Seven Reasons Real Estate is a Better Investment Than Stocks
I’ve now almost entered my fourth decade of investing in both real estate and the stock market. It’s easy for me to see which one has far outperformed the other. It is not even a close race.
When I read about the two compared side by side, or see a study or graph, the comparison is rarely accurate or correct. It is almost always made between stock market growth and the growth of the value of single-family homes. The house someone lives in isn’t a real estate investment, yet that is the benchmark that is usually used. I suspect these comparisons are often made by content creators who have never owned a true real estate investment.
Using only single-family home appreciation as the comparison leaves out both cash flow and tax benefits found in a real estate investment. So why do they do it that way? Because it is easy.
I encountered this issue in the hospital when I worked on outcome measures. Those who work to find the measures to chart outcome tended to look only at things that could be answered by pushing a few buttons on the computer. They looked for the measures that were the cheapest and easiest to record. They never wanted to open the chart to look for something that might be very important or that would more accurately answer the question. The length of time used to find the information was more important than the value of the information found.
To really get good outcome measures, the patient must be asked some questions. This takes a lot of extra time and money, so they don’t want to make the extra effort to do the job right. Instead, they find an easier item to measure. But if the patient had a complication, they might have gone elsewhere to fix it and the hospital would not have the complication in their computer system and would never know it happened.
This is why single-family home appreciation is the common benchmark for real estate investment returns; it takes very little effort to get the data. This method also grossly underreports the actual returns of real estate investing. To know the actual returns from a real estate investment property, you must do a little digging to find out the cash flow a property produced each year and what tax benefits the property received. Digging up these things takes a lot more effort. Only after putting in the right research, can one find the right answer.
Following are seven reasons real estate is a better investment than the stock market, coming from someone who has a long history of investing in both.
1: Real estate produces a better return on investment.
A few years ago, I decided to put in the hard work to find out exactly what returns my real estate had been making. I made a head-to-head comparison between all my stock market and my real estate investing. Following each contribution and tracking it over time is not an easy task.
What I found was reported in my article Who Wins: Real Estate or the Stock Market? A Real Life Contest. The findings were a landslide in favor of real estate investing. The contest was not even close. This was real life results and included the lost decade of stock investing during the 2000s, the tail end of the real estate boom of the 2000s, the greatest real estate crash in the last several decades, and the great stock and real estate booms of the 2010s.
Even though I invested more money in the stock market over a longer period than I invested into real estate, our real estate produces far more cash flow than I get from using the 4% rule on my stock investing.
2: Real estate produces cash flow without selling assets.
I began taking my retirement plan distributions at age 56 using the IRS rule 72(t) and wrote a guide to taking substantially equal periodic payments (SEPP) for those of us who retire before age 59 ½. One of the tough aspects I faced when I started taking money out of my retirement plan (stock market) was choosing which stock mutual funds to sell to have cash to distribute.
Making the sell decision in the stock market was tough for me. This was not an issue for my real estate investments, since real estate investments have a monthly cash flow built in. Every month, money is deposited into my bank account, and nothing ever gets sold.
I love this aspect of real estate investing the most. Today, I have more cash flow from real estate every month than the amount we spend on living expenses without the need to decide what to sell. Way less headache. This aspect of real estate investing is much more passive than stock investing.
3: Real estate has better tax advantages.
There are different ways to get the tax advantages on investment real estate. In my case, all the cash flow we made in the first seven or eight years of ownership was not taxed due to depreciation. If I earned $30,000 in cash flow, I got to spend the $30,000 of cash flow without the IRS taking a piece of the pie.
Today about a third of my real estate cash flow is still tax free. None of my stock market proceeds have ever been tax free.
4: Real estate is indexed to inflation.
Inflation is the measure of the rate of increase in prices over time and is measured using the Consumer Price Index (CPI). Housing cost is one of the factors used in this calculation. The rent increase charged to my tenants rises over time about the same as the inflation rate. Thus, as inflation occurs over time, my cash flow grows with it.
This does not happen at all for stock investing. Stock values are based on the profitability of each company and the desire for investors to own that stock. Tesla was not earning any money which should have led to a drop in stock value, yet their stock prices went up because people wanted to own their stock, which drove up the price. Stocks are not correlated at all to inflation.
I prefer knowing I have a cashflow indexed to inflation.
5: I can control the cashflow/profit of my real estate investments.
I love this feature of my real estate investments. I can choose to delay big expenses and take more cashflow in any given year. If my property manager tells me we should think about repainting the property and it will cost $30,000, then I can choose when the painting will happen. If I am going on a world cruise this year, and need that $30,000 to pay for the trip, I can tell them to set up the paint job next year so I can spend that money on myself this year.
I have no control of what happens with a stock investment. Dividends are paid when they feel like it.
6: Both real estate and stocks take a similar time commitment.
It is interesting how many people think real estate investing takes a bunch of time, which prevents them from investing in real estate. If real estate investing feels like a second job, then you are doing it wrong. You are not investing in real estate you are working in real estate, that’s why it feels like a job. Stop working so hard and let the investment take care of itself.
What if people looked at stock investing the way they mistakenly look at real estate investing? People who invest in real estate think they suddenly need to do everything involved in owning and running the property. What would it look like if you thought you needed to do everything you can to get the biggest return on your stock.
“I just bought this stock, and I can’t believe how much time it takes to own. I’m sent a 40-page update that I must read every year. I don’t even understand a lot of the terms in the update so I spend hours looking up the things I don’t understand. I must keep up on the news about the company. I’m getting tired of keeping an eye on the CEO, watching for things that might hurt the company’s value. I hate spending all the time and money it takes to go to the annual shareholders’ meeting to stay abreast on what is happening with the company and vote my shares. I have to keep track of my basis, selling price, and dividend distributions in order to do my taxes every year. I thought this was supposed to be a passive investment! I’m getting rid of my stocks because they are a pain and take up too much of my time, not to mention the extra money I’m spending on transportation, meals, and hotels to attend the shareholders’ meetings.”
That sounds ridiculous because people have come to understand that you don’t need to do any of these things when you own a stock. But you could, and if you did it would no longer be a passive investment. Unfortunately, they have not learned that their real estate investments should be treated the same way as their stock investments. Yes, you can receive every phone call from every tenant, but it is not necessary. Stop doing things you don’t need to do, and real estate investing will be every bit as passive as stock investing.
If you are having a hard time cutting your hours working in your real estate investments, then check out my video course, The Doctors Course to Automating Your Real Estate Investments. It will help you regain the time you are wasting fussing with your investments. Don’t work in real estate, invest in real estate.
7: Real estate investing can improve the life of my extended family.
None of the stocks I invest in today help my extended family and friends. But many of my friends and family have received a direct benefit from my investments in real estate. Some of them I hired, or asked my property management company to hire. Therefore, they were employed and earned a living at a job they wanted, that I created. Some earned a higher interest return when they carried notes for the purchase of my real estate investments. When interest rates were less than 1%, I had family members earning 5% – 8% interest. I love paying my friends and relatives interest way more than paying interest to the bank. Others got a place to live when there was a shortage of places to rent, when they called me, I moved them to the front of the line for my next vacancy. I had the power to tell my property manager to put them in my next vacant apartment without doing any screening.
These benefits (and others) to family and friends gave me great satisfaction. Owning real estate gave me the ability to help others that purchasing stock does not provide.
You can see why I love real estate investing which makes up the largest portion of my assets. If you would like more information on how I invested in real estate then get a copy of my book, The Doctors Guide to Real Estate Investing for Busy Professionals (Who Don’t Think Real Estate is for Them).
Don’t be fooled into thinking real estate investing requires too much of your time. Yes, there are things you can do to take up your time, but almost none of them are required.