Real Estate vs Stock Market

[Felix Piper]

We have been debating whether to jump into real estate and deal with tenants and all the other nuisances that comes with property ownership, when we have been happy making 20% in the stock market (and that's last year in a bear market!). Would love to hear from others that may also invest in the stock market and what are the pros and cons to jump into rei.

[Jacob St. Martin]

Hello Felix! I think there are many benefits of investing in real estate over stocks.

Normally real estate will get you higher returns. 20% in the stock market is actually quite good. Depending on the type of real estate you invest in you might be able to beat that in straight ROI or you might be slightly below. However, if you consider all of the way that real estate makes you money your return should be much higher. Let me break it down:

- Cash flow. With stocks you only make money when you sell (other than dividends but unless you have a huge amount invested this is probably not making you a lot). With real estate you are getting your returns regularly. With LTRs you might get 10-15% with STRs you can get more like 20-50% depending on the area and how good you are. 

- Appreciation. This depends greatly on the area but typically ranges from 2-5% annually. However, this is not 2-5% of what you put in, this is 2-5% of the purchase price. Say you house hack and are able to put 3.5% down on a 1 million dollar property which is 35k. If that property appreciates 3% in one year, your value goes up 30k which is a 86% ROI just from appreciation. This is the power of leverage which is a tool you don't have access to in stocks.

- Tax Savings. You can claim depreciation on real estate investments. Take the value of the property (lets use the 1 mil property again), subtract the land cost ( we will say 250k), then divide by 27.5 (which is the number of years you can depreciate the asset over, then multiply by the income tax bracket you are in (let's say 30%). That means you can take 750,000/27.5*.3 or ~$8200 off of your taxable income every year for the next 27.5 years. 

- You can re-leverage once you have built equity to keep your capital working hard for you, which you can't do with stocks. 

- Stability. Rents almost never go down if you are in fundamentally solid markets. Stocks however, can be much more fickle and fluctuate based on global events. 

- Tax deferment. In real estate you can do a 1031 exchange when you sell a property to defer paying capital gains tax. This means that when you reinvest the money you have a larger principal to work with and thus can buy a larger asset that should produce higher cash flow and appreciation vs with stocks you have to pay capital gains when you sell. 

My last comment would be that if you meet the right people, you can get all of these benefits without using too much of your time. For instance, I am looking for a partner on a deal right now where the partner would likely get 20-30% ROI and get all of the other benefits I mentioned, while I do all of the work and you sit back, relax, and watch the cash come in. Reach out if you want to discuss further. I hope this was helpful!