Real Estate or Stocks. Same ROI, Which is Better For Taxes?
Lititz, PA · Member since 2013 · 595 posts · 272 votes
If a RE investment and Stock investment return the same amount of ROI over a 15 year period and then sold which is the better investment? Assuming a 1031 is not used (they may not exist in 15 years), do certain structures of owning the stock (Roth ira) make the stock investment more desirable from a tax perspective?
Thanks!
I use a variation on Buffett's strategy to avoid paying any meaningful tax on my stock portfolio.
1) I invest primarily in high growth stocks and ETFs so currently taxable dividends are minimized.
2) I only invest in securities I intend to hold indefinitely so currently taxable capital gains are minimized. Losses on the other hand can be currently harvested to benefit from the loss deduction. Since I'm exceedingly selective upfront because I intend to hold all my stocks indefinitely my losses have been very few and far between.
3) All the capital appreciation on my stocks will be wiped out in my estate so my lifetime taxes paid will be negligible.
4) A Roth works too, however I don't qualify and conversion of my regular IRA would be tax cost prohibitive.
5) All my current and future cash needs are funded from RE portfolio and work. RE portfolio also allows me to cash fund additional stock investments with significant pre tax money (i.e., the depreciation sheltered component).
I use a variation on Buffett's strategy to avoid paying any meaningful tax on my stock portfolio.
1) I invest primarily in high growth stocks and ETFs so currently taxable dividends are minimized.
2) I only invest in securities I intend to hold indefinitely so currently taxable capital gains are minimized. Losses on the other hand can be currently harvested to benefit from the loss deduction. Since I'm exceedingly selective upfront because I intend to hold all my stocks indefinitely my losses have been very few and far between.
3) All the capital appreciation on my stocks will be wiped out in my estate so my lifetime taxes paid will be negligible.
4) A Roth works too, however I don't qualify and conversion of my regular IRA would be tax cost prohibitive.
5) All my current and future cash needs are funded from RE portfolio and work. RE portfolio also allows me to cash fund additional stock investments with significant pre tax money (i.e., the depreciation sheltered component).
Thanks for the excellent reply. Can you elaborate on number 3? I would like to do this as well.
Under current law, the tax basis of any assets that pass through your taxable estate is adjusted to their date of death Fair Market Value. So any unrealized gain (or loss) on such assets is wiped out.
@Christopher Smith Thanks for the reply. You will want to verify this, but I recall hearing recently that they are considering eliminating or changing some of the passthrough stuff.
Also, I can get 15-20% annual ROI on real estate. There are people who promise these returns with certain stocks (Tesla being one of them), but I'm always reluctant. I'm interested to know if you think there are stocks that can match or beat 15% annual ROI for the next 10 years.
@Christopher Smith Thanks for the reply. You will want to verify this, but I recall hearing recently that they are considering eliminating or changing some of the passthrough stuff.
Also, I can get 15-20% annual ROI on real estate. There are people who promise these returns with certain stocks (Tesla being one of them), but I'm always reluctant. I'm interested to know if you think there are stocks that can match or beat 15% annual ROI for the next 10 years.
Not 100% sure what you mean by passthrough stuff. If you're referring to eliminating the tax basis step up for assets that are part of your taxable estate that is possible, but of course changes in the law are always possible. Its all speculation at best at this point, but from what I have heard the estate tax increases will be targeted at the very rich, what that means who really knows, taxable estates over 100 million, 50 million? I may not make that limit, but again its all conjecture at this point. I think the chances of getting rogue radical tax increases through the Senate will be much harder for the liberals than most anticipate.
With regard to ROI, its best to compare apples with apples. I assume your RE ROI is based on the utilization of a highly leverage position and your stock ROI is not. On an equal footing (both without leverage) stock returns are much much higher than RE returns, but most folks are not comfortable making stock investments with the added risk of leverage, and perhaps appropriately so.
Can you obtain a 15 to 20% ROI with stocks? I have (and without the benefit of leverage), but the average investor will likely never reach those percentages, they might be lucky to get 8 to 12%, and that would require a level of discipline the average investor probably does not possess.
I was able to do it mostly acquiring the highest quality growth stocks (e.g., Facebook, Apple, Amazon, Alibaba, Microsoft, Google and a handful of very well managed REITs and other stocks like STOR and maybe MPW), and "most importantly" by buying very heavily into them during mass panic sell offs, either market general sell offs like the end of 2018, the COVID crash, or stock specific sell offs that can occur for any number of reasons.
That however takes having sufficient ready cash on hand, but most of all a rock steady emotional constitution when the rest of the world is running down the street naked with their hair on fire screaming that the world is coming to an end (so run for your life and sell everything that you own). But hey that's what creates real opportunity, the blood in the streets thing.
My RE I did the same way, I bought heavy into the post 2008 RE wipe out, started acquiring CA properties at the end of 2010 through mid 2012, and then added some out of state properties shortly after that as West Coast prices had become to pricey for my liking. The CA properties (all nearly new in some of the best neighborhoods) were at about 1/3 of their previous post 2008 crash highs.
I bought with cash as it very easily permitted to step in front of all those who had to borrow at the time, and to do it with a substantially lower bid price. I have achieved an unleveraged return of about 25% over the last 8 to 10 years. That rate will start to drop (really already has, notwithstanding the recent price surge) as post crash rates of return moderate for asset classes. However, I've cleared several million, have positive cash flow and significant profits after deprecation on all properties so I can live with a moderating RE ROI at this point.
@Christopher Smith Great reply! It seems your careful timing has worked out very well, and based on your responses you are more knowledgeable on the subject of investing than I am. I too started picking up RE in 2009 and have dabbled very lightly in stocks (picked up Apple in Dec.2018). As stated in the original post, at the moment I am trying to decide where to allocate funds between RE and stocks
I would be interested in your opinion of the following: This weekend Cathie Wood (ARK Invest) presented their 2025 estimates for Tesla. Cathie Wood and ARK Invest have proven their ability to achieve better than average returns that beat the indexes. Their "bear case" estimate of $1,500/share would mean a 22% Annualized ROI for the next 4 years (their "bull case" is $4,000/share and "expected case" is $3,000/share by 2025).
As you know, investing in stocks is much easier than owning and managing RE. With projections like this for a stock such as Tesla, it's hard to justify allocating funds to RE and not placing it in a stock like Tesla. In my case, it would be diversification as I'm nearly 100% RE for allocated funds.
What are your thoughts on the expected ROI for Tesla? Are there other stocks that you believe will have returns of 15% plus for the next 10-15 years at their current value (without waiting for a significant crash)? Final note: The attractive thing about RE is that I have been able to choose reliable locations that have a steady ROI that shouldn't change significantly and becomes even more attractive once the debt is paid down. (I don't plan to sell).
In conclusion, I am seeking annual ROI of 15-20% or greater, and as the original post stated, I am trying to compare the benefits of RE where I can achieve around 15% vs. Stocks where others, (not me yet) are achieving it.
Thanks you again for your insight.
With regard to Tesla and Cathie Woods.
First Cathie, I'm reluctant to chase the latest red hot hand as most investors who do so don't fair well long term as they pay an absolutely insane high price to buy into them. For example, Tesla has a PE ratio of over 1,000 (and that is after a large drop in the stock price from 900 to 650), so you pay $1,000 for $1 of current earnings.
At this point that is one heck of a bet on absolutely out of sight future growth. If you were in from the beginning great you've clearly made out big time, if you're just buying in now I personally think you're paying a king's ransom for a still genuinely uncertain future bet.
I'll give you a real world example. I bought into a Chinese internet retailer at 5, it's now around 450 (10 for 1) split adjusted.
Boy am I really glad I bought in at 5, but would I buy in now at 450, not very likely. While I still own it, the market it competes in has become insanely competitive so the risk reward profile to me just doesn't justify any new money. It's a game of probabilities and the likelihood that this stock will continue to replicate it's past performance is close to zero yet the buy in price is still crazy high.
The one stock I bought late into was Amazon, but I did so only AFTER a 50 percent drop (during the initial Covid days), but I did that with trepidation as it's PE was around 100 which to me is insanely high.
It's roughly doubled since I bought in last March, but I feel much better about having added Facebook and Google and Apple and Alibaba and Microsoft after their 50 percent drops as they have very reasonable earnings multiples (around 20 at the time) and long term track records of out of sight earnings. They aren't the hot hand of the moment, but their long term odds to me are much much better. Plus they have all also doubled since my last buy in.
So I can't tell you not to bet the farm on 57 Red, it might really pay off and make you ultra rich, however long term the house usually wins when you start chasing shooting stars.
@Christopher Smith Thank you for the explanation. It is always good to hear an example of a measured and balanced approach to stock investing. The market seems like gambling today, and I am trying to avoid the frenzy.
I have looked at historical returns for the DOW and S&P and seen multi-decade periods of no returns. I am therefore convinced it is better to carefully select stocks to get the best returns.
Do you think we will have to wait for another
correction/crash before buying? Are there any stocks in your "buy zone"
at their current values? (I wasn't sure if the stocks you mentioned
are still in that zone, or if you would only buy those again in the
event of a correction/crash).
Thank you again
Am I investing heavily now? No. I have a plan at work that I contribute evenly to at all times (and have done so for years) so it gives me a benchmark return I can use for comparison. But for all my investments outside of my plan at work, I'm mostly accumulating cash.
Of all my foundation holdings (stocks I fully intend to hold indefinitely) the only one I've added to recently, and then only a few additional shares so far is Alibaba. It's down roughly 30 percent (I've been buying at sub 225) from it's 320 high. Also the same for a couple of China internet tech based ETFs.
I will add progressively larger and larger amounts if/when Alibaba drops further buying heavily sub 200. Lots of hot air being blown around with the notion that the Chinese Govt is out to destroy Jack Ma, and cut the company down to size. I think that is very overblown, as it's underlying long-term fundamental economics are still incredible.
Now against my better judgement I have been buying into NIO on the bigger dips. Very speculative, and I would not recommend anyone else doing it.
It's very loosely speaking a Chinese Tesla, but if you buy it now it's incredibly expensive on a revenue basis and still losing money, so the risks are enormous. It has risen even faster than Tesla (not good from my perspective), but it's earlier in the game than Tesla so maybe it will work out for me.
When I do something as speculative as NIO I strictly limit my investment which means initially significantly less than 1 percent of net worth max. I've been in the Chinese markets for years and they have been good to me, but I understand that it's a very mercurial beast and use that to my advantage.
I remember an interview with Cathie Wood where she discussed valuations for "value" vs. "growth" stocks. She said it is common to see higher p/e ratios for growth stocks in their growth phase that level off when they reach the value stage. As you know she is a big proponent of identifying companies with high growth potential (she often refers to exponential growth potential). I suppose it's riskier, but she is hitting it out of the park. She'll even go so far as to say that it's risky to be in value and not be in the stocks they choose! I'm not making an argument for or against, just sharing ideas here.
I remember an interview with Cathie Wood where she discussed valuations for "value" vs. "growth" stocks. She said it is common to see higher p/e ratios for growth stocks in their growth phase that level off when they reach the value stage. As you know she is a big proponent of identifying companies with high growth potential (she often refers to exponential growth potential). I suppose it's riskier, but she is hitting it out of the park. She'll even go so far as to say that it's risky to be in value and not be in the stocks they choose! I'm not making an argument for or against, just sharing ideas here.
Sure, but the problem with that is by the time the entire world knows you're often way late to the party and you're left holding a disastrously over priced security. The folks that have made a mountain of cash with her were likely in much earlier, people getting in now are probably facing a pretty ugly risk reward profile they just don't realize it and likely won't until it's too late. The easy money likely has been made.
Nearly all my stocks have been considered growth and higher PEs come with that territory so I have no problem with that. But I do have a problem with jumping on the band wagon after the whole world knows, by that time the risk of massive overpricing is almost a guarantee. I would assume if you've read it in an article somewhere the whole world clearly knows.
So no problem with growth, but remember that no matter how attractive a stocks business growth maybe there is still a price range at which it's grossly overvalued and a poor investment even if hysteria is keeping the price artificially high even for an extended period of time.
My Chinese internet stock had a PE of well over 100 and I made over 1M on it the first time I invested in it. Then the bottom fell out and it lost 85% of it's value shortly after I sold it in no time flat. I was very fortunate to have gotten out.
I bought back in after the crash and it's higher now than ever before, so my timing had been very fortuitous. But it's a very dangerous game and many people who play it long enough lose, and those who come late almost always lose long term, and lose big.
Plus I would argue there really is no distinction between growth and value, a stock is a stock and it's either undervalued or overvalued based upon it's future prospects regardless of its level of growth.
Here's hoping you are not late to the party.
Just an FYI, thought I saw just this morning, that Cathie Wood's ARKK has lost over 40% of it's value since its February high. That's definitely hitting it out of the park, just in the wrong direction.
That should be enough to sober anyone up thinking that jumping in after staggering gains have already been made is a sure sign that they will continue. Not saying what will happen from here, but you should have your eyes wide wide open.
This article from today shows some of the activity around estate taxes:
As an estate and gift tax advisor in a previous life this has been on the liberal agenda for 50 years, so in that regard it's really very old news. As I indicated before, the Democrats are going to have a very difficult time pushing this through an evenly divided Senate, and I'm not sure Biden will support it either (at least not in the form as presented in the link).
In reality I think it is at most an initial negotiating position or just as likely mandatory virtue signaling for those members of Congress on the radical left in there neverending effort to be holier than thou.
If the Democrats want to keep their highly tenuous control of the Senate they will need to come up with something much more reasonable.
@Christopher Smith Are you familiar with the website "Tip Ranks"? It is a website that congregates multiple analysts' ratings and price targets for various stocks. Do you have any thoughts/opinions on this site?
I'm a little like Buffett, I generally don't consider "analysts" reports, nor their meaningless price targets. For the most part they are marketing and promotional documents that to me have negligible value. I'm sure there is some legitimate research that goes into their publication, but sifting between that which might have value and the mountains and mountains of sales driven BS isn't worth the effort.
If I had to distill my approach it would be to identify the highest quality companies (those with a proven durable competitive advantage - see Buffett for all that entails) and then buy heavily into them as opportunity presents itself.
Examples of three recent obvious opportunities would include:
Post 2008 (2010 to 2013) - bought heavily into high quality California real estate at about 35% of Pre crash values. All properties have increased in price nearly 3X, all cash flow, all are profitable AFTER depreciation.
2018 mini stock market crash added large amounts of FAAAMG at values about average of 1/3 or less than today's values (all FAAAMG stocks have a proven durable competitive advantage so they will very likely increase indefinitely into the future, they are likely never sell holdings).
March 2020 bought across the board into high quality trashed names Boeing, Disney, REITs, more FAAAMGs again. All have increased massively and the best part is they all have great growth prospects at reasonable earnings multiples (except Amazon).
I do take an occasional foray into risky assets like the Chinese internet stock they I made about 5000% on, but they aren't my real foundation stones as their outcome is as much determined by luck as anything else.
Long term success rarely comes from luck, but rather having solid insights, performing necessary due diligence and most of all having the emotional ballast and intestinal constitution of a Battleship.
@Christopher Smith Excellent post. I know you are familiar with compounding interest, but I thought I would share an example of the amazing effect of interest rate on returns. These are three hypothetical examples at 5%, 10%, and 20% APR for 30 years with an annual contribution. In the examples below the only variable that changes is the %APR.
Initial investment=250k, Annual Contribution 100k, APR 5%, 30 year total - $8,056,564
Initial investment=250k, Annual Contribution 100k, APR 10%, 30 year total - $22,456,693
Initial investment=250k, Annual Contribution 100k, APR 20%, 30 year total - $201,169,866
Historically, there have been extended periods of 10 years or more of low or no returns in the stock market. Therefore the only way to achieve high yield has been careful stock selection or investing heavily at dips. Considering we are not in a dip, I am forced to either 1. wait for a dip, or 2. make careful stock selections. This is why I am on the lookout for good stocks that can ideally return 20% or more.
One thing you might find as you get deeper into various asset groups and with time/accumulation is that you don't necessarily have to wait for broad market crashes to find attractive opportunities.
There can be groups or individual securities that are depressed while the remainder of the market is steaming upward at full speed.
Chinese equities have been hit particularly hard very recently because lots of very speculative negative rumor mongering most of which to me has little basis in reality or is so over blown as to be almost laughable. But people are driven by fear and prices have tumbled 30 to 50 percent.
I've bought on this dip adding to various Chinese holdings. Picked up one just last week at 25, that sold for 47 just a few days earlier. No change in its fundamentals at all in fact last earnings were quite good, just a fear based speculative driven short term panic selling spasm. I play a long-term game so these sheep driven stampedes are often solid openings for me.
Just a note of caution, many a $ has been lost because of a lack of patience inducing folks to buy into the latest hype du jour at massively inflated prices. At that point it's no longer a rational analysis of true expected returns and probabilities, but little more than a delusional hope game that often ends up in big disappointment in the longer term.
You're warning about patience is a good one. Warren Buffett had this to say about it:
"The stock market is a device for transferring money from the impatient to the patient."
I've scanned some of the Chinese stocks and may consider placing a small amount into them. Is VIPS the one you are referring to that dropped dramatically at the end of March?
@Christopher Smith Alibaba just took a big hit from the gov. Do you have thoughts on its future?
Alibaba has dropped from about 320 to where it is now. I've skimmed a few additional shares recently around 225 and will add progressively larger amounts at lower levels. Of course I've been in BABA for a few years now, with original shares in the 60s, added more in the 130 to 150 range on the major dips a couple or so years ago.
I'm not particularly concerned by the Govts fine, to me it's just Beijing's way of showing who ultimately has control. In my opinion China has no interest in crushing it's crown jewels, just making sure they know who is boss.
Yes you guess right on VIPs, I picked up additional shares at 25. I have a long history with VIPs as well, I bought it shortly after the IPO at 5 and sold it at 275. It crashed after that meteoric rise (fake accounting scandal asserted by a short seller) so I bought back in 5 to 15 range (10 to 1 split adjust) after the crash and had ridden it back up to 46 and added more modestly last month on the panic sell off.
Having said that, I invest in China because I like the Chinese play a very long game. It's a very highly volatile market so before you make that dive you better know what you are getting into, it's certainly not for the feint hearted. Most folks would say BaBa is better for some one new to China than VIPs. VIPs is a small fish swimming in a sea of killer whales, very intense competition and generally modest margins aren't very friendly waters. They also received a fine from Beijing recently, but it was very modest.
I made over 1m on VIPs the first time around, so I can take the risk on that one (note I am holding significantly lower holdings this time around - less than 2000 shares). Whether you should invest in VIPs is up to you, I would neither encourage nor discourage it.
@Christopher Smith Charlie Munger agrees with you on BABA:
https://www.barrons.com/articl...
I read the entire thread waiting for Christopher Smith to dramatically remove a mask and say “Fooled you! I really AM Warren Buffett!”
My disappointment is immense.
Just an FYI, thought I saw just this morning, that Cathie Wood's ARKK has lost over 40% of it's value since its February high. That's definitely hitting it out of the park, just in the wrong direction.
That should be enough to sober anyone up thinking that jumping in after staggering gains have already been made is a sure sign that they will continue. Not saying what will happen from here, but you should have your eyes wide wide open.
Thank you for this discussion and information, Chris. interesting and informative.
As a preservation stage mostly bored investor, I like to dabble in best of class dips and support levels. Many are the US stocks you mention. Keeps things interesting, but the 'bulk' (4% of NW LOL) of my paper securities are in mutual funds.
Following. I think I've only followed 5 threads in my 7 years on here if that tells you anything.
What keeps you motivated to stay informed and engaged after phat FI? I set my limits and stops and forget about it and I'm only medium. Thank you!