Its an age old debate. What I notice is that, most real estate investors don’t like stocks. And most stock investors don’t like real estate.
Some real estate investor will say, “What you gonna do with your money investing in stocks and be happy with 2% return per year?”
And then some stock investors will say, “Stocks have proven time and time again over a number of long years that they provide the best return on investments. Why bother yourself with managing tenants?”
Well, in my opinion, they are both wrong. And I don’t want to be in one group or another. Investing, whether be in stocks or real estate, is still the same concept – never lose money and never overpay for an investment. For me, investing in stocks or real estate is an option. Depending on the situation and depending on your needs. I don’t want to categorize one as the better investment against another. I like to think of it as, “one investment is the best for (insert kind of situation)”.
So its all about knowing in what situation you are in, and picking the investment that can best perform in that situation. Without further ado, let’s dive in.
Control & Transparency
Stocks and real estate are opposites when it comes to control and transparency. Real estate you have control, in stocks you can not control the outcome. The business that you own as stocks run on their own and it depends on the management to provide you with the performance. In real estate, you have total control. You can control what color of paint you want for the house, what kind of features to include in the house, how much to rent it, etc. Even the kind of marketing strategy to attact tenants or even negotiations with the price, sellers and contractors. But it comes with a price – transparency.
In stocks, everything should be disclosed to the public and its shareholders. Any news or rumors must be cleared with a press conference or an official letter of announcement from the company. This can help investors decide whether to sell or hold on or buy a stock. In real estate, its a bit hard, you need to do all the due diligence to make an informed decision. Real estate brokers will lie to make a commission. The sellers too will often lie to make a sale. You don’t know what problems the house have, only after you bought it. I know of someone who bought a property only to find out that its occupied by squatters (its very hard to make them leave). But it can be resolved by bringing an expert along, which, also have their own incentives and it can be hard sometimes if they are telling the truth or if their interest lies elsewhere.
Stocks you have no control. Real estate you have. In stocks you have transparency. In real estate information is muddled and you need to research on your own about the true state of things.
The Good Side of Stocks and Real Estate
Let’s dive in deeper to why people love investing in stocks and real estate. First, investing in stocks is a passive approach. You don’t have to pay anything else as expense once you bought the stock. You also have liquidity, which means you can trade your stocks for cash anytime you want. You also have the dividends which goes straight to your bank account. No more legwork or encashing your checks, everything is automated.
Then you have real estate, it provides income from rent. Protection from inflation, and most importantly, leverage. If you’re going to ask me, leverage is the best advantage of real estate. What leverage means is that most banks would be willing to lend you money and your real estate as a collateral than stocks.
Then the Ugly Side of Stocks and Real Estate
Now we go to the ugly side of stocks, stocks are very volatile. And according to most real estate investors, stocks have low return on investment where 10% is the highest and 2% per year is average. Stocks are also prone to market manipulation. Prone to disasters from market crashes. And the finance field of stocks are full of leeches and crooks that its hard to trust your brokers and fund managers about handling your money.
Now we go the the ugly side of real estate. Real estate investors always said that land prices go up, they don’t make new lands anymore. Yet, they got destroyed in 2007 – 08 and Typhoon Ondoy or Marawi Siege. Even with popular belief, land prices doesn’t go up in a straight line, it has cycles. Just like stocks have cycles. Real estate, you have to manage. Its a full time job for most people. Its not a passive investment in a sense that it, sometimes, becomes a full time job. Try owning an apartment. You get calls in the middle of the night from a tenant telling you to fix the toilet. Or tenants avoiding paying rents. Or tenants complaining about their neighbors and you need to fix the issue. That’s just the tenants. If you’re actively investing in real estate, what about the sellers, the brokers, the contractors, the lawyers and government officials who have their own self interest to take care of and they will lie and cheat to get more money out of your pocket.
Then you have the holding cost of real estate. You pay taxes, insurance, mortgage payments, home owners association fees, etc. Even if you have tenants that pay all these fees, if you are not yet done with the mortgage, if the tenant leaves, you will have to pay all these fees and expenses on your own. All the while its vacant, you have to protect it from being vandalized or squatted, and maintenance cost to make it look decent for the next tenant. Its hard work.
Competition
When it comes to competition, in stocks, everyone can see clearly all the prices of the stocks. In real estate, you won’t have the best deals offered to you. Since most listings go to a broker, those brokers have their preferred clients in which they would offer the best ones. Which means, you will never see the truly cheap bargains unlike stocks where everyone can see the cheap bargains.
I’m not saying that you can not find bargains in real estate. What I’m trying to say is, its going to be hard to compete with entrenched incumbents. In stocks, everyone is in a level playing field. All information is available and all the bargains are for all to see. Which makes it also hard because you are up against the smartest and most cunning people in the world.
Performance
This is probably the reason why people start debates about the subject, “which is better stocks vs real estate?” So in order to make an objective view, lets just take the whole stock market vs the whole real estate market. In that kind of data, the whole stock market performance provides better returns on your investment, vs the whole real estate market. The reason is that, businesses sitting on top of real estate would provide a better return on investment. Businesses provide more value than the land it uses.
BUT! And I did say but! Real estate is very hyper-specialized. What do I mean by that? Well, there are little spots in real estate market where they are better than the whole market of stocks. Those little towns (or streets) that is now picking up progress would provide a better return than the whole stock market. And I think, that is where investors make conflicting points. One real estate investor might be in a small niche market in real estate where the location is hot. While the other investor in stocks bought a hot tech growth company saying that stocks is better than real estate.
And this is what I meant by the situation.
The story of a stock investor who invested in real estate:
I once read a story of a legendary investor who invested in a company that costs him $20 a share. He bought a large chunk of shares because he knows the business well and he trust its founder. After a few years, he sold his shares for $700 per share, making 35x (3,500%) his money. He sold his millions to finance the construction of a condo building. Meaning, he sold his stocks to invest in real estate. Its a good investment. But the investor wasn’t happy.
The stock he sold at $700 per share was the company called Berkshire Hathaway, Warren Buffett’s company, in which the stock now sold at $303,750 per share. That’s 15,187X or 1,518,750% ( a million percent! ). Imagine the horror and pain this investor felt every year as he sees the stock go up in value. His holdings should have been billions now if he didn’t sold his shares, just because he wanted to invest in real estate.
The lesson here is that real estate or stocks are just investment vehicles. Its in the investor to decide which one is best for his situation. And that also means, if you know a lot of things about a stocks, might as well focus on that than investing in real estate. Sometimes, the best investments are those that we already have.