Read through the forums but looking for current advice on a strong argument for choosing rentals over non-qualified stocks over the long term. The biggest differences I can see would be the rental 1031 to avoid taxes as you scale bigger, whereas NQ stocks would pay taxes each time they're sold. However, even with leveraging 75% money after the down payment, stock returns seem like they could make much higher returns. Of course it depends what stocks, but even some "high quality" stocks like Amazon can have 10,000% growth in just 20 years. I think both options provide a tax free step-up in cost basis at death, so they seem them being equally tax and legacy friendly that way.
The top benefits I see to both would be:
stocks- much simpler to manage and liquidate stocks vs rentals and higher ROI even without the leverage rentals- income offset by taxes/depreciation and 1031 exchange for tax free liquidations
Would appreciate if someone could make a very strong case that I'm missing, for rentals beating the simplicity and returns of stocks. Thank you!!
Read through the forums but looking for current advice on a strong argument for choosing rentals over non-qualified stocks over the long term. The biggest differences I can see would be the rental 1031 to avoid taxes as you scale bigger, whereas NQ stocks would pay taxes each time they're sold. However, even with leveraging 75% money after the down payment, stock returns seem like they could make much higher returns. Of course it depends what stocks, but even some "high quality" stocks like Amazon can have 10,000% growth in just 20 years. I think both options provide a tax free step-up in cost basis at death, so they seem them being equally tax and legacy friendly that way.
The top benefits I see to both would be:
stocks- much simpler to manage and liquidate stocks vs rentals and higher ROI even without the leverage rentals- income offset by taxes/depreciation and 1031 exchange for tax free liquidations
Would appreciate if someone could make a very strong case that I'm missing, for rentals beating the simplicity and returns of stocks. Thank you!!
Why do you have to choose? How about Stocks AND Rentals?
EDIT: Just read some of the responses and while I get this is a REI board the sheer nonsense posted about stocks is amazing. Like every stock will lose money over 30 years! Or stocks are speculation and REI is 100% sure profit. What total and utter CRAP.
Stocks via ETFs and Mutual funds allow you to literally own a piece of the entire market. What equivalent vehicle exists for rentals? Sure there are REITs and Syndications but these are tiny compared to an S&P 500 or global market fund. And stocks have close to ZERO transaction costs and second to second liquidity. You can buy with very little capital and add small amounts regularly. You can leverage (via margin) and you can borrow against your brokerage holdings. So not that different from real estate.
Dont get me wrong. I own real estate but also own index funds and stocks. There is a place for both in any diversified portfolio.
I hate to not take a strong side, but what about both? Stocks, especially with index funds based on S&P 500, have been a historic long-term source of growth and wealth. I am not a fan of much active investing in stocks as I do with real estate, but if you let the market work, over the long run, it does deliver.
Real estate offers leverage, tax benefits, and better cash flow than most stock dividends. Long term appreciation is strong, although there's not much real estate that is likely to zoom up the way some stocks, especially tech companies, have in recent years.
I say do both.
Probably most have or want both is the reality. Perhaps some have to consider a 3rd leg today in that now 55% of the worlds top banks also have bitcoin.
Ann Arbor, MI · Member since 2014 · 1k+ posts · 997 votes
5y
It's really impossible to compare real estate to stocks and arrive at an outcome/result that is true 100% of the time. They both have their positives and they both have their negatives. At the end of the day it comes down to the individual’s risk profile, the amount of money they have, their time horizon, etc., etc.
So frankly, any answer this says it's one or the other is wrong. Dead wrong. And don't quote a book written by a real estate guru or a stock guru. Those aren't exactly unbiased opinions now are they?
And let's not forget that the vast majority of people on this forum have no idea with the stock actually is, have never traded stocks, don't even know how to invest in the stock market, and most people here are already predisposed to do something with real estate.
So frankly, this is a bit of a nutty question to ask a group of real estate investors on a real estate investing forum…
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
5y
@Casey Mayton scarcity is a reason for RE. The estimates are 2 to 3 million units shortfall. Vacancy is a valid risk stocks don’t have, but the data forecast that to be negligible. There is no shortage for stock dilution.
I agree with all other comments on control of RE.
Stocks can “flash crash” quicker than I can react to them.
@Casey Mayton and @Evan Zeigler, I would like to address a few things in this post. I have been trading Stocks and currencies for about 10 years now. I do quite well and have a decent track record.
Mr. Zeigler stock trading has a handful of differences compared to REI, but for the most part they're the same. For instance, lets say you're an appreciation guy, would you buy a property with a high crime rate with no businesses looking to start up there or no strong job market? Probably not, just the same as i would not buy a company with high amounts of short term borrowings with no Treasury Shares, Cash Reserves, or liquid-able assets. But Lets say you're a cashflow guy, you probably would not buy a property with huge property taxes, because property taxes eat up your cash flow in REI, and if you're a growth investor in stocks picking companies like Amazon (AMZN) or Boeing (BA) is not a good idea because they provide no dividend.
Mr. Mayton, this is strictly you're call. Let me ask you a serious question. Have you ever heard of a university offer a Stock Trading Class? No, and I sure haven't and I am considered a philosopher of Psychology LOL. I say that to say I have spent my fair share of time on university campuses. The reason they don't is the "risk". So, EVERY broker or trader is self taught. NOT A SINGLE ONE took stock trading 101. The traders on Wall St. were trained by the traders before them in their investment firm or read a few books. The brokers have to get certified, because its an insurance policy kind of thing to protect people from people like Jordan Belfort. the courses are stupid and the only way to get any type of certification is you have to be sponsored by an entity that is already sponsored. So, if you decide to go this route DM me and ill be more than gladly to send you some titles to read to educate yourself on stocks. Because in the end you're gonna pay someone a commission to do the same thing you can do, that you can do for free with a little bit of reading and time.
People will argue both sides you have two perfect examples in each realm to prove both systems work. Stocks with Warren Buffet and REI with Donald Trump and others. I say if you're educated in both do both. Why? Because, if you're good you can finance your own deals like a bank. throw your money into a few trades let it grow 10-20% square off your positions and take the money and buy a good property. Refi the property and throw that money into the market again and repeat. make sure you don't owe commission fees. With stocks you're reading 10Ks ALOOOOOT of 10Ks and you might feel embarrassed to admit owning part of because of whatever reason. For example, I own Dollar General (DG) and I say it with pride, because if some asks me why I can say their financials are ROOOCK SOLID!!! they don't pay a dividend worth a f*** but the company is solid by my measure at least. and in REI youre gonna scour the internet and MLS for deals that make sense and youre gonna look at crime reports migration patterns and etc.
One of the most solid companies i have run across is the Home Depot. One of the most solid companies i have ever analyzed! when you look at their financials they have negative equity and on the surface it looks bad. when you look at their revenue it has grown the past 10 years by at least 10%. The numbers check out when you see what their reportable income is. So how can they have negative Shareholder equity? because they are AGGRESSIVELY buying back sooooo many shares which drives the price up and because they are buying back their shares they are using their cash reserves and its showing up negative on their balance sheet (here is an article dedicated especially to the topic and they use Home Depot as an example...https://www.oldschoolvalue.com...
So, which one do you want to choose IF you had to choose only one? Lets run through some tax reasons for both as i have to do taxes on stocks and owning a primary residence.
Stocks- you will pay double taxes on unless you invest through a self-directed Roth IRA. With a SD-R-IRA you will pay taxes Now and when you liquidate your positions you DO NOT pay taxes then. any dividends paid through your SD-R-IRA will also be tax free. If you use a brokerage account you will pay Capital Gains Taxes at the 2X% range once the profits are realized (meaning the funds have cleared and available for withdrawal out of the account. BEFORE any commissions or what ever. ANNNND you will pay taxes on any dividends earned as Earned Income at the standard 3X% rate. This type of investing offers some benefits like if you don't like how the company is performing you can sell it with a click of a button and you can buy with a click of a button.
I would strongly advise AGAINST any margin trading. Even someone like myself i don't use margin because you have CEOs like Elon Musk out there that "trolls" people and their money. he has done it a few times with his own Tesla (TSLA) stock and with the dumb a** dogecoin. He can send out a tweet (on purpose might i add) and it will send TSLA sky rocketing and its a good day or he can tweet the infamous "i think TSLA stock is too expensive" and it drops 20% in one day. that 20% on margin could get called and the broker is gonna liquidate what ever positions you have to the amount you owe plus interest to cover the balance without your say so.
REI- this one you get way more tax benefits. you get get to claim deprecation, you get to do Cost Seg., you get to claim the interest you paid on your primary residence up to 750,000 and 10,000 dollars on property taxes, and you get to claim endless amounts of interest paid on investment properties and the same for property taxes. You have a 1031 exchange, (that might get chopped under the Biden administration) but you have it for now. you have 180 days to close under the 1031 and must identify a property in 45 days. there is also a percentage rule that applies too and i cant think of them right now but in essence it prevents you from just hurrying up and "cherry picking" a random property just to end the 45 day clock or the 180 day clock. you get equity in REI that you can leverage, you get loan paydown (which increases your credit score and reputation at a bank), and finally you CAN get appreciation if you buy right.
I have been advised to not add an extra tax shelter for your money that's already in a tax shelter. AKA like taking a loan out against your ROTH IRA to buy real-estate. Something weird happens tax wise and I'm not sure what!
Los Angeles, CA · Member since 2018 · 86 posts · 86 votes
5y
@Nick Barlow the one thing I will say about scarcity, and only because I have seen this argument come up a few times in this thread, is that the scarcity is not related to the stock itself but the underlying business model. Many stocks are businesses that have scarce resources or IP or other things that can’t be reproduced or substituted easily. The stock itself may or may not be scarce though, and to take it a step further, typically scarce stocks are scarce because they are overvalued stocks and have tremendous short interest driving up the borrow costs.
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
5y
Active real estate investing will far surpass total return of stocks. I still like stocks though and keep significant amount of networth in them but as real estate opportunities come up I pull out cash. I put cash back in after completing a BRRR. A lot of my clients do similar they do both and are always willing to pull from stocks either by selling or through an equity line of credit to make there be no tax event.
With real estate you get cashflow+mortgage paydown+appreciation+tax benefits. It blows SPY away!
I bought my first rental in 2011, put 20% down and the house has little bit more than double and I have been getting good cash flowing since day 1. Counting appreciation, cash flow, debt pay down I am getting 700% return in 10 years from my initial investment. Real estate return is pretty darn good and I sleep better at night. Of course I still have 401K, IRA, stock other stuffs but RE is my preference.
@Ryan Olsen this is incredible. I currently dabble in the stock market and I am a hopeful soon-to-be RE investor and I think you make some great points as to why REI is more beneficial and reliable.
Investor · Reno, NV · Member since 2021 · 23 posts · 47 votes
5y
@Drew Judge - glad it could help. It’s what stuck with me and reason for my focused game plan. A friends podcast consistently has great insights. You might dig it.
Real Estate Agent · Naples, FL · Member since 2017 · 48 posts · 15 votes
5y
Shiva Bhaskar, I agree. I have both and have for quite some time. As far as the stock market, I love a solid dividend paying stock! They pay you with, as Kevin O'Leary calls it, a nice KI$$ every three months. I was lucky enough to buy and hold AAPL. It split a couple times since I bought it which brought my cost basis down to $20.34. I do well with real estate for the same reason. I don't flip.
Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
5y
I work approx 12 hours a week
Will pay taxes on approx $480,000 from flipping this year
Same money invested in a broad fund in the stock market IF I sold it all would have netted approx $37,500 unless the stock market plunges or skyrockets by Dec 30
Rental Property Investor · Orlando, FL · Member since 2017 · 56 posts · 33 votes
5y
To me there is no real answer as it is a combination.
I like the argument for REI as to have more control, with that I wonder who are the LP syndication investors out there. Because those will loose control and not learn with mistakes.
So I wonder if investors actually would like to invest passively in REI instead of stocks
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
5y
@Casey Mayton really simple: BOTH! I have done both. Once you pick a diversified group of quality stocks with dividends, there is no longer more work. Its truly passive. With that said, I love the thrill of RE with some 40 flips and ownership in 100 units physically and some other RE syndications. RE is far from “passive” as I self manage 16 doors currently. I do not think you have to chose one bucket. You cannot show the Amazon stock pick or Blockbuster as someone mentioned, but stocks are about diversification. I think a solid blend of RE and stock holdings will be the wiser choice and its an easy argument for me, but realize this is a RE site so the bias will lean heavily for “passive” income, but stocks are much more passive for sure. If you want RE holdings, then syndicated RE deals are truly passive. Just my two cents, and yes, I owned $35k of Apple stock in the early 90s and traded it for a hot stock tip and lost most of that money. Would be worth millions today obviously! RE is about LOCATION, while stocks is about quality holdings over the long term. Both avenues have legit value! Its a matter of perspective
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
5y
@Casey Mayton oh, and I bought Amazon a couple of years ago for a high price of $1400 per share and now its more than doubled! Most of my stocks picks came from my advisor and son who steered me correctly!
Specialist · Baton Rouge, LA · Member since 2018 · 118 posts · 110 votes
5y
@Casey Mayton I do BRRRR using other people's money so I have infinite returns with RE. I was able to take my net worth from 70k (all invested in ETFs and mutual funds) to $275k in 12 months. $35k in stock gains, $170k in RE equity, plus cash flow.
I have not found a way to buy stocks for 0 down or with a bank's money yet, at least, not with my risk tolerance. For people just starting, education and lead gen can give you an unfair advantage in RE where you can create wealth quickly. And it snowballs.
For a mature investor with a bunch of cash, stocks may be a better choice. But for me, just starting my investing journey, I can only hit my goals of retiring at 40 thorough RE.