Real Estate vs. Stocks

Real Estate provides three levels of growth: asset appreciation, mortgage paydown and monthly positive cash flow.

Leveraging the investment is a powerful tool in the Real Estate Investment world. Banks will finance properties which show great potential for gain up to 85% loan-to-value. This permits investors to purchase assets worth much more than the down payment. Not only does the investor benefit from the original investment, but also the property’s total value.

For example:

  1. Say a property is worth $400,000. Assuming you are to put down a 25% deposit, the bank will finance the balance ($300,000).
  2. After a year, the property value has increased by 5% (or $20,000). That $20,000 represents a capital gain of 20% on the investor’s $100,000 investment.

All these factors make real estate investments less risky than stocks, but also make it easier to raise capital for initial investment.

With multifamily income properties, your tenants effectively pay down your mortgage. Put another way, your tenants essentially buy the investment for you in exchange for providing them with somewhere to live. This dramatically increases your return on investment.

Monthly positive cash flow is achieved when all expenses related to the asset are met from rents collected, and a surplus remains (net profit). Expenses include taxes, mortgage payments, maintenance costs, management fees, insurance, etc. These expenses are normally off-set by the income (rents) generated from tenants. If managed correctly, rents will cover all the expenses on the property and produce profit as well. This results in positive cashflow.

With stocks, performance is anything but assured. You must rely on the performance of companies, the boards of directors, the mood of investors, market trends and a long list of macro-economic factors, all the while watching the dreaded ticker, hoping your shares will appreciate. In the case of earning income directly from shares in the form of dividends, here again you are at the mercy of the company and board. There are countless approaches to “playing the markets,” some more sophisticated than others. From portfolio diversification and long term investment strategies, to day-trading, hedge funds, derivatives, credit default swaps, commodities index funds, overseas market funds—the list is literally endless. Also limitless is the time and energy that can be consumed, not to mention the anxiety you can experience, as you follow the markets day in and day out.

With the stock market, volatility is a daily reality. Stock prices rise and fall on a daily basis, often with very little warning for you, the investor. In stark contrast, real estate prices tend to fluctuate gradually—historically speaking. As a real estate investor, you have a much better chance of gauging trends and reacting to shifts in the marketplace. You can see changes coming well ahead of actual shifts to the value of your investment portfolio, which is all but free of any drastic swings in value.

So what about leveraging your existing stock portfolio as a source of income or means to further investing? True, you can borrow up to a certain percentage against your stocks, paying interest from day one and the principle back over time. However, this is a dangerous game that can quickly get out of hand. You always run the risk of markets taking a turn for the worst and you being left holding the bag.

Real Estate is really the most accessible, tangible, predictable and historically reliable investment vehicle (that has the potential for more meaningful returns).