Stock Market VS. Real Estate
For new and hopeful passive investors, most of the accessible information on the topic of the stock market versus real estate presents widely varying opinions. The presentations tend to complicate things by assuming you have a solid education in both fields. Then rather than feeling informed, this type of guidance leaves you in a state of confusion and frustration.
For newcomers to the debate of real estate or the stock market, I feel it’s best to simplify the subject to ensure you can capture the basics. It’s most important to provide enough information so you can start asking better questions as you embark on an investing path.
I am assuming that you want to grow your retirement funds in a safe investment that will produce good returns. Second, I am assuming you are busy and don’t have the time to gain the in-depth knowledge and experience needed to actively trade or invest in stocks or real estate and you are looking for a simpler solution.
First, I will define both Real Estate Investing and Stock Market Investing. Then I will go over some pros and cons of both types of investing, and secondly I will compare what it looks like to take the passive approach to both Real Estate Investing and Stock Market Investing.
Let’s begin by looking at each type of investment:
Real estate is something that you can physically touch and feel—it’s a tangible good and, therefore, for many investors, feels more real. For many decades this investment has generated consistent wealth and long-term appreciation for millions of people. Depending on the location of your real estate, you can enjoy sizable returns on your investment.
There are two main types of real estate: commercial and residential. While other types exist (mobile home parks, strip malls, apartment buildings, office buildings, storefronts, and single-family homes), they generally fall into those two categories. Making money in real estate isn’t cut-and-dry, though.
Some people take the “home flipping” route, searching for distressed properties, refurbishing them, and selling them for a profit at a higher market value.
Others look for properties that can be rented to generate a consistent income. Some real estate is cash generating — like an apartment building, rental houses, or strip malls where the tenants are sending checks each month, after expenses are paid the owner keeps the difference as the profit.
In real estate, passive opportunities are in private lending and rental properties. Private lending commonly involves lending funds to a real estate investor or business in exchange for a set return and length of time. Turnkey investment companies allow the investor to be as hands-off as they like. This means a turnkey company purchases, rehabs, rentals and manages the property, or sells the property. To truly make this a passive investment, turnkey companies do all the work for you.
When you buy shares of stock, you are buying a piece of a company. Whether that company makes ice cream cones, sells furniture, manufacturers motorcycles, creates video games, or provides tax services, you are entitled to a cut of the profit, if any, for every share you own. If a company has 1,000,000 shares outstanding and you own 10,000 shares, you own one percent of the company. Wall Street makes it seem far more complicated than it is. The company’s board of directors are elected by stockholders to monitor the management, decide how much of the profit each year gets reinvested in expansion and how much gets paid out as cash dividends to stockholders.
With a stock, you receive ownership in a company. When times are good, you will profit. During times of economic challenges, you may see diminishing funds as the earnings of the company drop. Taking a long-term approach and being balanced in many areas can help build your net worth.
As with real estate, financing in stocks allows you to use margin as leverage to increase the overall number of shares that you own. The downside is that, if the stock position falls, you could have what is known as a margin call. This is where the equity, in relation to the amount borrowed, has fallen below a certain level and money must be added to your account to bring that amount back up. If you fail to do this, the brokerage firm can sell the stock to recover the amount loaned to you.
When it comes to your retirement and the stock market, the most common passive investments are mutual funds. If you’re fortunate enough to average a 10 percent return on your investments and then you factor in inflation and fees, your eventual return may be lower than anticipated.
Now, let’s look at the pros and cons of each type of investments to better understand them.
Pros & Cons of Real Estate vs. Stocks
The value of real estate has steadily risen for centuries.
Real estate is like a forced savings plan for people who normally aren’t in the habit of saving or investing.
Tax deductions including depreciation and the option to sell through a 1031 exchange.
Requires no work on your part if you invest with Real Estate Investment Results (REIR).
Most people are more familiar with real estate as an investment than with stocks.
A real estate investment is tangible, you can touch it (and live in it).
It’s easier to avoid fraud with real estate.
Debt (leverage) is safer with real estate than stocks.
Real estate has historically served as an effective inflation hedge.
Requires a lot of work on your part if you don’t invest with Real Estate Investment Results (REIR).
Takes more time to buy and sell than stocks.
If you invest in a rental property, you lose money each month that your property is unoccupied.
You can own part of a business (through stock shares) without having to do any work.
If you own shares in a company that pays dividends, your share price and your dividend amount may both grow over time.
You can diversify your investments easily with mutual funds due to the low investment amount required.
Stock investments are very liquid, so your money is not locked up for weeks or months.
Successful stock investing requires an unemotional approach, which is difficult for most investors.
Stock prices can fluctuate very much in the short run, meaning it can take very little time to lose some or of all your money. This can also leave inexperienced investors worried.
You have little to no control over the company and the success of your stocks are at the mercy of the firm’s management.
Dividend-paying stocks may look like they haven’t grown in value at all during sideways market conditions.
When you invest in the stock market, your dollars are attached to stock certificates. Your money is attached to something, but the value of that stock certificate can actually go to zero. So, the paper that you’re holding onto you can actually become worthless.
Here are several key factors of what a passive investment looks like in real estate and in the stock market:
With the stock market, you are at the mercy of the fund and management. With private lending, you control who you invest with, the rate of return, the length of time you want to invest and approval of the asset your money is secured by. With rental properties, you are in control of what you buy, the improvements that will increase rents and what costs are passed onto the tenants, such as landscaping and shared utility expenses.
With the stock market, you lack anything tangible. With private lending and rental real estate, your funds are secured by a physical asset.
With the stock market, in a down cycle, your profits are instantly lost. In real estate, in any economic downturn, private lenders have up to 50% equity already built in, and investors with rental properties keep netting their monthly cash flow from their tenants despite the dip.
With the stock market, you invest your retirement savings or cash on hand. The same is true for private lending. You can leverage rental properties four-to-one, sometimes five-to-one, meaning your $50,000 investment can buy you $200,000-250,000 in real estate. In a rising market, this is a good thing and will maximize your cash on cash return.
If you purchased $50,000 in stock that is now worth $200,000, you will pay taxes on that amount when you sell it. Rental properties provide opportunities for multiple tax advantages such as depreciation, deductions and a 1031 Exchange.*
You don’t get to factor in added appreciation when investing in the stock market or private lending, but you do with a tangible asset like rental real estate. When you bring together the advantage of real estate being tangible, there’s really no comparison for the passive investor.
Assuming a $50,000, 15-year investment in the passive opportunities we’ve discussed in this article:
A mutual fund investment averaging 10% returns after fees ends up at a 7% net annualized return = Almost $138,000 after 15 years.
Private lending investment with no fees averaging 12% net annualized return = Over $273,000 after 15 years.
A turnkey rental property investment leveraging your $50,000 to buy $200,000 in real estate, averaging 6% in net annualized return after expenses and 3% annual appreciation of the asset = Over $431,000 after 15 years.
Whether you’re investing for your approaching retirement or beginning your passive income approach well ahead of time, passive investing is for anyone who seeks true financial peace of mind and passive income. If you had $10,000 month coming in passively, what would you be doing today? You don’t have to be an active real estate investor to achieve your goals — but you do need to find passive ways to direct some of your money into real estate.
Real estate is a real, concrete asset that you can see, unlike the stock market where you can’t visually see your money. Our Real Estate is a real, secure asset backed by hazard insurance, title insurance, and LTV (loan to value) or less than 75%. Furthermore, your name goes on the first mortgage when you invest with us.
The price of existing homes increased by 5.4% annually from 1968 to 2009, on average.
REIR does all the buying/building, fixing, marketing, managing, and selling for you. It’s real estate investing without the headaches!
Are you ready to make 10%-25% on your money? Call us at (608) 306-1199 or visit us at REIR.CO
* A 1031 Exchange is a tax strategy that allows investors to “defer” paying capital gains tax on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property.