Why Real Estate over Stocks?

Question

Hi. Accredited investor here, tech background.

I live in a VHCOL area, and the prospect of investing in Brooklyn beyond my condo seems... unlikely. I'm heavily weighted into technology and cryptocurrencies and I'm looking into diversifying. Diversifying into real estate is an intriguing thought, but:

• I don't know anything about property management
• I don't know how to find a "good deal"
• I don't know what the logistics involved in owning out-of-state are

Why real estate over just moving things to VTSAX or something? It seems like a ton of headache for... what seems to be roughly market return? Is that right?

Tom Wagner · Answer

It all comes down to one thing: **LEVERAGE**

If you invest $100,000 in the markets and your investment returns 7%/yr, your investment will be worth $196,000 in ten years (100k x 1.07^7), so your total return will be $96,000.

However, If you buy a property for $500,000 and put $100,000 down (20%), you'll get to reap the benefits of the appreciation and cash flow on a $500,000 investment, even though you only put down 20% of that amount. If the property generates $10,000 in cash flow per year, you pay the principal balance down $8,000/year and it appreciates at 2% year, your total return will look something like this:

$10k cash flow x 10 = $100,000

$8,000 principal paydown x 10 = $80,000

$500,000 x 1.02^10 = $609,497 - $500,000 = $109,497

SO, your expected total return will *CRUSH* the stock market alternative, totaling almost $300,000 total vs. $96,000. And these numbers get even juicier if you benefit from significant rent appreciation or property appreciation, or if you decrease your down payment percentage.

Aaron W. · Answer

@Hesham Salman How did you learn about technology and cryptocurrencies?  How did you learn to invest or whatever your job is?  Everything can be learned.  I invest in both the stock market and in real estate. I do put a lot of my stock invests in VTSAX. The reason I do real estate investing is for the diversification and returns. There are also tax advantages to owning real estate that we don't get or are limited with stock investing.

In short, I do both and believe we should focus on both stock and real estate investing to diversify our investments to avoid being too heavy in one area.

Taylor L. · Answer

To address your bullet points:

• You don't need to manage properties to invest in real estate.
• You're certainly smart enough to learn how to find a good deal
• You're also certainly smart enough to learn about out of state investing, too.

Real estate offers a lot that VTSAX doesn't - cashflow potentially greater than the small dividend, very low cost debt, fantastic tax treatment (learn about the 1031 Exchange, cost segregation, and opportunity zones), the ability to buy at a discount and force value add, and so much more.

You're always buying VTSAX at current market price, but you can buy real estate under market price at any time if you know where to look. You can't implement a plan to drive up the value of VTSAX, but we can (and do) force value add on real estate all the time.

That said, VTSAX has advantages that can't be denied. Highly liquid, very diversified, easy and cheap to buy, and easy to set-and-forget. In addition to real estate I have stock market investments, and VTSAX is one of them. I use it as a place to park capital in between RE deals. Others prefer to stay out of the market entirely but I prefer to keep my capital working as much as possible (other than reserves).

If you're accredited, you have access to 506(c) and 506(b) syndications, where you invest passively with a sponsor who handles the operations and value add. That solves the property management problem, but you still need to learn how to evaluate sponsors and deals (protip, evaluate sponsors first then deals). In my opinion, any sponsor that is willing to claim their investment could outpace the market is being irresponsible.

Mark Cruse · Answer

Everything you need to know about rental comps, vacancies, tenants and everything else is readily available. It would be very difficult to be successful in this industry if it wasn´t. There is a vast array tools and data on the internet alone in addition to dozens of others methods. In regards to liability you must understand how to protect assets (i.e business structure, insurance). In regards to buy and holds from a distance; many in that situation utilize property managers. Several who have investments in close proximity to them still use property mangers. There are hundreds of investors on this site who have properties hundreds to thousands of miles away.

Mike D'Arrigo · Answer

@Hesham Salman they are not mutually exclusive. It's wise to have a balanced portfolio and not all your eggs in one basket. When you consider all forms of return from real estate, real estate has a much higher return than stocks. Real estate returns come from 4 primary sources.

1. Cash flow2. Equity through appreciation3. Equity through principal reduction4. Depreciation tax benefit

Also, through the use of leverage which is not available with stocks, the cash on cash return is much higher.

Mark Cruse · Answer

I do both but in real estate there are many more ways to make money. I can do fix and flips, buy and holds, private lending, joint ventures, appreciation plays and so so much more. There are multiple angles to real estate. In stocks it´s hard to start off with nothing and become wealthy. I know people who do real estate as an occupation supporting entire families or putting kids through college. I know people who knew nothing and came in wholesaling into the six figures in less than a year. Stocks can be very very volatile and with a buy and hold you can get in for little, have someone else paying down your debt and pocketing the difference.

Hesham Salman · Answer

A 1031 exchange sounds like a particularly tax advantaged vehicle for expanding a portfolio. I'm comfortable assessing and analyzing a company based on available market data. But from my relatively limited understanding based on working with commercial real estate tech, market comps are largely limited to sales. Rental comps, tenant industry makeup, vacancy rates, options and concessions are hard to assess through a given market because they're non-standard or the data is a heavily guarded secret.

I'm not interested in particularly active real estate plays. Buy and hold plays seem interesting at a glance to me, but I'm concerned about liability. Additionally, the prospect of fielding tenant issues, maintaining occupancy and screening tenants seems best suited to properties that are relatively nearby, no? Could someone reasonably manage a property in Indianapolis from Brooklyn with a tool like Okupied? How are vacancies reasonably filled from such a distance without a property management company? Most importantly, how do you protect yourself from liability?

Matt J. · Answer

I'm sure a lot of others will have a similar answer here but just want to address your concerns.

You don't need to know anything about property management, you can outsource that to a property management company.

Finding good deals just takes time. The first thing you'd need to do is set your criteria on what a "good deal" would look like to you.

The logistics of owning at a distance are first and foremost to build a trustworthy team. @David Greene (I think) coined the term the "Core 4". You need a trustworthy and competent real estate agent, property management team, contractor and lender. Investing long distance is all about leverage and building trust.

Now your last point, why real estate instead of VTSAX (had to Google that) is an index fund gives you appreciation long-term, but not much else. With real estate, you generally should see appreciation long-term, cashflow each month, tax benefits that can lower your total taxable income, equity growth as your property is paid down by your tenants over time, plus you can add value to the property by making improvements.

With an index fund, you really are at the mercy of the market and have no control over how that investment performs, like you do with real estate.

If you were really interested in real estate, you could check out the podcast and some of the books BP published like The Book on Long Distance Real Estate Investing, especially since you live in Brooklyn.

Why Real Estate over Stocks?

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