Investing 102

[GregWeld]

REASONS WHY STOCKS ARE BETTER THAN REAL ESTATE

1) Higher rate of return. Stocks have historically returned ~8% a year compared to 2-4% for real estate over the past 60 years. You can also go on margin to boost your returns, however, I don’t recommend this strategy given your brokerage account will force you to liquidate holdings to come up with cash when things go the other way. Your bank can’t force you to come up with cash or move out so long as you are paying your mortgage.

2) Much more liquid. If you don’t like a stock or need immediate cash, you can easily sell your stock holdings. If you need to cash out of real estate you could potentially take out a home equity line of credit, but it’s costly and takes at least a month.

3) Lower transaction costs. Online transaction costs are under $10 a trade no matter how much you have to buy or sell. The real estate industry is still an oligopoly which still fixes commissions at a ridiculously high level of 5-6%. You would think Zillow or Trulia would lower transaction costs, but unfortunately they’ve done very little to help lower expenses. They are in cahoots with the National Association of Realtors. This is part of the reason why I don’t trust Zillow.

4) Less work. Real estate takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. Stocks can literally be left alone forever and pay out dividends to investors. Without maintenance you’re able to focus your attention elsewhere such as spending time with family, your business, or traveling the world. You can easily pay a mutual fund manager 0.5% a year to pick stocks for you or hire a financial advisor at 1% a year.

5) More variety. Unless you are super rich, you can’t own properties in Honolulu, San Francisco, Rio, Amsterdam and all the other great cities of the world. With stocks you can not only invest in different countries, you can also invest in various sectors. A well diversified stock portfolio could very well be less volatile than a property portfolio.

6) Invest in what you use. One of the most fun aspects about the stock market is that you can invest in what you use. Let’s say you are a huge fan of Apple products, McDonald’s cheeseburgers, and Lululemon yoga pants. You can simply buy AAPL, MCD, and LULU. It’s a great feeling to not only use the products you invest in, but make money off your investments.

7) Tax benefits. Long term capital gains and dividend income are taxed at lower rates than the top three W2 income rates (28%, 33%, 35%). If you can build your financial nut large enough so that the majority of your income comes from dividends, you could lower your marginal tax rate by as much as 20% or so, depending on the current legislation.

[GregWeld]

REASONS WHY REAL ESTATE IS BETTER THAN STOCKS

1) You are more in control. Every physical real estate investment you make puts you in charge as CEO. As CEO, you are able to make improvements, cut costs (refinance your mortgage), raise rents, and market accordingly. Of course you are still at the mercy of the economic cycle, but overall you have much more leeway in making wealth optimizing decisions. When you invest in a public or private company, you are a minority investor who puts his or her faith in management. Sometimes managers commit fraud or blow their companies to smithereens. Nobody cares more about your investment than you.

2) Leverage with other people’s money. Leverage in a rising market is a wonderful thing. Even if real estate only tracks inflation over the long run, a 3% increase on a 20% downpayment is a 15% return. In five years you will have more than doubled your equity at this rate. Leverage also kills on the way down, but real estate is very difficult to trade so you will most likely stay put unless things get really dire.

3) Tax advantageous. Not only can you deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for the last two of a five year period. If you are in the 28% or higher tax bracket, it behooves you to own property. All expenses associated with managing your rental properties are also deductible towards your income. Income limits do apply however, so make sure you don’t make much more than ~$166,000 a year total.

4) Tangible asset. Real estate is something you can see, feel, and utilize. Stocks aren’t event pieces of paper anymore, but ticker symbols and numbers. When the world comes to an end, you can seek shelter in your property. Real estate is one of the three pillars for survival, the other two being food and shelter.

5) Easier to analyze and quantify If you can calculate realistic expenses and rental income that’s all you really need when it comes down to valuing a piece of property. If you can borrow at 4% and rent out for a 6% yield, you’ve likely found yourself a winner. Real estate is immediately arbitrageable if you have the financial means to invest. There’s not only the cash flow component but the underlying equity component that helps investors build wealth. Stocks require you to trust what the company reports. There are countless ways for companies to massage their numbers to make things look better than they really are e.g. adjusting accounts receivables, adding one off gains, and using various amortization or depreciation strategies to name a few.

6) Less visible volatility. Your house value could be tanking and you would never know it since there isn’t a daily ticker symbol. During bad times, the utility of your home really helps soften the blow as you enjoy your home and create great memories. During the 2008-2009 downturn, I still got to enjoy my vacation property in Lake Tahoe 15-20 days a year even though values were plunging. Meanwhile, looking at the TV or computer screen just made me mad. When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom.

7) A source of pride. Making money for money’s sake is a pretty empty feeling. Every time I drive by my rental properties I feel proud to have made the purchases years ago. I know that my money is working as hard as possible so I don’t have to. Real estate is a constant reminder that taking calculated risks over time pays off. There is an indescribable feeling nobody tells you once you’ve closed on your property. Even though the bank probably owns most of it in the beginning, you literally feel like the King or Queen of your castle. When you die, you can pass on your pride to your children or closest companions to let them create their own memories.

8) More insulated. Real estate is local. If you’ve made a good decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy. Spain blowing up is likely not going to affect the rent you can charge. Look at prices in superstar cities such as Manhattan, Hong Kong, Singapore, London, Paris, and San Francisco. They fall the least, recover the soonest and gain the most. Of course, industries in your area could suddenly disappear and leave you broken as well.

9) The government is on your side. Not only do you get generous mortgage interest tax deductions and tax free profits, you get bailouts if you can’t pay your mortgage. The government also aggressively went after banks to force them to extend loan modifications to bad and good creditors. I even got a free loan mod recently to my surprise. Programs such as HARP 1.0 and HARP 2.0 are allowing folks without hefty downpayments to get in on the action. There are plenty of non-recourse states such as California and Nevada which don’t go after your other assets if you decide to stop paying your mortgage and squat for months. When was the last time the government bailed individual investors out of their stock investments?

[GregWeld]

So just do like I do --- Invest in both if you possibly can.


IMHO --- Stocks will "allow you" to invest in real estate... because you can make gains and be more liquid in "the market"... and real estate is illiquid and can actually need to be subsidized up front for 2 to 5 years.

I invested seven figures in a new apartment complex last year --- I will see ZERO return until next year some time due to us upgrading all of the units etc. SO the cash flow that would be going to pay out to investors - is being used to improve our investment in order to contribute a higher ROI (Return on Investment) down the road. But in the meantime -- I've lost the income on a million bucks -- AND -- it's totally illiquid for a number of years.

The key to this entire thread however -- is to do SOMETHING!

[Vegas69]

Originally Posted by Woody

I think the chart represents the average of the asset class as a whole. If you cherry pick one example of a piece of real estate that you know had a higher return, there are also examples of stocks that have had much higher returns than indicated on the chart.

A few years back I had done some research on long terms returns for stocks vs. real estate. The data that I found at that time indicated real estate and stocks have had pretty similar returns over the long term, with real estate having a slight edge. The figures I remember were close to 9% to 10% per year.

My point is the chart is inaccurate. The median home price in America is $212,000.

Now, if you calculate $100 over 80 years with compound interest at 9%. It's right at $100,000.

Where I think they meant to go with the chart is that same $100 invested in real estate wouldn't have grown at the same rate. Not even close.

In my opinion the median home price in 1928 vs. today would be a better example. Then you have to factor in costs over the years and it gets tricky. Is it an investment covering it's own cost for the most part or primary residence. etc...

The average home price in 1930 was $7800.

With the $7,800 and $212,000 in mind, there is no doubt the $100 in the stock market is superior.

Just for fun let's factor a free and clear property after say 30 years that generates income for 50 years. At only $500 a month for rent over 50 years, that's $300,000. Then you add the appreciation of $204,200 for a total of $504,200.

To put the nail in the coffin, if you would've invested the same $7,800 in the stock market in 1928, you would have over $7,000,000 today.

Case closed....

[GregWeld]

I've never read anything that ever created a case for real estate being a better investment NUMBERS WISE than the stock market over time....


Having said that --- I'm a firm believer in investment in INCOME producing real estate... the first part of REAL estate is that it's REAL. It's a good investment over time and while there are offsetting arguments -- none of them really hold up. If you buy an INCOME producing property -- it will pay off handsomely down the road. PERIOD.


STOCKS are easier. PERIOD. You can't (now days anyway --- LOL) buy a house with $1000... and you can buy stocks all day long every time you have $200 or $1000 to invest. They're liquid. The produce instant income (dividends)... and require very little "effort". Thus -- for most people it's just simply the best way for them to invest.

Once the investments -- or perhaps you inherit -- or win the lottery for 50 grand --- then a person would be wise to invest in some sort of real estate.

Personally I like LLC's --- where I don't have to do anything except collect the income.... but LLC investing requires minimum net worth (because of the illiquidity!).... and shares are generally 50K per share etc. So that alone requires a higher nut to crack.

[GregWeld]

Just wanted to personally thank Todd for investing in the stock market and killing us all in the process!! HAHAHAHAHAHAHAHAHA



Welcome to learning about the little man on Wall Street Todd!!

[Woody]

Originally Posted by Vegas69

My point is the chart is inaccurate. The median home price in America is $212,000.

Now, if you calculate $100 over 80 years with compound interest at 9%. It's right at $100,000.

Where I think they meant to go with the chart is that same $100 invested in real estate wouldn't have grown at the same rate. Not even close.

In my opinion the median home price in 1928 vs. today would be a better example. Then you have to factor in costs over the years and it gets tricky. Is it an investment covering it's own cost for the most part or primary residence. etc...

The average home price in 1930 was $7800.

With the $7,800 and $212,000 in mind, there is no doubt the $100 in the stock market is superior.

Just for fun let's factor a free and clear property after say 30 years that generates income for 50 years. At only $500 a month for rent over 50 years, that's $300,000. Then you add the appreciation of $204,200 for a total of $504,200.

To put the nail in the coffin, if you would've invested the same $7,800 in the stock market in 1928, you would have over $7,000,000 today.

Case closed....

You have over-looked the primary benefit of investing in real estate: Leverage. If I use your numbers of $7,800 in 1930 and assume a 20% down payment, the initial investment is $1,560. If the current value is $212,000, your return would be 6.3% annualized. The dow index in 1930 was 198 and as of today is 15,484. That equates to a return of 5.6% per year. The return on the real estate assumes that on average you break even on your rental income less expenses over 80 years. I would argue that on average over an 80 year holding period you would have a substantial positive cash flow, especially after the mortgage was paid off in 30 years. I also realize there would be dividends from the stock investment as well. It is really tough to make like comparisons with all of the variables that come into play, but my point is that the returns from both investments are pretty close.

[96z28ss]

Who can live to see an investment 80 years? isn't that too long of a period to compare?? shouldn't a 50 year span be a better comparison?

[Vortech404]

I have a question?

Trying to figure out what is better. I understand buy in company's you
like and shop at buy lets use this as an example.

Lets use a $6000 dollar figure and you like all 3 but can only pick 1.

60 shares of MCD vs 150 shares of Coke vs 77 shares of HD .
The yearly dividends of MCD $194, KO $168 and $120 for HD.

Looks like the Coke would win out because of the more shares? cheaper so the dividends buy more shares.But HD
killed them on total return? How do you choose?

What is the biggest factor in narrowing down a stock?

Thanks John

[GregWeld]

Originally Posted by Vortech404

I have a question?

Trying to figure out what is better. I understand buy in company's you
like and shop at buy lets use this as an example.

Lets use a $6000 dollar figure and you like all 3 but can only pick 1.

60 shares of MCD vs 150 shares of Coke vs 77 shares of HD .
The yearly dividends of MCD $194, KO $168 and $120 for HD.

Looks like the Coke would win out because of the more shares? cheaper so the dividends buy more shares.But HD
killed them on total return? How do you choose?

What is the biggest factor in narrowing down a stock?

Thanks John

Good questions John.... and here's my question for you. Why would you only have to buy ONE company? All three are great long term investments so why wouldn't you just buy $2000 of each one?


And here's the answer to your question.... Nobody can tell you which one you should buy. Which one (if you can't do all three) would you like to own?

That is also why you DIVERSIFY.... you want to own a bunch of different companies... in different sectors... i.e. industrial - financial - retail - etc.