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Investing in real estate vs the stock market? The age old question of which asset class will yield higher returns over your lifetime and help you build wealth. As a CPA who solely serves real estate clients, I'm a bit biased. I have access to large amounts of financial information that has led me to one conclusion: investing in real estate is a better choice for long-term wealth building.
I love investing; investing is me and I am investing. In fact, my first love was the stock market. Then is was options; then futures. I love the idea of money working for me. All I have to do is stay on top of market news and trends, not touch my money for years, and I'd be a multimillionaire in no time at all.
Unfortunately, it's not as easy as it had sounded to my youthful ears.
Then I discovered the possibilities of investing in real estate. I learned about the asset class, what it takes to invest, and who the players are. I began networking with investors, and then offered up my services as a CPA. Once I started realizing that my clients were crushing it with their real estate investments, I was sold.
Investing in Real Estate is Hard Work; But So is Any Type of Investing
We've all heard that we need to create passive income. Real estate investors constantly say that they are creating passive income. Stock market investors also claim their investments are passive. It's my belief that investing is never passive if you're doing it right.
However, I do feel that investing in real estate is easier than any other sort of investment out there. I've learned, through personal experience and interviewing my clients, that a real estate can be run at a relatively passive activity level.
I know what some you are thinking. Bull sh*t.
Think about it like this. If you buy a rental, or you are analyzing a syndication or partnership to lend to, when is the majority of the work conducted? Up front. After the deal closes and a tenant is placed, it's smooth sailing.
Sure, things come up, like maintenance requests and emergencies. And if you are partnering on a flip and actively participating, you will obviously have your work cut out for you (but then I'd argue you are running a business rather than "investing").
But the point is that in the real estate world, the hard work and the vetting is all done up front.
The stock market is a different beast. If you're doing it correctly you are thoroughly researching the particular stock or fund you are buying into. You are reviewing their prospectus, attending shareholder meetings, tracking how well their products sell, monitoring the equity's performance, and running all sorts of financial calculations.
Of course, this due diligence is comparable to that of investing in real estate.
But where the efficiency of a real estate investment really trumps that of an equities investment is that with the stock market. Investing in the stock market requires you to be constantly monitoring micro and macro economic events. You have to have a skill for "feeling" the market sentiment (read: analyzing people's emotions).
And guess what? There is somebody on Wall Street monitoring their portfolio literally 18 hours a day. And they are going to beat you every time.
There is somebody on Wall Street working 18 hours a day, and they are going to beat you every time.
The problem arises when you fail to pay attention and your stock or fund has a bad day. You could very well be caught holding the bag.
That's why I believe real estate investing is better than investing in the stock market. Assuming you buy a solid investment property, you can enjoy decent returns in any type of market and you don't necessarily have to worry about market swings or the underlying sentiment.
Before you skewer me, let me say this: I know there are plenty of people that lost their shirts in real estate in 2008. I have helped several of these people develop tax and financial plans to best mitigate their losses. I don't want to make real estate investing seem easy. Market conditions must still be monitored on a continuous basis.
My point though, is that it is highly unlikely there is someone on Wall Street working 18 hours a day to beat me on a real estate deal in Small Town, North Carolina. And once I have it locked into place, I only have to compete with the other rentals in the local area. By running proper due diligence and avoiding emotional decisions on the purchase side, if the market crashes, I can drop rent to keep a tenant in my unit yet still break even. Investing in real estate allows for that sort of flexibility as you own the asset.
With any investment, buying "right" is key. I'd argue this is especially true for real estate. "You make money on they buy" is a common phrase among those investing in real estate. Deals offering beefy margins seem to be running dry these days, so I caution you to avoid buying deals unless you can protect the investment in a downturn with relatively little effort.
Leaving Money for Years is Really Tough
A funny thing that I find about stock market advocates is that they boast "the market has returned an average of 8% over the last 100 years." Unfortunately, I'm a mere mortal and don't have 100 years to live. Additionally, I and am probably not capable of leaving money in a particular place for more than five years. Nor would I want to as that could suggest complacency - a detriment for any investor.
Average stock market returns don't make since because I, like you, am a mere mortal and don't have 100 years to live.
To further solidify this point, few of the people I've met actually believe these fancy financial plans that have been professionally developed. You know, the ones where you have a consult with a credentialed financial advisor, they throw inputs into their software, and out comes your financial and retirement plan. This plan analyzes all sorts of risks and tells you that you'll see returns of 5-8% on average for the rest of your life.
What it doesn't tell you though, is that life happens. It doesn't tell you that you're a regular human being and you'll probably not stick to that plan. Later on when you compare your actual results to the financial plan, you'll be bummed at the results.
The primary reason those financial plans won't work is because you have access to your money. You are an emotional human being and make knee jerk, gut reactions. So do I.
I'm not saying financial planning isn't important; it is. I just can't get on board with the economists and financiers who run complex formulas and model your future financial life. It's good to have insight, but largely not practical.
The mere fact that it's harder to access money is one of the top reasons I think investing in real estate is such a great wealth building tool. Sure, you can leverage yourself to the teeth and you get fancy tax breaks. But the key difference between real estate and investing in the market is liquidity. And illiquidity can be a great thing.
Related: The Ultimate Guide to IRS Schedule E for Real Estate Investors
When you are investing in real estate, you essentially moving money into a bank account that you can't easily tough. And that bank account pays large dividends.
Illiquidity is often viewed as risky and I tend to agree to a certain extent. There are plenty of ways to mitigate liquidity, so don't let it scare you. On the flip side, how many times have you dipped into a savings account "just this once" or "to cover a need?" You can't do that as easily when your savings account is called 23 North St, Washington D.C.
Cash Flow Trumps Net Worth
Investing in real estate allows you to build a cash flow machine. You can do this in a relatively short amount of time. Your first property may only cash flow $400 per month. When you buy ten of those, you're consistently seeing $4,000 hit your bank account every month. That's powerful.
You can do the same in the stock market, but to see comparable results, you need to buy on margin and focus on high yield dividend funds. This of course comes with additional risk.
Focusing on cash flow is the essence of value investing, a mindset which many wealth investors adhere to. My favorite part about investing for cashflow is that it's relatively easy. By that, I mean that I can model what my returns will be at any given price point. I can then map out my Internal Rate of Return (IRR) for a number of years and determine the optimal time to sell the property. That's powerful for an investor and it's another reason real estate is a superior asset class.
Related: Tax on Rental Income – What’s the Truth?
When you invest in stocks, you are primarily betting on appreciation. This appreciation is based on the future performance of the underlying company, which by the way is out of your control.
While you can certainly invest for appreciation with real estate, investing with a cash-flow focus in an asset you control will allow you to realize much higher returns than any other asset class.
It could be argued that betting on appreciation by investing in cities primed for growth offer better wealth building opportunities than the grind of investing for cashflow. This may be true, but it's much riskier and I always feel like I'm "going in blind." Kinda of like rolling the dice and hoping I get doubles.
Even if my real estate appreciated massively, I can't pay my monthly bills when my net worth is tied up in an asset. But if that asset is providing me with income, I'm in a much better financial position.
Conclusion
The stock market provides an average return of 8%. That average is cast over many decades which can be an impractical benchmark for investors. Real estate has many benefits, one of which is that the principal investment can't easily be touched. Investing of any sorts is hard work, but done correctly and you'll be well on your way to building massive wealth.