5 Million in Rentals or 5 million in stocks

[Mark Weins]

If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.

Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.

Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?

If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.

Is this true?

[Carlos Ptriawan]

In my own very long analysis on this aspect, here's how I see different asset class in term of reward/risk. The higher is better.

1. LP Syndication in Industrial space
2. Direct Rental Investment for Appreciation (CA/HI)
3. LP Syndication in Niche like Self Storage/MHP
4. Direct rental Investment for Cash flow (OH/AL)
5. HML/Notes
6. Active Stock Index Portfolio Hedging + REIT
7. LP Multifamily syndication 
8. LP Hotel/Office Syndication (avoid at all cost)

[Michael A.]

@Nathan Gesner This, all the way. Most important thing to note. Leverage in the stock market scares the crap out of me because you owe money on the downside.

[Tony Kim]

Quote from @Ian Ippolito:

Quote from @Mark Weins:

If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.

Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.

Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?

If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.

Is this true?

First, I invest in both the stock market and real estate. And in my opinion, each has its pros and cons and neither one is 100% superior to the other in every way. And so, I believe a well-diversified portfolio should have both asset classes.

To answer your question: it's a very different thing to say:

"The stock market has performed about 10% over the last 10 years"

versus:

"The stock market *will* perform about 10% over the *next* 10 years"

(or 20 years or whatever period).

The first is a fact. The second is highly speculative and no one really knows for sure (and anyone who says they do know is just guessing).

As an example, if you invested in the start market in February of 2009 then after 10 years you would have a -3% return. And the stock market has historically been much more volatile than real estate (with many more down periods).

A few years ago, a group of economists decided to take on the huge task of measuring the historical returns of all the asset classes over a much longer period. So they examined records back to 1870 (i.e. for about 150 years). And they called this study "The Rate of Return on Everything".

And they found that equities (meaning the stock market) and housing ( meaning residential real estate) performed about the same. And that was about 7%.

https://www.frbsf.org/wp-conte...

Note this didn't take into account the tax benefits of real estate which are usually much better then the stock market (and would thus make equivalent returns tilt toward real estate).

But that also doesn't make real-estate "better". 

Because they also saw that returns on different asset classes have changed over time as the structure of the economy changed. This is something that many investors miss (who often assume the factors that caused past performance to occur will stay the same forever).

So who knows what will happen to the U.S economy in the next 150 years. But we can safely say that it's virtually guaranteed to be a lot different than the last 150. And as just one example: if certain trends continue, the US won't even be the largest economy in just 20 years (nor the leading economic power). If this happens, it will almost be guaranteed to have an effect on  U.S stock market and real-estate returns (and cause them to change from the past).

So in my opinion it's a mistake to look back at past market returns and assume that guarantees future results of a certain amount (and then make plans as if the #s are guaranteed). And since no one can really predict for sure what will happen, I believe it's better to reduce the risk of guessing wrong by diversifying into multiple asset classes.

This response and @Carlos Ptriawan 's responses were my favorite in this thread. This question is not unlike many of those tweets you see on Twitter...they're fun to think about and interesting to read peoples' takes on this, but in reality, anyone with $5M in dry powder investing in only one asset class is not acting very prudently. Heck, even a 50/50 split between stocks and real estate isn't exactly to my liking either. Depending on where a person is in life and what their goals are should be an important determinant of where to invest your money. Saying real estate is better than stocks, or stocks are better than real estate is really ignoring the differing utility that each investment can provide.

[Tony Kim]

Quote from @Carlos Ptriawan:

In my own very long analysis on this aspect, here's how I see different asset class in term of reward/risk. The higher is better.

1. LP Syndication in Industrial space
2. Direct Rental Investment for Appreciation (CA/HI)
3. LP Syndication in Niche like Self Storage/MHP
4. Direct rental Investment for Cash flow (OH/AL)
5. HML/Notes
6. Active Stock Index Portfolio Hedging + REIT
7. LP Multifamily syndication 
8. LP Hotel/Office Syndication (avoid at all cost)

Amazingly, my hotel syndications have performed admirably through the pandemic. There was a period where distributions were halted, but they've since resumed and are in the post BOV stage and looking for buyers.

[Henry Clark]

This is the same question you posted before.  Just a different way.  

Real estate is far superior, not even close to stocks.  

Returns are better by far. Yes you can leverage stocks with options but you have to pay and kick in money as the market moves negatively. You don't with REI.

Far favorable tax laws.     

He only way sticks beat REI is passive versus active.

As mentioned above read some books or articles or the other 1,000 posts with this same question.  The math is very simple and the tax advantages are very simple to understand. 

Let's do something useful. What is your REI investment portfolio? What aspects would you like to improve or have a question in?

[Carlos Ptriawan]

Quote from @Tony Kim:

Quote from @Carlos Ptriawan:

In my own very long analysis on this aspect, here's how I see different asset class in term of reward/risk. The higher is better.

1. LP Syndication in Industrial space
2. Direct Rental Investment for Appreciation (CA/HI)
3. LP Syndication in Niche like Self Storage/MHP
4. Direct rental Investment for Cash flow (OH/AL)
5. HML/Notes
6. Active Stock Index Portfolio Hedging + REIT
7. LP Multifamily syndication 
8. LP Hotel/Office Syndication (avoid at all cost)

Amazingly, my hotel syndications have performed admirably through the pandemic. There was a period where distributions were halted, but they've since resumed and are in the post BOV stage and looking for buyers.

You are very lucky, the very fact 20% CMBS Loan going default between 2021-2022 time frame makes me think this asset class is the worst performance hitherto along with Office(office's default rate is about 5-7%).

There's one hotel syndication however, that after I checked their audited report, they're exceeding their projected cash-flow. But the location is in Maui LOL.

[Henry T.]

youngster RE. Retiree SP500 maybe.  There's no way the SP500 comes close to my RE returns. Nooooo way!

[Greg M.]

Quote from @Nathan Gesner:

Quote from @Greg M.:

Why are you assuming that the OP will leverage the RE and not the stocks?

Because I don't think it's possible?

Please explain how I can purchase $20 million in stock with just $5 million of my own money.

I never said they could buy $20M worth of stocks. Using margin they could buy $10M worth of stocks. Or they could also buy $500M worth of short term government bonds. 

My point stands: You can't point to investment A using ZERO leverage and investment B using MAXIMUM leverage and then say when the market goes up, B is better because you made more money. The risk profile changes dramatically when you start using leverage. Things go down in value - even real estate, not to mention there are also costs with leverage.

[Luka Milicevic]

If we're talking $5m to invest....

At this point, I'd put it in a high yield savings account and earn 4%/year.

Maybe mix it up with some treasury bills. 

Making $200k/year with very little risk and no work is plenty for me. 

[Mak K.]

To be honest such long term hypothesis are waste of time. At the time of cash out, your 5 million can be during Covid time with real estate boom or can be like 2008. Same can happen to stocks. 

Also at 5 million even 6 percent return would be more than what average person could spend. Honestly if retirement starts at 60, you only really spend till age 75. After age 75, due to age health and other reasons, you are going to be much laid back. 

It’s just my two cents as I see various people waste time in such long scenarios which would may never happen. My two cents. 

[John McKee]

Here is why I invest in Real estate:

Tax deductions on Interest.  There are others, but this one is a biggie!

Produces steadily increasing income.  My #1 motivation.  No Golden handcuffs for me.

A hedge against inflation

Control over the asset

Cost segregation (a from of depreciation that covers the internals)

Appreciation.  Can happen through rental increases, market forces, or value add

Leverage.  Using other peoples money

Long Term Capital Gains.  The ability to limit your tax by holding on over 1 year

1031 exchange: The ability to lever up your portfolio without paying tax

Step up in basis:  No taxes to be paid by your heirs as their cost basis readjusts, thus creating significant generational wealth.

Deprecation: Standard depreciation write off of the building.

Passive:  Relatively passive depending on the asset class

Freedom:  Because of the passive nature of real estate it gives you the freedom to go out and create more wealth or go fishing!

I know nothing about stocks, but I do know that no other asset has these many benefits.  Perhaps I am institutionalized in my way of thinking, but just wanted to let you know my perspective.

[Sam Yin]

@Luka Milicevic

My point exactly.

This post has generated a lot of good information for those that are trying to figure out their path. And that is awesome.

However, for those that have found their path, a solid strategy, or have the end goal in sight, the active vs passive debate is more significant.

I love RE and all its advantages. But I am well aware of its actual passivity. At the same time, my life situation woul lean me more towards a super passive income stream and $5M to start can go far in the more passive path.

If I was in a position to prioritize wealth building and growth, I woul definitely go with RE.

Heck, my ATT, 3M, and Ketchup has been losing massive stock value... but their are awesome because the dividends keep on coming in. That's what many fail to understand about aristocratic stocks. And lately, Tbills and even bank accounts are doing good. For example, my local banks are giving 5% on their savings. The minimum is 100K. But that's a drop in the bucket for the hypothetical person with $5M to play with.

To each their own. Great thread.

[Tony Kim]

Quote from @Sam Yin:

@Luka Milicevic

My point exactly.

This post has generated a lot of good information for those that are trying to figure out their path. And that is awesome.

However, for those that have found their path, a solid strategy, or have the end goal in sight, the active vs passive debate is more significant.

I love RE and all its advantages. But I am well aware of its actual passivity. At the same time, my life situation woul lean me more towards a super passive income stream and $5M to start can go far in the more passive path.

If I was in a position to prioritize wealth building and growth, I woul definitely go with RE.

Heck, my ATT, 3M, and Ketchup has been losing massive stock value... but their are awesome because the dividends keep on coming in. That's what many fail to understand about aristocratic stocks. And lately, Tbills and even bank accounts are doing good. For example, my local banks are giving 5% on their savings. The minimum is 100K. But that's a drop in the bucket for the hypothetical person with $5M to play with.

To each their own. Great thread.

Good post.

I've been slowly building up my REIT portfolio as they've really taken a beating the past few years and so I consider them to be pretty substantially undervalued. But even for the folks that were in REITs before the rate hikes and suffered big declines in value, their dividend payouts have been largely unaffected. At the end of the day, what I'm looking for as I transition away from my W-2 is reliable, passive income and modest increases that will provide a decent hedge against long-term inflation. I do my best to try and ignore the daily fluctuations in trading price. As publicly traded stocks, my REIT portfolio is subject to some strong scrutiny under SOX and hopefully a competent BOD. I love private investments, but the temptation for shenanigans will always reel a few sponsors in when things go south, so I limit those to a few that I really trust and with whom I have a long history of investing.

With that said, for someone who is in a different position and is looking to aggressively build their portfolio, hustle and sweat equity in real estate, VC, growth stocks, real estate developing, etc are the ways to go.

[Steve Vaughan]

With $5M, most of us would focus on capital preservation.  I'd be in money markets or tbills until an opportunity (dip) in the indexes, etfs or stock issues I like happen or when cash gets me a quick close discount in RE.  

Simple as that.  Make me get off 4+% risk-free couch money. 

[Sam Yin]

Quote from @Steve Vaughan:

With $5M, most of us would focus on capital preservation.  I'd be in money markets or tbills until an opportunity (dip) in the indexes, etfs or stock issues I like happen or when cash gets me a quick close discount in RE.  

Simple as that.  Make me get off 4+% risk-free couch money. 

 EXACTLY!

[Henry Clark]

@Mark Weins

What is your REI and wealth status? Otherwise this is a pointless question and adds no value to your growth in REI.

[Becca F.]

Quote from @John McKee:

Here is why I invest in Real estate:

Tax deductions on Interest.  There are others, but this one is a biggie!

Produces steadily increasing income.  My #1 motivation.  No Golden handcuffs for me.

A hedge against inflation

Control over the asset

Cost segregation (a from of depreciation that covers the internals)

Appreciation.  Can happen through rental increases, market forces, or value add

Leverage.  Using other peoples money

Long Term Capital Gains.  The ability to limit your tax by holding on over 1 year

1031 exchange: The ability to lever up your portfolio without paying tax

Step up in basis:  No taxes to be paid by your heirs as their cost basis readjusts, thus creating significant generational wealth.

Deprecation: Standard depreciation write off of the building.

Passive:  Relatively passive depending on the asset class

Freedom:  Because of the passive nature of real estate it gives you the freedom to go out and create more wealth or go fishing!

I know nothing about stocks, but I do know that no other asset has these many benefits.  Perhaps I am institutionalized in my way of thinking, but just wanted to let you know my perspective.

I have both real estate and stocks, but most of my money is in RE. I agree with you on all the advantages of RE. The only thing is that I feel that it's not that passive. I had to find a contractor to do the renovation, get a loan, go on site, do walk throughs with contractor and electrician and now I'm self managing this SFH in the Bay Area. With my other properties, I have property managers so I'm more hands off but I had to find the recent deal, which is out of state, communicate with the real estate agent, get financing, get an inspection, sign closing papers etc.

With stocks and index funds I can click on a button and in 30 seconds I just bought shares in Amazon or other stock. My Apple and AMD stocks are doing well since I bought them a while ago. However I have no control over whether the value goes up or down and I don't see the money unless I sell the shares and there are no tax benefits. If I sell the shares I'm paying capital gains tax. 

I don't think it's either RE or stocks but I tend to favor RE. It's important to have a diversified portfolio and it depends on the person's financial goals, timeline, individual situation etc. CDs and premium deposit accounts at banks are paying 4.8 to 5%. If I was given $5 million I'm not sure I'd put all of it in RE right now, maybe 50% of it???