Why investing in Real Estate is better than the stock market

[Jorge Vazquez]

Real Estate allows you to be in more control. Buying stocks leaves you at the mercy of the market forces.

I have always been fascinated by financial markets. Investing in real Estate and the stock market excites me. I love the thrill. Before the 2008 crash, I used to have my securities license. I was also able to trade from my desk. That was until I made a bad bet. My margins closed on me, and I had to put up more collateral to keep it open. I kept borrowing from my portfolio, hoping that my bet would improve. Sadly, the losses got wider and wider until my entire portfolio got wiped out by one bad bet. It was a wake-up call. Apart from my personal mistake, was there something larger at play that caused this to happen?

Riding a bus Vs Driving your car

I spoke with my mentor, and he gave the following analogy about control: Investing in the stock market is like riding a bus. You can't control the route it takes and where it goes. The only decision you can make is when to get in and when to get out. By contrast, investing in real Estate is like driving your own car. You have much greater control. You can accelerate, brake and steer it in whichever direction you want to go.

Having the highest control over my investment is the biggest reason why I shifted fully from stocks to real Estate.

Dividends vs Rent Payments

One of the biggest reasons people buy stocks is to build wealth so that with financial independence, you can retire early. Many financial experts talk about the 4% rule: you can withdraw 4% of your capital every year without exhausting your portfolio. It presumes that the real return of your portfolio is 4%. If you had to live off just 4% of your portfolio, you would need huge capital to begin with. Most people don't have that. One of the biggest reasons I prefer real Estate is that the rent payments are much higher than dividends in stocks. I am yet to find any stock in the market that can consistently provide a 10% return in terms of dividends alone.

Apart from the low dividends, if you want to create a cash flow using stocks, the only way is to be a day trader. It's a full time job that will prevent you from doing anything else. Rental real Estate can be largely passive and allow you to have a full-time job.

Volatility & Stop Loss

Real estate prices move slowly over time. Stock prices change every second. Market fluctuations in the stock market take place every day and wild swings are common. The volatility can cause sleepless nights, especially if your stock is down. Peace of mind is one of the biggest advantages when it comes to real Estate. Having the opportunity to think things through and making an informed decision comes naturally with a market that moves slowly. If the price of the property is going down for some reason, you can always sell your property or refinance it and hedge your position. Creating a hedge through financing for a rental property allows you to enjoy appreciation with a cap on the downside. You can't do this with a stock.

Bevy of options - Non Performing vs Performing

With Real Estate, you have several options. You can buy a non-performing property and turn it around or you could choose to buy a turnkey property from the beginning. With stocks you don't have the choice of buying a nonperforming asset. Even if you buy an underperforming stock, whether it turns around or not is not in your control.

Information Arbitrage advantage

One of the biggest advantages of real Estate investing is information arbitrage. If you know a better way to make a profit, you could use it to your advantage. With stocks, information arbitrage does not exist. The moment a certain piece of information becomes public, it gets priced in immediately. There is no way you can profit from having a certain skill or a piece of knowledge that can give you an edge. Warren Buffet is a firm believer in Value investing. The crux of the strategy lies in finding undervalued companies and buying them. With listed companies, everybody has access to the same information. If there is an undervalued company, analysts will pick up on it immediately once the quarterly reports are released and the value will go up immediately. The velocity of trading is so high that there is no way of capitalizing on information arbitrage. So what separates you from Warren Buffet? The volume of money being deployed. Warren Buffet can afford to buy so many stocks in a company that he can win a seat on the board. This gives him much greater control over the company. He can turn a distressed company around with this power. Ordinary investors don't have the level of capital to be able to do that.

Leverage

The only way to buy stocks is with cash. You could buy derivatives with a leverage of 80% but the positions are short-term and it would require you to be an active trader keeping a tab on the positions. You have to also account for decay in value of the derivatives. By comparison, it's simple and straightforward to buy real Estate with financing. The interest rate is low and the term is fixed for 30 years. It doesn't get any better than that when it comes to leverage. If you opt for a BRRR deal, you even get 100% leverage and have no money invested in the property. You can't do this with stocks.

Tax Benefits & Equity gain

Real Estate comes with significant tax advantages. You can deduct your mortgage interest, defer your capital gains indefinitely or even qualify for an exemption on capital gains altogether. With rental properties with every mortgage payment your tenant makes on your behalf, your principal reduces adding more equity in your pocket. Stocks don't come with any such benefits.

Conclusion

With real estate, you can enjoy passive returns for years to come, benefit from steady appreciation and have a high degree of leverage. With the right purchase and right strategy, real estate investing is a surefire way to grow your wealth. It's not a coincidence that real Estate has produced more millionaires than any other field out there.