Real Estate vs. Stocks: The Final Showdown?
The problem with answering this question is like asking a person which is better: sports or music? For each individual the answer will vary based on experience, preference and/or internal desires.
Additionally, how broad of a statement this: Which is better: sports or music? Better at what? Better how?
Same goes for Real Estate and Stocks.
Confused yet? Let me explain:
Advantages of Real Estate over Stocks:
Real estate is one of the best, if not the best, ways to build wealth in America. This is due to 2 important factors. Leverage and tax breaks. No other investment option provides these two factors which allows an individual to build wealth faster than any other investment.
But to clarify, these tax breaks and leverage opportunities for the individual only apply to your personal primary residence. Or in other words: your home. However, the term ‘Real Estate’ includes commercial properties, industrial, retail, apartment buildings, in addition to residential real estate. So when someone asks me “Which is better, stocks or real estate?” the first thing I have to do is explain the myriad differences.
- Buying your first home
- FHA loans 3.5% down payment
- 10-20% down payment conventional
- Investment properties 20% typically
- Mortgage limits, much tougher after 4 mortgages
- Buying investment properties vs. trading up your primary residence (2 years)
- Power of Leverage
- Tax Breaks of Home Ownership (Mortgage Interest Deduction)
- 1031 Exchanges.
The same broad confusion goes with stocks.
- Mutual Funds
- Index Funds.
- Tech Stocks, Retail, Energy, Consumer.
- Dividend Stocks vs Growth Stocks.
Advantages of Stocks over Real Estate
To start: you can begin investing in stocks at a much lower cost than real estate. Investing in any type of real estate requires more capital, but with stocks you can open up a brokerage and begin investing with a few hundred dollars.
Stocks are also liquid investments, meaning you can liquify, or sell, your stock portfolio quickly if you need to. However, this can be both good and bad. In times of panic everyone can liquify. This is why the stock market is more volatile than real estate, meaning it can rise and fall at a much faster rate.
“If the biggest investment you ever make is purchasing your home, then you are doing it wrong.” Your home will be a very large investment indeed, but it cannot be your biggest and/or only investment.
There is no one piece of perfect advice to give, when it comes to starting your investment portfolio, because times change markets, and regions impact results.
For example, the Phoenix Real Estate market is much different than that of New York City. And while I may like certain stocks today that I would adivse others to get into, you may be reading this a year from now and new information may have presented itself to change market conditions and provide better opportunities elsewhere.
This is what makes The Cash Flow Lifestyle such a crucial concept in your path to financial freedom. There are a few guiding principles to live by, thus a lifestyle, but there is no “end all be all” way to live it.
Every major real estate investor I know also has a very large and diversified stock portfolio. Same goes for all the major stock and bond investors I deal with in regards to owning real estate.
There are a few younger stock investors I know that still prefer to rent and stay out of the real estate market, but when I talk to them about why, its usually because they are still waiting on they type of home they want to buy to become available, and also because their way of life depends on having a large ammount of capital working for them in the market.
Similarly, fix and flip investors I have worked with have so much money tied up in their projects that they have yet to diversify into more liquid investments, like the stock market.
However, keep in mind these are two examples of people still working for their money as opposed to their money working for them. There is money that can be made fixing and flipping houses, but no matter what anyone says, it is very capital and time intensive work. I know.
And for those who argue day-trading is a path to working your own hours and setting your own schedule, this is true if the schedule you want to set for yourself is 8-10 hours a day of studying and researching the markets.
There are easier and better ways to make moey, but society has an obsession with house flippers and day traders. But remember, these are jobs, not passive investment opportunities.
One question I often struggle with is when a person I have never met asks me what it is I do. This is because I do a lot of different things, mostly looking for market inefficiencies and then capitalizing on them. But this is too much to explain at a cocktail party. The most positive response I ever got were the years I was flipping houses. It was as if I told them I was a cowboy from the wild west.
“Isn’t that dangerous?” They would ask.
“Isn’t that risk?y”
“Do you have your own TV show?”
“Yes, Yes, and no. What I do is too dangerous for TV.”
I am not too proud to admit that there were times I wanted to keep flipping houses just for the mystique that came along with it. Even as margins were dropping and I was working longer hours for less money. But don’t be fooled by the late night infomercials or the scammy-looking Facebook ads.
Even the successful day-traders and home flippers work long hours, spend a lot of time researching, and have a lot of their personal wealth tied up in their investing. Oh, and of all the people I have met who tried day trading and flipping houses, very very few were successful over time. And all of them have at one point or anther lost a lot of money. No successful investor hasn’t.
So which is better: Stocks or Real Estate?
Hopefully I have explained how impossible this is to answer. Remember the analogy of which is better music or sports?
The answer is too subjective.
Athletes listen to music and entertainers sit courtside at sporting events. A good mix of both is best.
Stock investors own homes and a real estate portolio and real estate investors keep liquid assets to fund their businesses.
Finding the right balance is key. But balance is difficult when you are first starting out.
Real Life Advice:
Too many books and blogs out there spend too much time dodging actual advice. Although I spent the last 20 minutes explaining how this question really cannot be answered, let me know explain what I would if I were starting from scratch today:
I am opening a brokerage account (e-trade is what I use) and putting at least 10% of my income into stocks every month. If I am very risk adverse, I am buying Vangaurd Index Fund. If I am more educated and searching for cash flow, I am buying dividend stocks, starting with energy companies followed by REITS. (I am investing in energy companies with a proven track record of growth and dividends. This can include producers, transports and pipelines. I am not investing in new tech like renewables and solar/wind.)
I am also looking to buy my first house, 3 bed 2 bath single family home somewhere close to where I work or maky my living. Depending on the numbers (purchase price, taxes, interest rates, going rents) I am purchasing it as my primary residence to get the best loan and tax breaks out there, and then I am going to rent out the two spare rooms.
After 2-3 years I am going to look for another home and do the same thing. When I move I am going to continue to rent my first home out, but this time all three bedrooms. This only works if the rents are covering all my my expenses, however. So its very important you run all of these numbers and scenarios from day one. It might make more financial sense to put more money down on your purchase, so that your monthly expenses are lower (usually avoiding mortgage insurance premium is your best bet.)
All the while I am putting 10% of my income into the same stocks.
I am going to continue to do this for 10 years. This means after 10 years I should own three houses, and a cash flow producing dividend stream in my stock portfolio. The stock market has most likely risen and fallen 5-25 times during this period.
I didn’t notice though, because I was just focusing on my 10% into stocks every month and looking for my next real estate investment. There are times where I will fund my real estate investments with money or income from my stock portfolio. This is why I have my stock portfolio.
There is no reason that this strategy will not work. If it won’t work in your part of the country then move. If you can’t invest 10% of your income every month then stop spending money on other crap. This strategy does work, but only if you are committed.
This is a 10 year plan that anyone can follow. This was my first ten year plan. It works.
Some mistakes I made along the way that you can avoid, and also advice to adhear to:
Avoid condos. Maybe there is an instance where they make sense, but they will never appreciate as well as single family homes and you are always at the risk of the HOA raising its costs. This cuts into your cash flow deeply and is tough to predict.
Work with people and professionals that have your best interest in mind. Then question why they might have your best interest in mind. Usually only you will have your best interest in mind, which is why you need to invest in yourself.
Never stop educating. If you are in a career, attend every conference, seminar, read every book and watch every youtube clip on your profession. Be the best at it, most educated and most driven. Become irreplaceable. Become the person people want to follow. Whether you leave companies, careers, it doesn’t matter. You are being paid to learn, so invest a little extra in yourself.
Learn other skills as well. Learn how to write better. Or learn how to make youtube videos. Learn how to understand Facebook or other new technologies. There are hundreds of books on every topic. Read them. Get an amazon kindle unlimited subscription and read ebooks all the time.
Your industry has changed, is changing, and will change much more, in the next 10 years. Be prepared for it. Or better yet, be the reason it changes.
Keep the focus on your why. Sometimes times get tough, stick to the plan. Sometimes times get really easy. Stick to the plan. Sometimes you get so tied up in your sucess and achieving goals you may forrget why you are working so hard in the first place and instread just work hard to get better or to beat your competition. Remember your why.
So Real Estate vs. Stocks, which is better?
They both are.
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