Stocks vs. Real Estate: Which is Better?

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That is the title of a CNN Money article that is being discussed over on the BiggerPockets Forums.  You can see that discussion here:
Why invest in real estate when stocks are better? 

I believe, at least in the past 10 years, that this question has been asked  a lot.  The truth be known, had I been left to my own designs, I would have gotten involved as a stock day-trader in 2000 instead of becoming a real estate investor.  I have my loving wife Vicky, definitely the smarter of the two of us, to thank for redirecting my efforts.

The CNN article above does its best to fairly compare the two investment classes, but you would have to be in a fog as you read the article, to not realize that this article really is intended to ensure the “stock” advocates that they have made the right decision by investing in stocks.

So… where does that leave us real estate investors?

Are we uninformed schmucks?  Or are we the ones who will get the last laugh?

I will provide a response… but before I do let me share a quick story…

A very close friend and mentor of mine spent 25 years building his business.  In late 2006 he sold the business and placed the proceeds into an irrevocable trust tied to a stock market index.  Great tax strategy, but probably not a great investment strategy.  Well, you know what happened in the ensuing time-frame.  By the time 2008 was over he had lost over 50% of his overall wealth and almost 40% of the principal amount of his wealth.  OUCH!  This event was so significant it actually caused him to change his lifestyle to accommodate for his losses.  And the really tough part about this story is that he felt totally helpless because the vast majority of his wealth was tied up in something he not only had no control over, but couldn’t get control over.

Scary stuff… won’t you agree? 

 Now on to my response, which will focus on why I believe we as real estate investors get the last laugh.

Lets review all of the advantages of being a real estate investor.  

First for clarification purposes I am broadening the definition of real estate investor to include activities such as rehabbing, wholesaling and other common “profit” making activities in this discussion.

The biggest advantage I see for real estate investors is that we have much more control over our outcomes than stock investors.  While I realize that no one can control market directions, we real estate investors have much more control over our offer and sales prices, can often times take action to increase property values, and we have control over the level of our profits — assuming we purchased correctly to begin with.

The more obvious advantages are the gains to be made through positive cash-flow, capital gains deferrals, depreciation, leverage, re-amortization and the wonder world of tax free refinance events.  And if done correctly, an investor’s overall return on investment can exceed 50% to 100% — or more. 

In today’s market it is possible to purchase properties at such a substantial discount, that making double and triple digit returns is the norm not the exception.

And, where else can you put a asset under contract with little or no money down and with a high degree of certainty of very little risk, and potentially make $3,000 to $10,000 in just a few weeks? 

One other critically important advantage of real estate investing over stock investing is that the average “Joe or Jane” just like you or I can get into real estate investing, quickly learn the mechanics and expect to succeed.  In my discussions with others, you don’t find this environment with stock investing.

One last thought; our entire tax code is set up to encourage and foster real estate.  From the assistance the Government provides to homeowners through interest and property tax deductions to the support real estate investors get through depreciation, 1031 exchanges and tax-free cashout refinancing, real estate is, at least for now, a favored asset class within our tax codes.  I can’t think of many other investments that offer such great incentives. 

Can you?

So there you have it!  I know that I am preaching to the choir with this post, but perhaps you know someone who is thinking about getting into real estate. If so please pass this article to them and ensure to let them know you got it from BiggerPockets.

Photo: Public Domain

About Author

Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.

11 Comments

  1. Your friend lost 50% or more of his trust because he didn’t have a good system set up that would limit his risk. We provide 40 videos to show how to maximize your stock investments while minimizing your risk.

    The stock market is more controlled by a few than the real estate market, especially residential.

  2. Peter,

    A very good article on the age old debate of stocks vs. real estate.

    I once believed in the financial markets when I began investing in general.

    I lost faith in the financial markets once I started to invest more in real estate

    Currently, my feelings on the Financial Markets is that they are a good place to invest.

    However, as with any investment, you have to exercise your due diligence.

    I think that as real estate investors, we often show the financial markets ‘no love’. (when I say ‘we’, I am talking about real estate investors in general)

    I think that most real estate investors don’t like investing in financial markets.

    However, there are some real estate investors that like the financial markets, and invest in these markets.

    Which market is better to invest in? I don’t know.

    What I do know is that, whichever market one decides to invest in, if somebody does their research, is very diligent, invests wisely, and has luck on their side, there is no reason why they should not succeed.

    Thanks for this great article!

    Regards,
    Neil.

    • Neil…. great response…. while I have never been too keen on the stock market, I do realize that over time gains can be made. I just feel more comfortable with real estate because I know I have more control of most of the pieces then I do with stocks.

      Pete

      • Hi Peter,

        I tend to agree with you.
        I still think the financial markets can be a good place to invest, if one knows what they are doing.
        However, similar to you, I have more comfort in the real estate markets currently.

        I guess that I am biased as I witnessed so many people have their life savings cut in half or wiped out entirely due to this current recession.

        The people who had their savings wiped out were obviously invested in the financial markets.

        Our real estate markets in many parts of Canada stayed quite strong even through the recession. In fact, many markets continued to appreciate quite well.

        Best Regards,
        Neil.
        .-= Neil Uttamsingh´s last blog ..Business Life Story Part Four =-.

  3. I think we are all here as we see the value and potential in Real Estate. However, I believe real estate as an investment is all about timing….like the stock market. If you had cash and invested in the stock market at the beginning of 2009 you would have seen an amazing increase in value. Same scenario, and buy a house instead, you may be in the negative category right now. (ducking while everyone goes into the “you gotta buy it right” argument)
    .-= Brad´s last blog ..Just Served Foreclosure Papers – What to do =-.

  4. Greetings,

    I am in the real estate field and have been since the top of the market (about 07). Since the market crashed I have been heavily involved in all aspects of real estate and have made it my bread and butter. However, increasingly, I have been interested in trading securities.

    However, since the beginning of this year, I have been taking trading classes at a local community college. The teachers are all finance professionals that know what they’re doing (very rich, self made). Specifically, the class I am taking is Introduction to Technical Analysis, and Introduction to Fundamental Analysis. Along with this, I have immersed myself in books and websites, and have been practicing trading in a simulator. The classes concentrate more on both futures and stocks, though the concepts we use can be applied across a whole variety of asset classes, including real estate. The techniques I have learned in these classes are used by traders that profited in the market crash, and even predicted it before and while it was happening (technical analysis).

    In my learning in the simulator, I would have to say that real estate is much easier than trading. I have done some learning in the real financial markets, but honestly, it was the fastest $5000 I have ever lost. Real estate is straightforward, and is something you can do right now. Furthermore, in real estate it can be said that it takes your own human ingenuity to control the situation. Trading is very risky and if you have no idea what you’re doing you might as well be betting on coin flips.

    However, I do recognize that there are many professional traders, including the dwindling number of locals and floor brokers on the floors of exchanges, as well as electronic online traders, that make insane amounts of money! Trend trading is a reliable way of making money (holding for a few weeks or months). In trend trading, the basic idea is that you execute trades based on what the trend has been. You are not trying to catch market bottoms or tops, but trying to catch the bulk of the trend on the way up or down. Day trading is even more difficult and I think that it takes years of skill and practice.

    Another major difference between real estate and securities, is that you can’t sell short real property other than a REIT (just to clarify, selling short is not short sale). This is huge! Selling a stock or future short would’ve made you bagillions of dollars when everyone else was getting beat up.

    I believe that real estate investing in general, is much easier than trading. I hope to learn more and practice trading over the next few years but I don’t think that it will replace my real estate business. By avoiding “day trading,” it doesn’t have to be a full time job. You can trade daily, set stops and/or set up a system which doesn’t force you to sit and watch the markets like a monkey. You can come home every night, check out how the markets are doing, whether you are still in a trade, or automatically taken out by your stops.

    If you are interested in trading and want to see a PBS documentary about it (from the 80s), check out Paul Tudor Jones loose $5 million, and then make it all back and more. IN those days it was very exciting, since you are on the phones and shouting at the broker on the floor etc…. nowadays you’re just punching in buttons in the computer….

    PBS: Trader
    http://www.tudou.com/programs/view/XH5W4vffBbY/

  5. are all you real estate proponents really serious. The archaic notion that putting a little down or so, leveraging the property to the hilt, and having some renter pay it off assumes a whole lot. It assumes that carrying costs will be covered by said rent..not certain as rates are at hsitorical lows and will not stay so low. Take a look at the states, I am sure a lot of would be real esate investors never touched rental property investing. Decline coming soon to Canada.
    Funny, richest men and women in the world have all made their fortunes through ownership of public traded companies and still this archaic rental property assertion exists. Please look up Robert Schiller, Wharton school of business finance professor PH.d his analysis of realestate verses stocks.
    5-6% dividend clip on a 100 year old plus company plus growth will get me much richer over time while keeping me liquid and avoiding bounced cheques from renting rift raft and the cohort of real estate ‘professionals’ out to grab a piece of your rental property dream..LOL

  6. Great article Peter! I completely agree. Real Estate is where its at. You have control and can get out whenever you want and the profits are substantial. I know many many investors and they have invested in both the stock market and real estate and all of them agree Real Estate is the safer more profitable way to go!
    Thanks Peter!

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