Stick to real estate or buy stocks on sale?

Question

Just wanted to get some opinions from the pros..

I've been watching the stock market(probably my first mistake..lol) and every time it drops I get more of an urge to click that buy button. Since the real estate market doesn't necessarily follow the stock market exactly, there's no guarantee that real estate prices will drop the way the stock market has now. So I'd like to take advantage of this FIRE sale.

That being said, should I dump the money I've been putting away for a rental property, into the stock market? Unfortunately, I dont have enough dry powder to do both to any meaningful degree. It seems like too good of a deal to pass up, but my fear is that if the real estate market tanks, I'd already deployed all of my cash into the market.

Any thoughts?

Trent Stone · Answer

The stock market is just gambling unless you are in it for the long run. As Robert Kiyosaki says, putting money in the stock market and hoping it does well is not investing, it's just trading and speculating. You have no control over your money in the market and if it tanks then you could lose everything. You have a great deal of control about when and how you invest in real estate, and if it all tanks you still have a physical asset to fall on. You might hit the jackpot with stocks, I have before, but just with play money, not with my investment money. Average P/E ratio in the S&P is about 15 right now. That means they are charging 15 times what the company actually produces in revenue. That's a lot of speculation and good will. Real estate by far has my vote.

Nicholas Hernaez · Answer

@Joe Villeneuve

The fact of the matter is I just really like making money and taking advantage of good deals. I understand your concern with the stock market, but like warren buffett has said “Be greedy when others are fearful”

And in response to your game show analogy, it would be more constructive if you used actual numbers as not to mislead people that will take your advice at face value and not actually run the numbers. And you may argue that under the right circumstances if you use private money, no money down, invest long distance for better returns those numbers are completely achievable. Sure, but that isn’t exactly risk free is it? And if we’re going to cherry pick, I could tell you since the bottom of the market in 2009 google has gone up 2122%.

If you’re landlord insurance was due 6 months from now and they called to tell you they’d give you 30% off today, would you say “no thanks, I’m good, I’ll wait to pay full price in 6 months”?

Don’t get me wrong, I’m not arguing that stocks are better than real estate. I’m a member of a RE forum, and am a RE investor with multiple properties. But at the end of the day, I’m an investor and I look for deals.

But I still greatly appreciate your feedback. I think discussions like this help us all grow.

Joseph Cacciapaglia · Answer

I actually had someone ask me this question yesterday, and if she had bought the index fund she was considering, she would have lost almost 10% today. The problem is that you don't know if the drop is over yet, and there is nothing you can do about it if it's not. Of course, some day stocks will be up way above where they are today, but will you be OK if they drop another 10-20% from here over the next 6 months? Look at past declines, and you'll see that they often last quite a while.

Liquidity is both the blessing and the bane of the stock market. It's great to be able to sell whenever you want, but it's not so great that everyone else can sell in times of panic. It takes a much bigger bump to move real estate down than it does stocks, because it's relatively illiquid. That's why real estate prices make it through many recessions without any decline in prices. It's pretty tough to panic sell your home.

Connor Mckelvey · Answer

@Nicholas Hernaez

The biggest benefit of real estate compared to stocks in my opinion is the increased ability to control your own outcome.

That being said, for the global economy to function, capitalization must increase over time.

Two or three weeks or so, the S&P 500 has dropped about 25%.

So, my gut reaction is, yes. Dump whatever you can into index funds that are selling at a discount.

However, we don’t know if this is the bottom of the stock market this cycle.  If the stock market crashes another 25%, yes real estate will be effected.

This is where Dollar Cost Averaging comes in. This is a lot easier to do in index funds than real estate for the average investor.

Just start putting your money in the market at an equal rate over the next 6mo - 1yr.

If the market swings up really quick, you’ll make a nice return.

If the market keeps going down, you’ll keep buying at a bigger discount. Then once it’s swings up you can decide to hold or sell.

TLDR:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

And what we know know is that people who invest in the stock market are fearful right now. Take advantage.

Joe Villeneuve · Answer

How about 3 properties in 3 different micro-markets?

Start            Prop #1     Prop #2     Prop #3Buy             100k           120k         210kCost             20k             24k          231kStart Yr2CF              4000/y       5000/y     8000/yComps        106k            130k        230kStart Yr3CF             4150/y       5400/y      8200/yComps        114k          138k          245kStart Yr4 (this year)CF            4300/y        6000/y          8300/yComps       121k                       145k         270k

Nicholas Hernaez · Answer

@Joe Villeneuve Care to expound?

I’d love to see a break down of a specific property based on today’s number.

Joe Villeneuve · Answer

When I give examples, using numbers with "$", they are NEVER guesses...they are always based on current numbers I gave in front of me at that time.

The 5 to 1 valuation is based on 20% down.

Joe Villeneuve · Answer

You must really like taking risks.  Good luck.  You're really going to need it.

Nicholas Hernaez · Answer

I appreciate everyone's input and after sleeping on it and having some time to let the adrenaline flush out of my system I've made my decision. If anyone is interested in what I'll be doing, here's my plan:

I'll be setting aside $6000, which I will be allocating to max out my 2021 Roth IRA anyway(I've already maxed out my 2020, in my haste to take advantage when the market was down 5-10%). And since no one know's where the bottom will be, I'll be setting buy limit orders of $1000 at intervals of 5% drops in relation to the peak of the market in february. After a year, I'll be able to sell it, then buy equivalent investments in my Roth IRA. If it's grown past the original $6000, I don't mind taking the 15% hit for capital gains.

This way I can DCA as the market goes down and I don't feel like I'm missing out on the FIRE sale. And if the state of emergency announcement was the jump start we needed for the economy to recover, then non of my orders will trade, I was worried for nothing and I'll have $6000 more in my down payment fund...

Joe Villeneuve · Answer

OK.  Let's play a game called "The Choice is Right". There are 3 contestants.  Each one starts with $100k in cash.  Each will have to buy what's behind curtain #1, curtain #2 or curtain #3.  Here's a little peek at what's behind each curtain:

Curtain #1:   5 Packages of Stocks & Bonds.  Each Package costs all 100% of the $100k in cash with a yearly return of 15%/yr Curtain #2:  5 Packages of REI Each Package costs all 100% of the 100k in cash with a yearly appreciation of 5% and $10k/yr in cash flowCurtain #3:  5 Packages of REI Each Package costs all only 20% of the 100k in cash for the down payment with a yearly appreciation of 5% and only $5k/yr in cash flow                                 ...what to do...decisions, decisions, decisions.

Contestant #1 goes first, and chooses Curtain #1...the Stocks and Bonds, and out of the corner of his eye sees the other 2 contestants smiling...can't figure out why.Contestant #2 goes next, and chooses Curtain #2...the REI with $10k CF option, and out of the corner of his eye sees the 3rd contestant's smile get even larger...can't figure out why.Contestant #3 goes last, and almost can't contain herself.  She chooses Curtain #3...the REI with $5k CF option, and starts dancing...and can't figure out how/why the other 2 contestants left her with this enormous gift.

The other 2 contestants are left scratching their heads, looking at eachother, and can't figure out why the 3rd contestant was so happy getting 50% the CF of the 2nd contestant, 33% of the returns per year as the 1st contestant, and was dancing around the room like she just won the lottery.

That's because she did...and because percentages lie.

Stick to real estate or buy stocks on sale?

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