Why invest in real estate and not the stock market?

Question

My family has always owned rental units since the 1960s. It is what we have done for investing all our lives. However, why not just free yourself of all the work that goes into owning rental property and put it in the stock market? The rate of return in the stock market (at least that I've read on the internet) seems to be averaging about 8% long term. Is real estate such a better deal? My analysis spread sheet doesn't beat 8% most of the time (at least on a cash return on investment basis) until the property has been in my possession for about 5-10 years.

Can you please convince me (again) that putting most of my money in the stock market is crazy and that rentals units are a far better investment? I would love to hear the persuasive argument from those who have more experience and knowledge than me. Thanks in advance!

Dan Brewer · Answer

Alex -

Real estate investing is such a vast area; there is the right spot for everyone in real estate. At one time, I owned dozens of rental properties.  But I discovered I didn't have the discipline and detail-opriented nature to effectively manage them.  I hired someone to manage them for me, but was unhappy with the attention they paid to the properties. So I decided that while real estate rentals are wonderful investments, and the vast majority of investors do very well with them, they did not fit my interests and skills.  I have been in real estate investment for over 20 years, its my fulltime profession.  I found my passion on the capital side of the business, and have continued to evolve and specialize.  Its what I enjoy, and believe that I am very good at doing.  I can bring a lot of value to others, which is terribly important to me.  So rather than chasing dollars and return, I sought what I liked to do and what I was good at.  Amazingly, the dollars and returns followed.

My suggestion to you is to invest in what makes you happy and in what you like to do.  It could be the single family rental business, it could be a different direction in the real estate investment world - there are so many directions you can go.  It could also be the stock market (although I found out I that was not a good idea for me either lol).

One key factor to consider is how much time and effort you personally want to invest managing your investments.  I promote the concept of passive investing, because for most people, time is their most valuable asset.

If you enjoy what you are doing, you are bound to be more successful at it. Good luck in whatever you decide!

Mark Creason · Answer

Alex,

Real Estate is a great investment for a number of reasons.  You have a cash on cash return.  You have principal pay down.  You have appreciation.  You are allowed to depreciate your asset.  You can 1031 exchange your real estate to move up without paying significant tax penalties.  A good property today can get you 10%+ on your cash on cash return and an IRR substantially higher.  Hope this helps.

Mark

Doug McLeod · Answer

My 4 single family purchases this year average $400/mo cash flow (after PITI) on an average $27k cash out of pocket.  That's 17.8% just on cash flow. I also captured an average of $6k equity (all-in costs vs. appraised value). Assuming no appreciation and that the $6k gets wiped out by realtor fees if I sell with a realtor, I would at least get the benefit of the equity pay down on the mortgage.  That's another $900/yr average over the next 5 years (conservatively) - or 3.3%.   Let's wipe out 3.1% for maintenance and vacancy.  That leaves 18% annually - most of it in actual cash and much of it shielded from taxes by depreciation expense.  If we have a normal market and I can get some appreciation or I sell without a realtor at close to full market value, my return are significantly higher.  If have insurance to protect my assets and I can trade up to larger properties with a 1031 exchange to defer capital gains. If the market drops, my leverage is in a manageable range and will still have positive cash flow with flexibility to lower rent should the market force that.  I have friends and family whose retirement was wiped out in stocks (2008, World Comm, Enron, etc.).   I'll take Real Estate (with a sound approach to buying, financing, managing, and selling/trading up) over stocks any day.

Account Closed · Answer

If you are doing it and are NOT beating the stock market you should STOP doing it.  Just say NO!

Dawn Brenengen · Answer

Diversification and control of my assets. I do invest in the stock market, but I have no control over how my stock investments perform. At least with my rental properties, I get to make the day to day decisions that help influence what kinds of tenants I will have and how well my property is kept.

Diversification - I think people should be invested in both vehicles.

Joel Owens · Answer

Hi Alex,

Right now today as I speak I have tens of millions in sales and more under contract with clients buying retail shopping centers.

The cap rates range from 7.5 to 9 cap rate. Putting 25% down going in cash on cash is hitting in the low teens to high teens annually . Factor in  professional business tenants, rent growth, and cap rate compression along with tax depreciation and it's easy to beat your 8 percent ( actually the 8 percent is surpassed before even getting into those other metrics...... : )

All the best.

Joel