Stocks vs Real Estate
By Christopher Levarek
“Rule No. 1 : Never lose money. Rule No. 2 : Never forget rule No. 1”
- Warren Buffett
Traditional methods of investing follow along the lines of the stocks, bonds and retirement accounts. These often feel comfortable and easy to understand simply because they are familiar. This being the case they are preferred by many as the main focus of what is called “investing”. However we would like to look at the topics of control and investment returns for traditional investing listed above side by side with real estate investments.
Returns and Leverage
In a recent discussion we had with a top executive at highly successful banking institution, investing in stocks was discussed as being “safer” and on par with returns for real estate investing. Regarding this topic, we believe that the following will show how traditional stocks can not equally be compared to real estate investing and one of the main reasons has to do with leverage.
As discussed in our “IDEAL” investment article, leverage is the ability to take today’s dollar value(with regards to buying power) and pay a small percentage, 20% for a property, to acquire 100% of the value. This means that 100% of the value is providing a return based on 20% of the contribution, thus a higher cash on cash return or overall Return on Investment. Below, we will demonstrate this concept with a simple scenario with stocks and real estate.
Scenario 1 : Stocks
$100,000 invested with a 10% return (annual)
$100,000 invested
10% return = $10,000 return
$10,000/$100,000 = 10% Total Return on Investment
Scenario 2 : Real Estate Investment
$100,000 real estate property purchased with 20% down and 10% return (annual)
$20,000 invested (20% down)
10% return = $10,000 return
$10,000/$20,000 = 50% Total Return on Investment or Cash on Cash Return
As you can see, leverage allows real estate investments to acquire much higher cash on cash returns for the amount of money invested or Return on Investment (ROI). Additionally, the benefits of utilizing the remaining $80,000 in the example above for additional investments to increase overall returns demonstrates the true power of leverage with real estate investments, see our article on Opportunity Cost.
Control
The idea of having control of the investment either is of great importance or not even considered at all for many investors. For some, the less control the better. The idea is the investment is better managed by someone who better understands the intricacies of the investment.
Due to the vast number of moving parts in the stock market and the lack of understanding or control by the general stock investor, control is acknowledged to be the responsibility of the fund account brokers/managers. This relies on good faith in the fund account management and a “cross-the-fingers” type approach for most investors.
When this is paired with the overall unpredictability of choices by companies making up the stock funds, the lack of ability to truly own and control the investment becomes obvious. For a real world example of this unpredictability, simply look at what happened with the Tesla stock after the CEO, Elon Musk, participated in the smoking of an “illegal/legal” substance on a Joe Rogan podcast interview.
When the idea of control of an investment is applied to real estate investing, we see a higher degree of possibilities then investing in stocks. Clearly, it is up to the investor to either take a more passive or active approach to real estate investing however, the opportunity is there. The asset or product, real estate property is easier to understand, available to physically touch/see and fundamentally able to be acquired, modified and sold with a clearer understanding of the entire pipeline.
Of course it is worth mentioning, it becomes harder to control the “market” the real estate property or investment is located in but we would argue, understanding real estate markets can be an easier task then trying to dissect companies goals, ambitions and objectives with regards to their stock funds for accurate investing.
In Final
In this quick look at the above two topics when comparing stocks vs real estate, it becomes clear that when investing, the topic of most importance is to understand your goals, objectives and reasons for investing. Some will choose to invest in stocks for diversification or hands-off investing or even the lower entrance bar and online purchasing options. Some will choose to invest in real estate due to the “leverage” advantages with returns or the higher level of control and understanding.
We advise looking at a number of comparisons between investment assets, diversifying your portfolio and choosing what aligns with your goals. In either scenario, investing in the future and planning for the future is always a positive move. Invest Smart!