Sunday, 19 January 2020

Stocks or Real Estate Investing - Which Is The Better Investment?

Stocks or Real Estate Investing

In today's article, we're going to be comparing stocks versus real estate investing to figure out which investment actually better. I've made some money in stocks, I've made some money in real estate but in this article, I just want to take a deep dive into the pros and cons of each to figure out which is best for you.

Let's Get Started


1. Stocks Pro: Low Barrier To Entry

What I mean by that is that typically if you want to invest in one stock or one share of a stock lets just call it Johnson and Johnson for example, at the time of writing this article Johnson and Johnson are trading at about $130 a share. if you want to compare this to let's say a single-family rental property or investing in a real estate syndication, you're going to need $10,000 to get started in those kinds of investments. This is relative because let's just saying you make 15% on Johnson and Johnson and you make 15% ROI on your single-family investment property, you're still making 15% across the board. 

However, I think for the most newbie this is a pro because they can get started today for $130. And if you use like m1 finance or if you use even like a betterment you can almost invest in fractional share as well, to where you don't even have to come out of pocket with a $130 for one share. 

There's a lot of stuff on the market to where stocks may become appealing to beginners because they may not have that $30,000 down payment or the $50,000 payment for the syndication, they may get invested with stocks because of the low price per cost or low price per share.


2. Stocks Pro: Stocks Are Liquid

Liquid simply means that something is able to be bought or sold relatively easily. The reason why stocks are liquid is that there are brokers that have access to 100,000 of people with efficient markets, technology, that are willing to sell or buy that share Johnson and Johnson stocks. There's always going to be someone on the other side of the transaction for Johnson and Johnson, you have Bob in Baltimore, you have Sally in San Antonio, Bob wants to sell, Sally wants to buy, there's an efficient market there.

It's relatively easy to buy and sell the stocks of Johnson and Johnson, that's another pro for stocks is that they're very liquid. 


3. Stocks Pro: No Physical Work Required

It's not like where you buy a fix and flip property or you're renovating a single-family home for tenants there's no work. The only work that typically goes into investing and buying stocks is that you may have to research some stocks, you may have to read some annual reports, you may understand the brokers that you want to invest with but this is not necessarily physical back-breaking work.

A lot of people actually invest in index funds where they literally just deposit their money and let it ride without even looking at it for months at a time.  


4. Stocks Pro: Stocks Are Flexible

What do I mean by flexible? They're flexible in the fact that you can allocate them into retirement accounts like a Roth IRA or even a 401k, there are both great ways to invest with either tax-free or tax-deferred and then you can also allocate money into them just on a speculative basis if you think a certain stocks or a certain index fund or a certain mutual fund is going to grow over time you can just invest in that fund or that stock specifically.

If you think it's going to go down you can shot the stock but the nice thing is that you can actually allocate your money in stocks however which way you want. To be quite fair though, you can stick invest in physical real estate using a self-directed IRA or a self-directed 401k.

What are the first cons of stocks or perceived con?


1. Stocks Con: Not Tangible

People that like investing in real estate the first thing that they'll say about stocks is that they're not tangible, so what does this mean? Tangible I something that you can touch, feel, smell, stocks they used to be paper so if you bought a share of ford maybe 60 years ago you would literally get a certificate or a piece of paper saying hey, you own X amount of share of Ford Motor Company.

Stocks are literally pixels on a screen they're not tangible you can't touch them, feel them, smell them, as opposed to real estate where obviously I'm sitting in a house right now, standing in a house right now, you can live there, you can touch it, feel it, smell it. Tangibility is a big one for people that aren't a fan of stocks.


2. Stocks Con: You Can't Control Them

Let take the Greek economic crisis for example, the Greek economic crisis affected American stocks negatively. So can you control the greek economy or the Chinese economy or the whatever economy? No, you can't, so it's out of your control. Meaning that just because somewhere else in the world is doing poorly economically they may trade with companies in your portfolio, hurting that company ultimately, hurting your portfolio.

The price of a stock is the price you can have foresight into where that stock may go in the future but you can't control it. Real estate you can actually force the appreciation which we'll talk about later in this article. 


3. Stocks Con: Emotional / Irrational

Sometime people become very married to their positions, it can become very emotional and irrational. If you're investing especially in an individual stock and you're not disciplined, it can be an emotional ride and you can actually get very emotional, make emotional decisions. Who here has regretted making emotional decisions or doing something out of emotion as opposed to logic.

I know we've all either been in an argument with our significant other or we've been in a heated battle on the playground or whatever, it could be a sporting event, sometimes our emotions get the better of us and we make rash decisions or say the thing that we don't really mean. Emotion and irrational buying decisions that can definitely be a con for individual stocks and also a certain portfolio.


Now that we've talked about the pros and cons of stocks, let's talk about some of the pros of real estate.

Real Estate is one of the most powerful wealth-building tools throughout the history of the world. There's always bee lords and serf and landlords and people that live in their building or you occupy their space for their business, this is basically the landlord and the tenant relationship.


1. Real Estate Pro: Income Producing

The real estate produces income in the form of residential or commercial leases. People need a place to live, businesses need a place to conduct business and operate, depending on what type of property you're in whether it's like single-family, residential, apartment buildings, flex space, retail and industrial. 

You're creating a stream of income or cash flow, so every month or however your lease agreement works, this property is hooting off cash flow. If you're an efficient manager or having an efficient manager working for you, if you keep your expenses low and your leases are at market rate and you're providing a good place for that tenant to either live or conduct their business you should be making a profit.


2. Real Estate Pro: Tangible

Unlike stocks being those pixels on a screen that we talked about, real estate is a real tangible investment you can touch it, feel it, walk through it, sleep in it, for some people it makes them more comfortable investing in a tangible investment rather than something that they can't see or feel. It's one of those things where it's like see it believe it, that's why a lot of real estate investors prefer real estate as opposed to stocks.


3. Real Estate Pro: Depreciation (Tax Benefits)

This is just one of the tax benefits but I want to talk about depreciation specifically. The IRS uses depreciation to recognize that an asset obviously has a lifespan that it wears down over time, so depreciation is considered a paper loss which means that you didn't actually spend any money or incur any money out of pocket but you still get to write off that perceived expenses.

Let's say, for example, you have a single-family home, you're realizing all this rental property income and your tenant is paying you every month, you still may not have to pay the full amount of taxes on that exact gross income because you're allowed to depreciate that property over time. The IRS really like real estate and they want to keep that blood flow or the circulation of real estate going within the United State specifically, and that's why there's a lot of favorable tax advantages to real estate, depreciation being just one of them. 


4. Real Estate Pro: Equity Buildup

Equity is what your ownership percentage of the property is if you owe nothing on it you have 100% equity in that property. 

The nice thing about real estate is that you can use debt to acquire real estate so the income from your tenant is actually paying down your mortgage. Let's say, for example, you buy a $100,000 house, you get into it with a 20% down payment meaning your cash outlay is $20,000, the $80,000 plus interest overtime is being paid down month after month by the tenants that live in that property or use that property. 

Basically, your cash outlay is $20,000, the rent that you're receiving from this $100,000 property is being used to pay down $80,000 debt, thus increasing your equity. You're owning more and more of the property over the course of 15 years, 30 years, whatever, however, fast you pay it off. That way you get 100% equity in the property meaning you owe the whole thing. But your tenants have been the one that's been paying off your mortgage.

At the end of the day, you may control this asset that worth $100,000 or more after those 15 to 30 years or however long that mortgage was on the property. But you own a 100% of it after your debt is paid off.


5. Real Estate Pro: Appreciation

Appreciation is simply is how much your property appreciates over time so over the long-run real estate is typically average and say 3% to 4%, there's obviously a lot of areas in United State where appreciation has been significantly higher than 3% to 4%.

The other thing with appreciation with real estate is that you can force appreciation, meaning that if you have a property that is in area where all the rents are going for $1,000 and you find this old building that may be a little bit under the weather, dilapidated, where the rents are $750 a month you have the ability to raise all the rents of those apartments by $250 meaning you're forcing the appreciation, you acquire the asset for some amount of dollars, you do all the updates that you need to do and now you can rent out those suites for a $1,000 a month and get it to market rates. That is what we call-forcing appreciation.


1. Real Estate Con: Real Estate Is Illiquid

You know how we talk about stock being super liquid you can buy and sell trade there's a butt for every seat, there's a billion Baltimore, Sally in San Antonion they're always going to find a buyer and seller in that market. Real estate is not the same, you can't just buy and sell real estate like you buy and sell stocks, sometimes properties sit on the market for years unless they're deeply discounted at some point, so keep that in mind.


2. Real Estate Con: Lots of Work!

Real estate can be work-intensive so it all depends in your investment style, it all depends on what property type you're investing in, if you find a syndication where someone else is managing it, someone else is running the deal, you just invest $50,000, that is a relatively passive investment, however, if you're the Barbara running the barbershop and you're buying these single-family homes and you don't have a manager in place, well, guess what, who's making the calls, who's doing the maintenance, who's doing all this stuff.


3. Real Estate Con: High Barrier To Entry

When people see real estate they can be intimidated by the price tag, is definitely more expensive than stocks, again, it can be more intimidating, the advice is to educate yourself using resource like bigger pockets, forums, podcasts, the best advice that I can give you to get into real estate is not try and do it all yourself, yes, it's more rewarding and you'll see a higher ROI but if you build a team, if you have a real estate agent, a CPA, contractors that you can trust, you can get out of this high barrier to entry if you just systematize the business.



That is it for stock vs real estate, I hope you got some value from this article.

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