in the deals you created
2. The total equity value of you and your limited partners combined or
3. The market value of your portfolio without taking debt into account.
Always like to make sure its an apples to apples comparison. Turning 20k into either is impressive, but 1 exponentially more than 2 and 3.
@Todd Dexheimer - I like @Bill F. am curious if the $10M you referenced is
1. The total equity value you personally have in the deals you created
2. The total equity value of you and your limited partners combined or
3. The market value of your portfolio without taking debt into account.
Always like to make sure its an apples to apples comparison. Turning 20k into either is impressive, but 1 exponentially more than 2 and 3.
That’s turning $20,000 into $10 million equity personally. I wouldn’t mention it if it was anything other than that. It wouldn’t make any sense to add in investors equity.
I don’t really mean it as a way to toot my own horn. I think what I did is peanuts compared to what a lot of businesses/RE investors do. The main point is that With control in the asset you’re able to create the most amount of value.
You threw in a one off stock example to prove your point of stocks being a great investment. Anyone can throw a one off example for any investment or business and make it sound like it’s the best thing in the world.
I'm liking all the conversation and points you guys are making about these investing options. I do have another question, though. The 10% return from the stock market has been thrown around a couple of times. While these numbers check out, I believe that percentage is before fees and other expenses are added in. So in reality, the return an investor is getting back is more like 6-7%. Am I wrong in my understanding?
What's the #1 human need--- shelter aka a home!
I invest in my 401K, but I love real estate because it's something I can control. I can setup my lease according to my rules, and we pick the tenants. Maybe I'm a control freak, but I love the fact I know I can control my income, sure a house might go vacant-- but then I can do a move-in incentive, or lower the price and immediately get more people interested. I can't control a stock or mutual fund, so many things can make it fluctuate-- and you just have to go along for the ride.
Your wife is probably thinking of the notorious 3AM phone call, so maybe push the idea of a property manager so it'd be just as passive as a mutual fund. Suggest turnkey where it'll be an easy thing for her to see value in. Maybe stress to her the fun aspects of us, like interior design! Why not watch some Flip/Flip on HGTV and say how she could be involved and you guys would do this together? I'm picking back splashes out tonight actually! Personally, I love seeing my visions come to life!!
@Todd Dexheimer - That is impressive indeed. Also, that stock is just one example but there are many others out there that would have performed very well over the same time period.
For those who didn't look it up, $5k invested in PM in 1960 with reinvested dividends would be worth a little over $25M today. You would also be getting approximately $1.25M paid out in dividends annually. There are lots of stocks you could have bought with the same strategy and turned in into $5M, $10M, or $15M. There are also some that went to $0.
I wouldn't be on this site if I wasn't a firm believer in owning, developing, and investing in real estate. I have more in real estate than I do in equities and other financial products but I keep my options open and always will.
One important differentiator between equities and real estate...... Real estate is work! It is a business and not a passive investment in almost all cases (except perhaps NNN). I can guarantee you that you didn't turn $20k into $10M as a passive investor. The hypothetical Altria investor had their money working for them (passive) and you were 100% working for yours (active). That does not diminish your success at all, but it is worth pointing out.
Great discussion!
Public market investing and Private Real Estate investing can both be great paths to wealth.
If you want to put your money away and passively receive average returns than public markets are a great option. Syndication, turnkey or note investing can be excellent as well within the world of private Real Estate. With all of these investment vehicles it is necessary to perform due diligence up front to make sure the opportunity meets your investment criteria (especially in Turnkey and syndication, please, please please do your due diligence). But basically its one binary decision. Do I invest? Yes or no. Then you are done.
But to outperform average returns in any investment vehicle or business you need to have an edge. Typically one can have three types of advantages, informational (better information), analytical (better analyzing process or model) or emotional (better control of emotions during times of greed or fear, this one is hard to define. Warren Buffet would be a great example of someone who has this. Seems to always be buying when everyone else is selling and vice versa). There are certainly operators who have an edge in public markets. People who actively trade Stocks, Bonds, credit default swaps, Options, Futures, Commodities ect. There are even individuals or firms that simply pick a small concentrated portfolio of individual equities and are able to outperform the SP 500. There are also many people who try these methods and get their face ripped off, me included. I got a nice education in trading options a few years ago, lost thousands of dollars. I lost money because I had no edge and was competing with professionals.
The appeal of Real Estate is that it is so location and asset specific. For some it is much more intuitive to gain an edge in private real estate. If one can develop in depth knowledge of as specific sub market and zero in on the specific asset class I want (SFR's, small multi families, Apartment Buildings, Retail Shopping centers, Office Buildings ect) than it is much more possible to determine what is and is not an attractive entry price, than determining attractive entry prices in public markets. Also private real estate is much more reliant on relationships with other people. one can find the best deal in the best market but if they have a poor property manager or sub par contractor the investment may still under perform or even become distressed.
So what skills do you posses? do you even want to invest actively in anything? What is your goal financially?
Those are the types of things you need to know the answers to before you and your wife choose what to invest in.
If you are a Real Estate agent and have done some transactions than you may be on your way to building an edge in the local real estate market. But you obviously need buy in from your wife in order to pursue any investment, especially a path of active investment.
Cheers
I was going to say exactly what @Maxwell Manatt said but he saved me the typing. +1