When people talk investing, the first thing that pops into most people’s minds is Wall Street, shareholders and hedge funds. However, if you have extra dollars just lying around in a bank account, perhaps instead of investing your buck in “convenient” stocks, bonds and mutual funds, you should seriously consider investing in real estate. Here are the reasons why.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
3 Reasons You to Put Your Money in Real Estate (NOT Stocks)
Because people will ALWAYS need homes.
One of the many benefits of real estate is that it is a hard asset, meaning that you can touch it and see it. With the population increasing by the year and with more and more families needing somewhere to live, the demand for single-family homes, apartments and other property types is not going away anytime soon.
So despite the need for ongoing care, due to the lasting demand for homes, the influx of cash should be steady, regardless of whether you choose to sell it or rent it. This makes real estate a sturdy alternative to the ever-fluctuating stock market, where the changes in demand are not quite so predictable.
Related: 5 Ways Real Estate Wins Big Where Stocks Fall Short
Because you don’t need an advanced degree to understand the financials.
It is by no means surprising that understanding the rental figures in real estate is so much simpler than that of a full blown stock market’s annual report. So unless you are a business or economics major, it is likely that getting your head wrapped around the stock market will be a lot harder than just reading a spreadsheet about rental figures on real estate. After all, real estate is known as a “dumb man’s game.” Once you have firm grasp on the major concepts, nothing will be able to drag you down.
Because it’s your best bet at keeping up with the inevitable force of inflation.
Real estate has a well-known history against inflation. Generally acting as a protective shield against rising prices, rental rates and home prices increase as inflation increases. This helps shield you financially in terms of both your rental income and the property value. Not to mention, if you are smart enough to choose a fixed mortgage payment, if inflation does occur, it will no doubt offer a great deal of benefit over time. Meanwhile, stocks don’t have the privilege of being directly linked to inflation. It is true that prices do tend to rise over time, but unfortunately, the stock market can’t offer an equivalent protection against potential inflation as real estate.
All in all, you can see just some of the many advantages real estate has over stocks, bonds and mutual funds. Not everyone would agree, but for anyone who wants to a have a steady investment that will help them reap in a nice tidy profit every week, real estate is your best bet.
Related: Are You Still Picking Stocks? You Are Ridiculous. Here’s Why.
From the sturdiness of real estate to its simplicity in understanding financials and with the protective backup of inflation insurance, these investments offer a potential for serious power over a stock portfolio. So what are you waiting for? Analyze your market, find a steal for a investment and don’t get too stressed seeing that steady influx of cash!
Investors: Why do YOU love investing in real estate over the alternatives? (And if you don’t — why not?)
Leave me a comment!
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22 Comments
Hi Sterling:
Being a control freak…. I like the “control” real estate gives me. I can raise or lower rents, I can add a bath, enclose a garage, I have options to increase value or to cover my costs.
I know practically nothing about why stocks go up or down. I have no influence at corporate board meetings. With stocks, someone else makes all the decisions and I end up paying for them over time. Freaks me out!
And I love having a tangible asset – something I can touch.
Thanks for your post. Here’s to real estate!
Cheers to real estate! Glad you enjoyed the read Karen. Looks like we have a similar thought process when it comes to real estate.
So the caution I have is this form of investment should be more challenging to get it right. The main reason so many people went belly up in 08 is because they didn’t invest on the fundamentals, they speculated on appreciation. No or negative cash flow, over leveraged investors dropped like flies. When you do have control like Karen mentioned, you really do need to know what you are doing. Otherwise you’re just controlling your own downfall.
But I completely agree that REI is fundamentally better when done wisely.
Totally agree with you Ronald! You hit the nail on the head. Speculating can really get you in trouble when things go sour…Part of the reason I focus more energy in buy & hold and occasionally will fix up property to sell to a home owner.
Sterling, I love your Point #2 about the complex math. One of the main reasons I became a buy and hold investor is because the P&L is so easy to understand. It’s just one revenue line item (rent) and only six main expenses categories (principal, interest, taxes, insurance, maintenance, and management fee). And if you have multiple properties, you can easily break each one out separately to judge its individual performance.
Great article!
Howdy,
This message is of course coming from a great REI group. I call it “confirmation bias” we all have them. REI is a good vehicle, but not the best for everyone. Also, diversification is important in all business.
Because people will ALWAYS need homes.
Unless you are in Detroit in 2008.
Because you don’t need an advanced degree to understand the financials.
Anyone can buy index fund from Vanguard, Fidelity , etc. in five minutes. Once you educate yourself in investments, you will realize that stock pickings is a losers game for the average fellow. No one, can’t predict the market.
Because it’s your best bet at keeping up with the inevitable force of inflation.
Unless you are in Detroit in 2008. Actually, unless you lived in the USA in 2008.
All buildings depreciate. A roof doesn’t get better with age. A water heater doesn’t heal. RE typically appreciates 1% over inflation, and depreciates 1%. It’s a wash. This does not apply to all markets, some have great appreciation. I compare appreciation to stock picking, also known as gambling.
Cheers and keep it real,
F
I love buy and hold, or buy, fix and hold. Easy to understand, works well when DONE right and more control over it than stocks. But just like stocks, it has it’s up and downs, just need to ride it out, be patient, and be mentally prepared. Based on past performance, it is my FAVORITE way to invest.
Totally agree Tracy! Thank you for taking the time and reading. I wish you the best of luck this year
Frank,
I have a real estate bias, like most people here, but I agree with your cautions. I think the author was just making general points, which were good, but there are plenty of exceptions.
Real estate is extremely local. Some people get in trouble with the “they’re not building anymore land” or “everyone needs a place to live” speeches, because it implies all real estate will have the same long term demand.
The most powerful point Sterling made was about borrowing on fixed interest rate long term and holding with a property that could increase in rents over time. That’s basically shorting the dollar, which I’m betting will be worth a lot less 20 years from now.
Trust me, I am here to get a piece of this RE confirmation bias! I speak my contrarian mind to evaluate different points and promote discussion.
There is magic in RE as it relates to rents and inflation, absolutely. Time is the best ally of any investor.
Best,
Frank
Glad you enjoyed the article Chad! As stated throughout there may have been a little bias on my end. I invest in what I know and that is real estate. I wish you the best in 2016!
Nice post. I agree that property values and rental income may be less volatile than stock prices (at least in desirable areas), but would like to point out that stocks also offer inflation protection. After all, when you buy stocks you own a small share of the businesses you invest in (their equipment, real estate, as well as their cash flows which grow with inflation).
Also, I find that you don’t have to be an expert to invest in stocks. Many people did very well by just buying some passive index fund that tracks the overall stock market and steadily adding to their position over many years. In fact, it can even be counterproductive to be an “expert”. Many people who work in finance don’t do well with their personal investments at all because they think they have an edge, overtrade and don’t diversify.
A big advantage of real estate investing is that you can actually leverage your time (e.g. by forcing appreciation). When investing in stocks it’s much harder – you may spend hundreds of hours doing research without being able to outperform the market.
Nico
I agree with your counterpoint, Nico. The broader stock market does in fact offer significant inflation protection historically compared to other asset categories in general.
Based on Robert Shiller’s historical data (Nobel Prize Economist from Yale), “From 1890-2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%.” Excerpted from here: http://www.fool.com/investing/general/2014/05/04/the-uncomfortable-reason-your-home-is-not-a-great.aspx
The problem is that most people try to time and outperform the market, which ends up being catastrophic for most! It’s telling when ~80% of active fund managers fail to beat their respective market benchmarks instead of trying to take the market return, which has outpaced inflation.
Vanguard’s publication on active vs passive index fund performance for those who are curious, start on page 4: https://pressroom.vanguard.com/content/nonindexed/Updated_The_Case_for_Index_Fund_Investing_4.9.2014.pdf
You understand that you are preaching to vegans at an organic vegan restaurant right? Not many people will disagree with you on a real estate forum that real estate is better than stocks.
I do disagree with the article though. Stocks get bashed on this forum because people don’t understand them. Just like you always hear that real estate investors need to do their due diligence and learn how to analyze a deal etc….well same thing with stocks, if you just blindly put your money in an index fund, your returns will be mediocre and real estate looks good. But there are millions of ways of making money in stocks if you actually research some techniques and find the right mentors and coaches, just like real estate. There is algorithmic trading, momentum, value, dividend, technical analysis, seasonal trends, etc. You can get a sick return with stocks
1. People will ALWAYS need products…its the same thing, you will always need utilities, and food and toothpaste and cell phones and medical supplies, etc. Those are stocks. And underneath the price fluctuation everyday, there are business that grow all the time. Market will always go up for that reason.
2. You don’t need advanced degrees for stocks…seriously? I was a business major at one of the top business schools in the country, they don’t teach you how to invest. Its same as real estate, you learn on your own from some books and mentors and forums.
3. Stocks absolutely go up with inflation. There are businesses underneath the prices and they will increase their price of goods with inflation. Not to mention dividends from good companies increase way above annual inflation.
Completely agree with your viewpoint Kyle. I stick to what I know and that is real estate. Even when things go sour economy wise everyone will still always need a roof over there head.
I wish you the best of luck in 2016 and thank you very much for taking the time to read the post
Technical analysis is witchcraft. I prefer using sunspots patterns.
Kyle, spot on. Most people on this forum don’t have a clue about stocks and equity market but they keep bashing investing in stocks, without giving any data to back it up. I understand that this is a Real Estate forum but sometimes it really looks ridiculous.
REI is a good investment vehicle, a little complicated, but fine. However, bragging about stocks and data shows ignorance and lack of comprehension of the intrinsic the flaws related to stock picking. It is a worthless effort.
Data: The burden of proof falls on the pickers, not the indexers.
I love this! My experience with stocks back in 2000 was terrible. So I looked into real estate and found it much easier to understand and I felt like I can have control over this. I agree with Karen. I like having control of rents and I know I can count on a monthly cash flow from my rentals because I checked out my tenants before I signed a lease agreement with them. I think it is super important to verify their info on the application they fill out. It can save a huge head ache later on.
Laura, I am sure if you had put the same amount of due diligence at your stocks as you have put in your Real Estate you would be fine with stocks. But no, most people usually take stocks as a gambling and hope they will make money because somebody told them so. Instead, they need to recognize that shares are not little numbers that jump around in the paper every day. They represent a partnership interest in a real and ongoing business, a business that earns a decent profit, shares that profit with you, and grows the amount of profit shared on an annual basis. Investing in stocks is about being a partial owner of a real business.
Gosh Sterling (et al), I wish I could have shared this blog with my cousin. He bought cashed out his stocks (which were up in 2015) and bonds and bought 3 rental properties in Flint, MI.