Real Estate vs Stock Market
Member since 2022 · 17 posts · 10 votes
Real Estate vs Stock Market
Most Popular Reply
Jacob St. MartinPro Member
Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votesHello Felix! I think there are many benefits of investing in real estate over stocks.
Normally real estate will get you higher returns. 20% in the stock market is actually quite good. Depending on the type of real estate you invest in you might be able to beat that in straight ROI or you might be slightly below. However, if you consider all of the way that real estate makes you money your return should be much higher. Let me break it down:
- Cash flow. With stocks you only make money when you sell (other than dividends but unless you have a huge amount invested this is probably not making you a lot). With real estate you are getting your returns regularly. With LTRs you might get 10-15% with STRs you can get more like 20-50% depending on the area and how good you are.
- Appreciation. This depends greatly on the area but typically ranges from 2-5% annually. However, this is not 2-5% of what you put in, this is 2-5% of the purchase price. Say you house hack and are able to put 3.5% down on a 1 million dollar property which is 35k. If that property appreciates 3% in one year, your value goes up 30k which is a 86% ROI just from appreciation. This is the power of leverage which is a tool you don't have access to in stocks.
- Tax Savings. You can claim depreciation on real estate investments. Take the value of the property (lets use the 1 mil property again), subtract the land cost ( we will say 250k), then divide by 27.5 (which is the number of years you can depreciate the asset over, then multiply by the income tax bracket you are in (let's say 30%). That means you can take 750,000/27.5*.3 or ~$8200 off of your taxable income every year for the next 27.5 years.
- You can re-leverage once you have built equity to keep your capital working hard for you, which you can't do with stocks.
- Stability. Rents almost never go down if you are in fundamentally solid markets. Stocks however, can be much more fickle and fluctuate based on global events.
- Tax deferment. In real estate you can do a 1031 exchange when you sell a property to defer paying capital gains tax. This means that when you reinvest the money you have a larger principal to work with and thus can buy a larger asset that should produce higher cash flow and appreciation vs with stocks you have to pay capital gains when you sell.
My last comment would be that if you meet the right people, you can get all of these benefits without using too much of your time. For instance, I am looking for a partner on a deal right now where the partner would likely get 20-30% ROI and get all of the other benefits I mentioned, while I do all of the work and you sit back, relax, and watch the cash come in. Reach out if you want to discuss further. I hope this was helpful!
27 Replies
- Real Estate Agent · Los Angeles, CA · Member since 2019 · 302 posts · 163 votes3y
I definitely dabble in stocks, mostly index funds, but my main focus is on real estate. My main argument for real estate over stocks is that you can use leverage in buying real estate where you can't with stocks. Let's take an example of a person who is renting in LA. A one bedroom goes for about $2k where I live. You are spending $24k a year paying off someone else's mortgage. You can take $24k, an instead put that down on a condo for $500k, and rent out the extra bedroom. Appreciation has been well over 10% on average, but let's take 5% appreciation. That's $25k a year, and you can double your initial investment after year 1. That's not included principle pay down and money saved not paying rent. For investment properties obviously the numbers change and I'd love to talk with you about different strategies that work out here in SoCal.
- Member since 2022 · 17 posts · 10 votes3y
@Robert Reynolds, I meant investment property, not primary residence. Regarding stocks, I mainly trade options (more specifically sell them) and you definitely could use leverage. There are trades for any risk appetite. The only advantage I see in rei, are the tax benefits, but not sure if that compensates.
- New to Real Estate · Sunnyvale CA and Maplewood, NJ · Member since 2022 · 257 posts · 161 votes3y
Real estate investing is a lot of work. You have to be willing to put in the work. You sound happy with the returns you are getting in stocks (not everyone here would be, but you sound like you are). That, to me, does not give you a compelling "why" for getting into real estate investing.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
You can control and add value to your investment in RE, even if the market tanks you will have cash flow. Stocks to me is brainless investing.
- Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes3y
Hey Felix,
Its all about Risk vs Reward! You want to make more money? Buy real estate and do value add. Its a little more risky to jump in and do it, but you should yield higher returns if you do your calculations right.
If you want steady, easy, hands off investing and are okay with less returns, then buy mutual funds or stocks.
By the way, you can do both!! You do not need to go 100% in one and not the other.
A responsible investor will have money in both the stock market and real estate. Most of us around BP (myself included) are more real estate heavy, and it's for reasons already outlined in this thread.
1. You have more control over real estate compared to stocks (from the location to the finishes to the exit strategy)
2. Real estate is a physical asset that in theory will always hold some value, compared to a % of ownership in a company which, in theory, could go to zero (all companies can eventually go to zero)
3. With rental real estate, when you combine cash flow, appreciation, tax benefits, and principal pay down, the return should outweigh that of the S&P500.
4. Let's be real with ourselves. Real estate investing is simple, and much more practical for the average person with an average education to pull off. I've tried my hand at picking stocks. I don't have the brains for it (outside of investing in broad market index funds). Understanding balance sheets, market cap, price to earnings ratios, dividend yield, etc is quite complicated. Buying a house, doing some renovations, and throwing a tenant in there is a very digestible concept.
- 3yJacob St. MartinPro MemberInvestor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
Hello Felix! I think there are many benefits of investing in real estate over stocks.
Normally real estate will get you higher returns. 20% in the stock market is actually quite good. Depending on the type of real estate you invest in you might be able to beat that in straight ROI or you might be slightly below. However, if you consider all of the way that real estate makes you money your return should be much higher. Let me break it down:
- Cash flow. With stocks you only make money when you sell (other than dividends but unless you have a huge amount invested this is probably not making you a lot). With real estate you are getting your returns regularly. With LTRs you might get 10-15% with STRs you can get more like 20-50% depending on the area and how good you are.
- Appreciation. This depends greatly on the area but typically ranges from 2-5% annually. However, this is not 2-5% of what you put in, this is 2-5% of the purchase price. Say you house hack and are able to put 3.5% down on a 1 million dollar property which is 35k. If that property appreciates 3% in one year, your value goes up 30k which is a 86% ROI just from appreciation. This is the power of leverage which is a tool you don't have access to in stocks.
- Tax Savings. You can claim depreciation on real estate investments. Take the value of the property (lets use the 1 mil property again), subtract the land cost ( we will say 250k), then divide by 27.5 (which is the number of years you can depreciate the asset over, then multiply by the income tax bracket you are in (let's say 30%). That means you can take 750,000/27.5*.3 or ~$8200 off of your taxable income every year for the next 27.5 years.
- You can re-leverage once you have built equity to keep your capital working hard for you, which you can't do with stocks.
- Stability. Rents almost never go down if you are in fundamentally solid markets. Stocks however, can be much more fickle and fluctuate based on global events.
- Tax deferment. In real estate you can do a 1031 exchange when you sell a property to defer paying capital gains tax. This means that when you reinvest the money you have a larger principal to work with and thus can buy a larger asset that should produce higher cash flow and appreciation vs with stocks you have to pay capital gains when you sell.
My last comment would be that if you meet the right people, you can get all of these benefits without using too much of your time. For instance, I am looking for a partner on a deal right now where the partner would likely get 20-30% ROI and get all of the other benefits I mentioned, while I do all of the work and you sit back, relax, and watch the cash come in. Reach out if you want to discuss further. I hope this was helpful!
- Realtor · FL · Member since 2013 · 372 posts · 83 votes3y
@Felix
@Felix Piper, thank you for the input and your question on this platform. I would have to echo what everyone else said. Real estate will always need a home vs everyone does not need (invest) in stocks. Furthermore, in real estate you can always increase its value vs with stocks you are subject to the market. For example, with stocks, a high net worth individual (a celebrity) can tweet, ''I hate apple products" and you could see their stocks decline in value. In real estate, for example, if you add a pool, redo the kitchen, the value of that home will increase in value.
- Real Estate Agent · Member since 2019 · 143 posts · 74 votes3y
It's difficult to say which is better, real estate or the stock market, as it depends on an individual's goals, risk tolerance, and investment strategy. Both real estate and the stock market have their own set of risks and rewards, and what works well for one person may not be the best choice for another.
Real estate investing can provide long-term appreciation and cash flow through rental income, and can also offer potential tax benefits. However, real estate investments can be illiquid, meaning that it may take a while to sell a property, and they also require significant time, money, and effort to manage and maintain. Additionally, real estate markets can be cyclical, meaning that property values can go up and down based on economic conditions.
The stock market, on the other hand, can be more liquid, meaning that it is easier to buy and sell stocks quickly. It also allows for a more diversified portfolio, with a relatively lower investment amount. However, the stock market can be more volatile, meaning that stock prices can fluctuate rapidly and unpredictably, and it doesn't provide cash flow like rental income.
It's important to consider your individual goals and risk tolerance when deciding whether to invest in real estate or the stock market, or a combination of both. It's also important to have a well-diversified investment portfolio to minimize the risk, and to consult with a financial advisor before making any investment decisions.
- Member since 2022 · 17 posts · 10 votes3y
I really appreciate all the input. I didn't expect so many points of view, but it does sound like for my particular situation, stocks/options would benefit me more. As some of you mentioned, diversity is probably the way to go. I will probably look into allocating a small percentage to real estate, especially for the tax advantages that you can't get in stocks. I just don't look forward to being a property manager…
@Nathan A., I agree RE is more work, which is the reason for my post.
@Eliott Elias, as I mention on my post, I made 20% last year when the market went down, so the nice thing about stock, more specifically options, you could make money either way.
@Jon Puente, I sell options which is more active, but not as active I expect RE to be.
@Scott E., thanks your input. I agree, it would be a good idea to diversify into both for specially for the tax benefits.
@Jacob St. Martin, you make a lot of good points, but I've been looking in CA in it is difficult to get good cash flow. I actually don't own many stocks, I sell options, which provides me with a great cash flow - the 20% is my stocks cash flow, not appreciation. The tax savings is the game changer for me, in my opinion. I could offset stock gains with real estate. With options, you could definitely leverage, there are trades for any risk appetite, but maybe it is not leveraged as much as RE.
@Duriel Taylor, you make a point that everyone will need a home, but there will also always be companies to invest in as well.
@John Mathew, the illiquidity of RE is another reason that deters me, but it's ok to invest money I would not need. As mentioned above with options, I can generate a nice cash flow, so wouldn't be a reason for me.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes3y
@Felix Piper Real Estate all day.
- Warsaw, IN · Member since 2017 · 229 posts · 270 votes3y
@Felix Piper a lot of great points on RE already made. Are you trading options in an after tax brokerage or a tax deferred account?
For what I know, you either have a huge tax bill, or can’t access any of the returns you’re getting until 59 1/2.
Getting some depreciation into your tax filing-even if it's from one turnkey SFH rental-could be very beneficial if you have a large tax burden for your options income.
Consult your CPA for further details.
Quote from @Felix Piper:
@Robert Reynolds, I meant investment property, not primary residence. Regarding stocks, I mainly trade options (more specifically sell them) and you definitely could use leverage. There are trades for any risk appetite. The only advantage I see in rei, are the tax benefits, but not sure if that compensates.
It's not just the tax benefits imo. What LTV can you get on stocks? Can you buy a stock, add value to it, then refinance to pull all of your cash out of the stock while retaining ownership of it?
Yes, the tax benefits in real estate are better. But also control and risk. In terms of control, you get to make all decisions related to the asset; whereas, if you own a minority position in a publicly traded company and the CEO does something stupid, what can you do about it?
In terms of risk, there are company's that go out of business or their stock price declines for good. Unless you're buying property in a declining region, this is unlikely to happen with real estate.
That's my argument.- Bay area, CA · Member since 2021 · 383 posts · 306 votes3y
Real estate any day!!
Good turnkeys, complete passive investment, still provide more return than the stock market!!
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes3y
I have most of my investments in real estate but I have some stocks. I've thought to myself that I should diversify my portfolio but my real estate has held its value but my stocks and IRAs haven't in the past year. I agree with the above comments that buying stocks doesn't require as much planning and thought as REI.
The thing I like about REI is you can force appreciation by renovating a property, add an ADU, etc. Land is finite and property holds its value over time and it's a great way to pass on generational wealth to my kids. I can also pull out equity of my rentals to use them to buy more rentals by doing cash out refi or HELOC. The tax benefits of rental property are great - it reduces my taxable income a great deal, can't really do that with stocks. I'm paying taxes on every dollar of stock dividend.
You can do both - it's not one or the other.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
I hear you about the work. I just sold most of my 20 yr RE portfolio and am focusing on stocks. So much easier. I'm up 15% on several issues since Dec 27th. Thankfully I only swing with Roth $ so taxes don't matter.
Stick to what you know. If I could use options in a bear market and consistently make $ with minimal work I'd stick with that. Most here have no idea what options even are. I'm mainly just a value investor and buy best in class on the cheap but do write calls for idle market cf.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes3y
Quote from @Felix Piper:
We have been debating whether to jump into real estate and deal with tenants and all the other nuisances that comes with property ownership, when we have been happy making 20% in the stock market (and that's last year in a bear market!). Would love to hear from others that may also invest in the stock market and what are the pros and cons to jump into rei.
Real Estate all the way....James don't dance with Stocks.
- Realtor · Los Angeles · Member since 2022 · 56 posts · 32 votes3y
How about both? Diversify your portfolio
- 3yHersh ShahBusiness MemberRealtor · Atlanta, GA · Member since 2016 · 122 posts · 80 votes
As many have said in this thread already, it doesn't have to be binary. You can do both! You seem to good at trading, so take that active income and invest it to diversify. Some have mentioned how REI has 4 distinct ways of generating a return in comparison to only in stocks or specifically trading like you are doing. The most important reason to invest in real estate is because it is far more passive than 'trading'.
My family will be taken care of for generations to come without having to learn anything. Property managers will handle the properties while my dependents collect the cash while doing what they love and not having to 'learn' real estate.
Hersh Shah Group4.9113 Reviews I allocated first to equities, and put large lump sums throughout the years. I always want to make sure my investments are liquid. Once I have enough of a backing there, I decided to pursue real estate as these are notoriously illiquid and a lot more work. It's a physical concept, go figure. However, I started on syndications and reit platforms first. Now, in this year I started with real physical investments.
Id always recommend the most liquid route first.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Felix Piper:
@Robert Reynolds, I meant investment property, not primary residence. Regarding stocks, I mainly trade options (more specifically sell them) and you definitely could use leverage. There are trades for any risk appetite. The only advantage I see in rei, are the tax benefits, but not sure if that compensates.
if you are doing good selling naked put, you could continue invest in that area. I am pretty good in both, with non-naked RE and naked position selling SPX and futures ;-) good thing about RE is I can sleep slightly better, and still having naked position lol
- Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes3y
Stocks requires less capital and lesser restrictions where anyone can invest as long they have a bank account. It is definitely more liquid than real estate when you need the cash. However, real estate i would say it's less volatile than stocks and you can have consistent cash flow (earnings) when all goes well. As for stock, it's not in our control where the market is all monopolize but still diversifying your portfolio is never a bad thing. @Carlos Valencia @Albert Bui
- Real Estate Agent · Rancho Cucamonga, CA · Member since 2018 · 82 posts · 36 votes3yDamn, 20% returns in the stock market!! Just keep doing that forever lol.
To answer your question, it depends. If you want liquidity and more passiveness (assuming you invest in index funds, ETFs, etc.), stocks are the way to go. If you want tax writeoffs and usage of leverage, real estate is the way to go. - Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes3y
Quote from @Robert Reynolds:
I definitely dabble in stocks, mostly index funds, but my main focus is on real estate. My main argument for real estate over stocks is that you can use leverage in buying real estate where you can't with stocks. Let's take an example of a person who is renting in LA. A one bedroom goes for about $2k where I live. You are spending $24k a year paying off someone else's mortgage. You can take $24k, an instead put that down on a condo for $500k, and rent out the extra bedroom. Appreciation has been well over 10% on average, but let's take 5% appreciation. That's $25k a year, and you can double your initial investment after year 1. That's not included principle pay down and money saved not paying rent. For investment properties obviously the numbers change and I'd love to talk with you about different strategies that work out here in SoCal.
I think a lot of folks in real estate don't realize there are a lot of ways to Leverage in the stock market. I have a buddy that borrows had 2% interest. I don't even know how it works, but there are definitely ways.
- Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes3y
Quote from @Felix Piper:
@Robert Reynolds, I meant investment property, not primary residence. Regarding stocks, I mainly trade options (more specifically sell them) and you definitely could use leverage. There are trades for any risk appetite. The only advantage I see in rei, are the tax benefits, but not sure if that compensates.
Yeah selling options is great. I used to trade options until I realized I was fighting Theta... Now mostly stick to shares.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.