Real Estate vs. Stocks - Which Is the Better Investment?
A Comparison of Real Estate Investments vs. Stocks
Asking the questions, “Which is a better investment – real estate or stocks?” is like asking whether chocolate or vanilla is superior or if an Aston Martin is better than a Bentley. There really isn’t an answer because a lot of it comes down to your personality, preferences, and style. It also comes down to the specifics of the individual investment. Very few stocks would have beat buying beachfront property in California in the 1970’s using a lot of debt, and then cashing in twenty years later. Virtually no real estate could have beat the returns you earned if you invested in shares of Microsoft, Johnson & Johnson, Wal-Mart, Berkshire Hathaway, Dell or Southwest Airlines, especially if you reinvested your dividends. So the answer, as with many things in life, isn’t as easy as it may seem. Let’s begin by looking at each type of investment:
Pros of Investing in Real Estate
Cons of Investing in Real Estate
A Look at the Pros and Cons of Investing in Stocks
Pros of Investing in Stocks
Find out who wins - Donald Trump vs Warren Buffett
Asking the questions, “Which is a better investment – real estate or stocks?” is like asking whether chocolate or vanilla is superior or if an Aston Martin is better than a Bentley. There really isn’t an answer because a lot of it comes down to your personality, preferences, and style. It also comes down to the specifics of the individual investment. Very few stocks would have beat buying beachfront property in California in the 1970’s using a lot of debt, and then cashing in twenty years later. Virtually no real estate could have beat the returns you earned if you invested in shares of Microsoft, Johnson & Johnson, Wal-Mart, Berkshire Hathaway, Dell or Southwest Airlines, especially if you reinvested your dividends. So the answer, as with many things in life, isn’t as easy as it may seem. Let’s begin by looking at each type of investment:
- Real Estate: When you invest in real estate, you are buying physical land or property. Some real estate costs you money every month you hold it - think of a vacant parcel of land that you hope to sell to a developer someday but have to come up with cash out-of-pocket for taxes and maintenance. Some real estate is cash generating – think of an apartment building, rental houses, or strip mall where the tenants are sending you checks each month, you pay the expenses, and keep the difference as the profit.
- Stocks: 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 1% of the company. Wall Street makes it seem far more complicated than it is. The company’s Board of Directors, who are elected by stockholders just like you to watch over the management, decides how much of the profit each year gets reinvested in expansion and how much gets paid out as cash dividends.
Pros of Investing in Real Estate
- Real estate is often a more comfortable investment for the lower and middle classes because they grew up exposed to it (just as the upper classes often learned about stocks, bonds, and other securities during their childhood and teenage years). It’s likely most people heard their parents talking about the importance of “owning a home”. The result is that they are more open to buying land than many other investments.
- When you invest in real estate, you invest in something tangible. You can look at it, feel it, drive by with your friends, point out the window, and say, “I own that”. For some people, that’s important psychologically.
- It’s more difficult to be defrauded in real estate compared to stocks if you do your homework because you can physically show up, inspect your
property, run a background check on the tenants, make sure that the building is actually there before you buy it, do repairs yourself ... with stocks, you have to trust the management and the auditors. - Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.
- Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in purchasing power of the dollar.
Cons of Investing in Real Estate
- Compared to stocks, real estate takes a lot of hands-on work. You have to deal with the midnight phone calls about exploding sewage in a bathroom, gas leaks, the possibility of getting sued for a bad plank on the porch, and a whole host of things that you probably never even considered. Even if you hire a property manager to take care of your real estate investments, it’s still going to require occasional meetings and oversight.
- Real estate can cost you money every month if the property is unoccupied. You still have to pay taxes, maintenance, utilities, insurance, and more, meaning that if you find yourself with a higher-than-usual vacancy rate due to factors beyond your control, you could actually have to come up with money each month!
- As you learned in The Great Real Estate Myth, the actual value of real estate hardly ever increases in inflation-adjusted terms (there are exceptions, of course). This is made up for by the power of leverage. That is, imagine you buy a $300,000 property by putting in $60,000 of your own money, and borrowing the other $240,000. If inflation goes up 3% because the government printed more money and now each dollar is worth less, then the house would go up to $309,000 in value. Your actual “value” of the house hasn’t changed, just the number dollars it takes to buy it. Because you only invested $60,000, however, that represents a return of $9,000 on $60,000. That’s a 15% return. Backing out the 3% inflation, that’s 12% in real gains before factoring in the costs of owning the property. That is what makes real estate so attractive.
A Look at the Pros and Cons of Investing in Stocks
Pros of Investing in Stocks
- More than 100 years of research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world. Nothing, in terms of other asset classes, beats business ownership (remember – when you buy a stock, you are just buying a piece of a business).
- Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn’t require any work on your part (other than researching each company to determine if it is right for you). There are professional managers at headquarters that run the company. You get to benefit from the company’s results but don’t have to show up to work every day.
- High quality stocks not only increase their profits year after year, but they increase their cash dividends, as well. This means that every year that goes by, you will receive bigger checks in the mail as the company’s earnings grow. As Fortune magazine pointed out, "If you'd bought a single share [of Johnson & Johnson] when the company went public in 1944 at its IPO price of $37.50 and had reinvested the dividends, you'd now have a bit over $900,000, a stunning annual return of 17.1%." On top of that, you'd be collecting somewhere around $34,200 per year in cash dividends! That’s money that would just keep rolling into your life without doing anything!
- It’s much easier to diversify when you invest in stocks than when you invest in real estate. With some mutual funds, you can invest as little as $100 per month. With companies such as share builder, a division of ING, you can buy dozens of stocks for a flat monthly fee of as little as a few dollars. Real estate requires substantially more money.
- Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
- Borrowing against your stocks is much easier than real estate. If your broker has approved you for margin borrowing (usually, it just requires you fill out a form), it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks and you pay interest on it, which is typically fairly low.
- Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors. Case in point: During the most recent collapse, the Credit Crisis of 2007-2009, well-known financial advisors were telling people to sell their stocks after the market had tanked 50%, at the very moment they should have been buying.
- The price of stocks can experience extreme fluctuations in the short-term. Your $40 stock may go to $10 or to $80. If you know why you own shares of a particular company, this shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap or sell shares if you think they are too expensive. As Benjamin Graham said, to get emotional about stock prices that you believe are wrong is to get upset by other peoples’ mistakes in judgment.
- On paper, stocks may not look like they’ve gone anywhere for ten years or more during sideways markets. This, however, is often an illusion because charts don’t factor in the single most important long-term driver of value for investors: reinvested dividends. If you use the cash a company sends you for owning its stock to buy more shares, over time, you should own far more shares, which entitles you to even more cash dividends over time. For more information, read the work of Ivy League professor Jeremy Siegel.
Find out who wins - Donald Trump vs Warren Buffett
How to Invest in Stocks Like Warren Buffett ?
Over many decades, Warren Buffet has made his clients huge sums of money - and equally important -- has helped them to avoid losing lots of money when the broader market slumps. Just how awesome has he been for shareholders? His portfolio has outperformed the S&P 500 in 24 of the past 30 years. In that time, he's garnered an 18% annualized return, compared to an 11% annualized return for the S&P 500.Most impressive of all, Buffett doesn't rely on some secret formula. While other investment pros talk about their "black box" approach to investing, Buffett's investment approach is remarkably straightforward -- and can be copied by almost any investor.
Why insurance? Because it's a steady, predictable business that generates respectable annual cash flow in any economic climate. Buffett learned that lesson after reading up on the most noteworthy figure in value investing -- Benjamin Graham, who along with David Dodd in 1935 wrote "Security Analysis," which is perhaps the most widely read book in the modern era of I investing. After taking the helm of struggling textile firm Berkshire Hathaway (NYSE: BRK) in the mid-1960s and turning it into an investment company, Buffett's steady hand helped the company to boost book value at Berkshire at a 21% annual clip for the next 40 years. By 1990, Buffett entered into the billionaires club, and by 2008, he was deemed the richest man in the world, with $62 billion in assets. Yet these days, Buffett is more interested in shedding his wealth.
Buffett's Investment Strategy And Big Wins
Investors can bag Buffett-like returns by following two simple maxims. First, focus on companies that have a long track record of steady and strong cash flow, and make sure that they are fairly well-insulated from new competition or technological obsolescence. the second maxim is harder to follow and requires a great deal of resolve. You must be bold when the market and the economy reach their scariest moments. By keeping cash in reserve, you should counter intuitively load up on stocks right at the times of peak selling. Warren Buffett relishes those moments, and should you.
Warren Buffett's Portfolio: What's He Holding Now?
Though Berkshire Hathaway now has stakes worth hundreds of millions of dollars in many companies, the firm has more than $10 billion in just a handful of top holdings. ( P.S. -- Warren Buffett is the ultimate buy-and-hold investor. Famously, his preferred investing horizon is "forever." If you're seeking Buffett-like returns, you should look at a special group of securities we call "Forever Stocks" -- stocks solid enough to buy, forget about and
hold... forever.) Find out and listen to "Forever Stocks" - why successful valued investors hold stocks for decades ?
Why insurance? Because it's a steady, predictable business that generates respectable annual cash flow in any economic climate. Buffett learned that lesson after reading up on the most noteworthy figure in value investing -- Benjamin Graham, who along with David Dodd in 1935 wrote "Security Analysis," which is perhaps the most widely read book in the modern era of I investing. After taking the helm of struggling textile firm Berkshire Hathaway (NYSE: BRK) in the mid-1960s and turning it into an investment company, Buffett's steady hand helped the company to boost book value at Berkshire at a 21% annual clip for the next 40 years. By 1990, Buffett entered into the billionaires club, and by 2008, he was deemed the richest man in the world, with $62 billion in assets. Yet these days, Buffett is more interested in shedding his wealth.
Buffett's Investment Strategy And Big Wins
Investors can bag Buffett-like returns by following two simple maxims. First, focus on companies that have a long track record of steady and strong cash flow, and make sure that they are fairly well-insulated from new competition or technological obsolescence. the second maxim is harder to follow and requires a great deal of resolve. You must be bold when the market and the economy reach their scariest moments. By keeping cash in reserve, you should counter intuitively load up on stocks right at the times of peak selling. Warren Buffett relishes those moments, and should you.
Warren Buffett's Portfolio: What's He Holding Now?
Though Berkshire Hathaway now has stakes worth hundreds of millions of dollars in many companies, the firm has more than $10 billion in just a handful of top holdings. ( P.S. -- Warren Buffett is the ultimate buy-and-hold investor. Famously, his preferred investing horizon is "forever." If you're seeking Buffett-like returns, you should look at a special group of securities we call "Forever Stocks" -- stocks solid enough to buy, forget about and
hold... forever.) Find out and listen to "Forever Stocks" - why successful valued investors hold stocks for decades ?
Stock Investing or Real Estate? Find out more...............listen to this video.
Stock investing or real estate, what's a better investment for the average investor? From our real estate rental property we would expect to have these
upside expectations? Capital appreciation would fall into the historical range of 4 to 6 % per year over a 10-year period. Cash flow from the monthly
rental income after all expenses would be in the range of 8 - 12%. This is often known as being in the sweet spot in rental real estate. And we would expect a reasonable total return of 12 - 18%, if all goes well. So what are some of the downside expectations of rental real estate?
First you have the responsibility of dealing with emergencies, such as fixing toilets and faucets or addressing tenant issues at possibly all hours of the day. Second, there is the time and cost of marketing the property to would-be tenants, which is usually done in the evenings and on weekends when people are available to view the property. Third, you have to contend with the monthly administration of rent collection, bill payments and bookkeeping.
Fourth, you have a more restrictive ability to travel out of town for long periods of time since emergencies, showings and tenant issues can arise on a moment's notice.
Now let's take a look at how selling covered call options on stock that you own can generate a monthly income similar to that of rental property income.
Our upside expectations would be that. Capital appreciation would fall into the historical range for the stock market of 6-8% per year over a 10-year
period. Cash flow from the monthly "rental" income of selling the covered calls would be in the range of 8 - 12%. We would expect a reasonable total return of 14 - 20%, if all goes well. And You would have no management responsibility. As well, you can be anywhere in the world for extended periods of time and still manage your investment. The downside expectations of selling covered calls are that. You have weekly research to conduct to verify
if anything has changed in the stock's fundamentals, the competition and the market sector. You are unable to leverage your initial investment, unlike
real estate. And you risk having your stock sold should it rise in value above your "rental" rate. However, you still get to keep the "monthly rent" and
any stock appreciation above the initial stock purchase price.
When looking at both investments, we would expect a similar reasonable total return on investment of around 15%. Not bad, in both cases. Where there is a clear distinction is in how much control you have over the investment. Stock investing allows you to move into and out of the market usually within 24 hours. This gives you greater flexibility to react to major market corrections. On the other hand, unloading a rental property usually takes a much longer period of time. Another huge advantage is that keeping tabs on your stock investments can be done from virtually anywhere in the world. As a rental property manager you need to be physically accessible to handle issues most days of the week. In essence, investing in the stock market does a better job of creating a time-rich lifestyle where you do not need to deal with as many pressures and time constraints as managing a rental property. If you are starting out as an investor, you may be better served learning how to invest in the wonderful world of stock investing first.
upside expectations? Capital appreciation would fall into the historical range of 4 to 6 % per year over a 10-year period. Cash flow from the monthly
rental income after all expenses would be in the range of 8 - 12%. This is often known as being in the sweet spot in rental real estate. And we would expect a reasonable total return of 12 - 18%, if all goes well. So what are some of the downside expectations of rental real estate?
First you have the responsibility of dealing with emergencies, such as fixing toilets and faucets or addressing tenant issues at possibly all hours of the day. Second, there is the time and cost of marketing the property to would-be tenants, which is usually done in the evenings and on weekends when people are available to view the property. Third, you have to contend with the monthly administration of rent collection, bill payments and bookkeeping.
Fourth, you have a more restrictive ability to travel out of town for long periods of time since emergencies, showings and tenant issues can arise on a moment's notice.
Now let's take a look at how selling covered call options on stock that you own can generate a monthly income similar to that of rental property income.
Our upside expectations would be that. Capital appreciation would fall into the historical range for the stock market of 6-8% per year over a 10-year
period. Cash flow from the monthly "rental" income of selling the covered calls would be in the range of 8 - 12%. We would expect a reasonable total return of 14 - 20%, if all goes well. And You would have no management responsibility. As well, you can be anywhere in the world for extended periods of time and still manage your investment. The downside expectations of selling covered calls are that. You have weekly research to conduct to verify
if anything has changed in the stock's fundamentals, the competition and the market sector. You are unable to leverage your initial investment, unlike
real estate. And you risk having your stock sold should it rise in value above your "rental" rate. However, you still get to keep the "monthly rent" and
any stock appreciation above the initial stock purchase price.
When looking at both investments, we would expect a similar reasonable total return on investment of around 15%. Not bad, in both cases. Where there is a clear distinction is in how much control you have over the investment. Stock investing allows you to move into and out of the market usually within 24 hours. This gives you greater flexibility to react to major market corrections. On the other hand, unloading a rental property usually takes a much longer period of time. Another huge advantage is that keeping tabs on your stock investments can be done from virtually anywhere in the world. As a rental property manager you need to be physically accessible to handle issues most days of the week. In essence, investing in the stock market does a better job of creating a time-rich lifestyle where you do not need to deal with as many pressures and time constraints as managing a rental property. If you are starting out as an investor, you may be better served learning how to invest in the wonderful world of stock investing first.