Why It’s Harder To Get Rich Off Stocks Than Real Estate

It's harder to get rich off stocks than it is to get rich off real estate. The main reason why is due to the amount of money you need to risk to get rich in stocks. With stocks so volatile (see March 2020), it's hard to invest as aggressively in stocks as it is with real estate.

Ever since making a goal to accumulate $1,500,000 more capital or generate an additional $60,000 in retirement income by the end of 2022, I've been thinking of various ways to make more money. Given neither my wife or I have a job, we are facing an almost impossible financial challenge.

After much consideration, I decided one way we could achieve this stretch goal is by taking more investment risk. When you also have two little kids to take care of, taking more investment risk is not my favorite way. But I was running out of options.

Harder To Get Rich Off Stocks As It Takes More Guts

Take a look at this graphic below and tell me what you see.

Financial Samurai purchasing Tesla stock - Why It's Harder To Get Rich Off Stocks Than Real Estate

What you see is a purchase of a measly three shares of Tesla stock at $694.04, $698, and $698.94 for a combined total of $2,090.98. The Tesla stock purchase comes after the account was funded with $243,000 that was safely earning 1% in an online savings account. In other words, less than 1% of the capital was deployed to purchase Tesla stock.

The example is a great definition of the phrase: chicken shit.

Being chicken is the number one reason why it's harder to get rich off stocks than it is to get rich off real estate.

Harder To Build A Significant Position

After Tesla rallied to over $950 a share, I began to feel FOMO that I didn't build a large enough position in the name at a reasonable price. I had about a $150,000 position at the time and wanted to build a $200,000 position to one day get rich.

For roughly 20 years, I've always had a “Punt Portfolio,” equal to 10% – 20% of my public investments, where I buy individual stocks to try and outperform the S&P 500. My decision to take more investment risk to hopefully get rich meant hitting the top end of the 10% – 20% range.

With Tesla, I began to daydream that 15 years from now the company could be a $1.5 trillion market capitalization company (10X from here). If I had a significant size position, I could brag to my kids that their old man had the foresight and the guts to invest in Elon when his company was still in its relative infancy. I could also tell them the reason why I was able to be a stay at home dad all these years was due to this one investment.

Based on my analysis on whether to buy Tesla, I decided to attempt to buy $50,000 more Tesla stock under $700/share, a 35% pullback from its highs. When the share price dipped below $700/share on the morning of February 6, I began to buy one share at a time given trading is now free.

I figured I would buy around 75 shares over several hours in the morning. I was simply too scared to buy a significant amount of stock at one go due to the stock's tremendous volatility. Unfortunately, Tesla shares stayed under $700/share for less than 30 minutes before rebounding higher.

Now, Tesla is around $1,500/share as of July 24, 2020. Nuts! I ended making a little over $100,000 in Tesla, but that amount isn't going to change my life one bit. I'm still holding onto 30 shares to see what happens.

Fear Is Why Buying Real Estate Is So Much Easier

My fear of instantly losing money on Tesla stock was my main reason for not buying $50,000 worth of stock all at once. If I had really believed Tesla would be worth at least a double in five years, does it really matter whether I buy the stock at $698 or $750? It doesn't.

Why It's Harder To Get Rich Off Stocks Than Real Estate - chicken

But before buying, I considered what if I buy $50,000 worth of stock and it goes down another 35% that afternoon. How would I feel? I would feel so pissed! I have no desire to watch $17,500 of my hard-earned money instantly vanish.

Chicken shit I say.

Now let's go back to my latest real estate purchase, a single-family home in San Francisco with panoramic ocean views. Although I diligently put in the work before buying, I had no problem paying over $1,700,000 in cash for the property. In fact, I'm ready to buy another home for a similar price if one becomes available.

How is it possible that I had no fear paying 34X more for an asset? The answer is that I had conviction in the value of the house and I had no fear the house would disappear soon after purchase.

Too Much Uncertainty With Individual Stocks

With Tesla, although I'm bullish, there is a myriad of exogenous variables outside of my control. For example, Tesla could very easily miss earnings next quarter because the coronavirus halted production and affected demand in China.

Will analysts and investors see past a disappointing earnings result and still look to the future? Or will analysts and investors punish Tesla stock, providing me a better entry point to buy? Who knows! All I know is that I have an entry point at below $700 and I hope it gets there.

Now let's compare the likely performance of Tesla stock and the price performance of a single-family home with an ocean view in San Francisco over the next 10 years.

I can see the ocean view home appreciating at a 5% annual clip. A 5% increase on a $1,700,000 position is $85,000. Whereas I could easily envision Tesla growing at a 15% annual clip, thereby doubling its share price in just five years.

Tesla is, after all, planning to dominate the electric vehicle market and build an autonomous global taxi market. However, a 15% increase on a $200,000 position is only $30,000.

Despite Tesla's massive growth potential, there is no way in hell I would ever invest $1,700,000 in Tesla stock. Tesla could certainly be a nice double or triple in 5-10 years. But there's also a chance it might go bankrupt.

Conversely, even if my house burned down, I'd still own a plot of land worth at least $1 million. I'd also receive $750,000 – $1,000,000 from my home insurance company to rebuild a brand new 2,500+ square foot house.

The Requirements Of Getting Rich

So many things have to go right in order to get rich.

1) You've got to invest in the right asset. Instead of investing in Friendster, you better have invested in Facebook. Instead of investing in Yahoo, you better have invested in Google.

2) You've got to have enough guts to invest a sizable amount in the right asset. Even if your $5,000 position goes up 10X, a $50,000 gain is probably not going to change your life.

3) You've got to hold onto the right asset for a long enough period of time, through even the worst of times. When the world feels like it's coming to an end, as it did between 2008-2010, it was very easy for people losing their jobs to try and protect their remaining wealth by liquidating stocks. But the people who got rich not only held on but also bought aggressively through serious uncertainty.

Clearly, it's harder to get rich off stocks than it is to get rich off real estate.

Most people, including myself, cannot do all three consistently with stocks. Therefore, we end up buying a mutual fund or index fund with the majority of our position. Investing in index funds over the long-term is a great way to build wealth.

However, by definition, index fund investors will never outperform the market. And if you never outperform the market, are you really getting rich? Doubtful, just like the person who makes $1 million a year is not really rich if everybody else makes $1 million a year. Besides, $3 million is the new $1 million anyway.

Your goal is to outperform the masses in order to achieve financial freedom sooner, rather than later. The easiest way to outperform is to work more, save more, and invest more. The riskier way to outperform is to take more risk in your career, in business, and in certain investments.

It's not easy to get rich off stocks.

Related: Why Real Estate Is Less Risky Than Stocks And The Irony That Follows

Getting Rich Off Real Estate Is Relatively Easier

Real estate is a tangible asset that generates income and provides utility. Thanks to real estate's relative illiquidity, it's easier for real estate investors to hold onto their asset over the long term (point #3). It still stubbornly takes at least two weeks and a 3.5% total commission to sell a property.

See this interesting chart below that shows the top 10 U.S. markets with the longest average home seller tenure in Q42019. Compared to the year 2000, the average homeownership tenure has more than doubled!

Average homeownership tenure

Now let's look at the average U.S. homeownership tenure below. The average has also slowly climbed from about four years in 2009 to currently about eight years in 2020.

Average US homeownership holding period - Why It's Harder To Get Rich Off Stocks Than Real Estate

People simply aren't moving as often because transaction costs are still high, the desire for bigger and better homes has dissipated, and more owners understand the wisdom of holding for the long term.

As homeowners hold onto their homes longer, they are able to build more equity. With a larger equity cushion, there is less of a need to sell during an economic downturn. When you're just busy living life and regularly paying your mortgage, you're more than likely going to build a significant amount of home equity.

U.S. home equity growth - Why It's Harder To Get Rich Off Stocks Than Real Estate

Big Money In Real Estate

Given the median price of a home in America is ~$320,000, the median home buyer is also investing a significant amount of capital into one asset (point #2). In some cities, of course, the median home price is much higher.

In comparison, the average stock position size or entire equity portfolio is much smaller, especially since we know the median American has less than $20,000 saved for retirement.

We can also take action to improve a property's value or increase its rental income. With stocks, we are a passive investor at the mercy of management and various unforeseen exogenous variables.

Finally, it may be easier to select the next outperforming real estate investment versus the next outperforming stock. With real estate, we simply need to understand demographic trends, valuations, and job growth while benefitting from tax benefits and leverage on the way up.

Take a look at the national home price appreciation well into the coronavirus pandemic. Look how the appreciation rate is accelerating.

Real estate is easier and apprciating

Get Rich Off Stocks And Real Estate

Although it's harder to get rich off stocks, investing in stocks clearly has its merits. 2019 was a banner year for stock investors after a dismal 2018. But 2020 has been a terrible year for stocks so far as real estate significantly outperforms.

Over the long-term, stocks have consistently outperformed real estate. Just make sure you actually hold for the long term and not sell or not sell too much during bear markets. You've got to have the courage to continuously buy.

I say that for most people, getting rich off real estate will not only be easier. Real estate will also be more rewarding given the utility real estate provides.

It feels wonderful to be able to provide shelter for your family, especially during a pandemic. Making money down the road is the cherry on top. When all you're doing is enjoying life in a significant asset you own. You feel like you're getting a two-for-one special all the time.

There's no reason why you can't invest in both.

Consider Hybrid Real Estate Investing

If you want to invest in real estate while also experiencing the ease of investing in stocks, you can invest in a publicly traded REITs. Or, you can invest in eREITs through Fundrise or or individual deals across the country CrowdStreet. Both platforms are free to sign up and explore.

I've invested $954,000 in real estate syndication deals online since 2016. The IRR has been a passive 11% so far. Fundrise and CrowdStreet are my favorite real estate marketplaces today. Both are free to sign up and explore.

Harder To Get Rich Off Stocks Than Real Estate

Invest In Private Growth Companies

Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

For more nuanced personal finance content, join 100,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. 

117 thoughts on “Why It’s Harder To Get Rich Off Stocks Than Real Estate”

  1. This entire argument is wrong. “im buying a property because I know what Im doing” Thats the biggest BS. You have no control on real estate prices. Just because real estate went up for a decade doesnt mean it will go up forever. Look at Japans real estate which was the most expensive real estate in 1990’s. You can make money in real estate only if theres another sucker to buy it out of you for a higher price. Everything is law of supply and demand. If we have say a 1929 style depression, real estate will be stuck in rut for another 10 years. The golden years of free money and the real estate appreciation are done. Atleast with stock market you have the liquidity and the ability to get out when you want to not when you have to.

    1. You could certainly be right. In addition, stocks could go up in a 1929 style depression as real estate declines. But doubtful.

      The bigger argument is that more people understand real estate compared to stocks. You get a place to stay for the rent or mortgage you pay. Stocks are more complicated, therefore, people may buy less, not construct their portfolio properly etc.

      And if you buy your home with a mortgage, in a normal upward market, the compounding effects are much greater.

      Look at your returns and your wealth. If you’re happy with them, no need to be upset. Keep doing what you’re doing. And if you’re not happy, then adjust accordingly.

  2. Barry Dunaway

    Sam,

    You’re right, watching stock prices change second by second is not good for our finances or mental health. Every down-tick is a reminder of how dumb we are. “Why didn’t I sell when I had the chance?” Two down-ticks lead us to draw a straight line and figure how many days will pass until we’re broke.

    Smart investors follow your lead: Focus on the long-run potential of what they own and ignore prices except when they offer a good opportunity for profit. People who own private companies pretty much have to do this.

    Makes you wonder if business appraisers are right to value private companies at a discount to public ones because owners can’t sell at a moment’s notice. Maybe this is actually worth a premium.

  3. I think a lot of the author’s opinion on real estate comes from living and investing in San Francisco during the best possible time. Even including the housing market crash SF is having a crazy run up in housing prices. He is confident in investing $1.7M in cash in a house in SF because even during the worst downturn we’ve ever seen he was able to recover relatively quickly. However, I can say that for me personally the feeling is the exact opposite. I cannot understand how a housing market can have a median house price that is 10x the median income. How anyone pays their bills or invests for retirement is beyond me. You are all in on your house, at a time when no one can actually afford the houses they are in. So I would NEVER invest that much money in a single asset, especially not into unsustainable fundamentals.

    Having said that, I actually understand why he would hesitate to put all of his money into a single stock (or house). Diversification is valuable. If you are looking to increase return by taking on more risk, it is usually more efficient to do so with leveraged investing in diversified funds rather than putting all of your eggs in one basket.

    1. Nah, that’s not even it. It’s because if he constantly yells “downturn coming in the stock market” he can point out when he’s right, which will be at a time when other PF bloggers’ investments are down, since they all advocate for index investing.

    2. Everything is relative. Majority of people under 1m net worth have a most of their assets in their primary residence. This isnt risky, its just necessary in order to have a roof over their heads. But what Financial Samurai is saying is that its easiest to do that because you sort of have to just to have a place to live, unless you like renting. But putting majority of their wealth into stocks (or anything that you have no control over) is very scary because it can, as he said in his blog, go from something to literally nothing in no time. That is why I am a huge proponent of real hard assets because the likelihood of it going to “0” is smaller than paper assets. Also, real estate can be leveraged in a safer manner than many other investments thereby naturally increasing ones return. And income producing real estate (which is what needs to be compared to stocks because It makes no sense to compare apples to oranges) provides an extra safety measure when using leverage because of the tenants paying the mortage. The key is using a safe amount of leverage (35-40% dp) because even in a downturn landlords are one of the last to stop getting paid, think about it, who will APPLE stop paying first, its landlord or shareholders. Even if, as a landlord, I have to cut rents in half or 1/3 of what I was getting before I am still getting paid versus the person who bought stock in a company that stopped paying dividends. I should also still be able to pay my mortgage and property taxes if I didnt overleverage. All in all stocks may outperform real estate over the long term but safely leveraged real estate should outperform stocks everytime.

  4. Stocks vs RE has always been an interesting debate but at the end of the day, they are very different assets and the choice whether to go with one over the other is a personal decision. Over the spectrum, there’s anecdotal evidence of those who did really wonderfully with either choice but also those who went bankrupt investing in either. Just generalisations:

    Stock:- more (much more) volatile on a daily basis and also very visible at a touch of a button!, much more psychological discipline required, single stocks always have a chance of going to zero but as much a chance as going 1000x too. Virtually zero maintenance (apart from voting) and near zero transaction costs.

    RE:- much harder to accurately value (you don’t really know its worth until you sell or your immediate neighbour sells and has identical house to you), needs leverage +++, in general, virtually can’t go to zero but all the same, will never go 1000x unless its a unknown gold mind beneath, very high maintenance costs and transaction costs, ability to touch and see is a bonus to some people.

  5. Real Estate much more risk if you don’t pay for the property in cash. If things go awry and you can’t make your payments on huge mortgage you can lose a lot more than just your down payment. Leverage works both ways. That being said, there’s a freaking stampede going on into Bond Funds and Index Stock Funds. This is a bubble getting near the nasdaq 2000. See the ungodly amount of money just being shotgunned into these investments. The next bear will absolutely gut these people and investments.

    What am I investing right now? Dividend Stocks/ETFS/Mutual Funds – yes they will get hit too but nothing like the sp500 sheep and the FAANG Stocks which make up the biggest positions in index funds. Bond funds will get literally turned inside out when the concrete gets poured over these poor soul’s foxholes. I am investing in Bond Managers who run unconstrained strategies. Nobody will be able to time the pop of the bubble…everyone will guess and 99% will be wrong. The best way is to be smart with your money.

    1. Spend less than you make
    2. Stay out of debt
    3. Invest every month your cash flow into above investments 80% stock/20% bond
    4. have 6 month emergency fund
    5. Exercise everyday
    6. Stay away from eating Sugar
    7. Don’t eat red meat
    8. Drink 2 Liters of water each day
    9. wRite a gratitude journal every day
    10. Stay off social media

    1. Sorry you ended up losing a lot of money in this stock market route.

      80% stocks in this bubble market? You’re crazy. 80% bonds more like it.

      Are you also alone and childless? You sound like a lonely sociopath.

  6. I read a few comments and didn’t see any with larger stock purchases as compared to median home prices in their area(as you requested). So here are a few figures: I’m 36 and I owned a home in Louisiana at $59k in 2006, $89k in 2011 and $150k for half of a condo now in Nashville, TN. I bought about $139k worth of AAPL stock between 2012-2013…a total of 2,000 shares. I have reduced the position over the last 6 months to 1,700 shares(still over $500k). I have initiated two other 6-figure positions and have sold out of both of those. But your main point is absolutely correct—the dispersion in stock returns is far more extreme. What was it that cane out of the Booth School research study-our of 26,000 listed stocks, around 4% accounted for 90%+ of the excess returns over T-bills? Compare this to real estate: where leverage, liquidity-risk, and inflation drive returns and the idiosyncratic risks can be controlled more easily(insurance is widespread and affordable).

  7. Sam, while I agree that it’s easier to build wealth in real estate over stocks, there are easier and less risky ways to create wealth, and you didn’t touch on those in your article. Namely, expand your business, create that into a cash flow machine, keep increasing profits year over year, and invest those profits into asset appreciating investments. It is possible to buy a multi-unit-residential property with rents well below market at a super low CAP rate. Move the tenants out, fix the units up, and raise rents. At a 3% CAP rate, an increase of $1,000 a month in rents will provide a $333,000 increase in the value of the building. Then, flip the building, and you’re looking at a very healthy IRR. I’ve done both, built a business, and flipped and held MUR properties, and I’ve produced an over 30% year-on-year compounded return for the last 30 years. That’s how you create massive wealth. Jeff

    1. So you are saying you build wealth by kicking tenants out of their homes so you can charge new tenants more. That’s great.

      1. “Their homes” That’s funny. Why do people think their entitled to other people’s assets when it comes to real estate? It’s just as absurd as someone claiming they should own some of Zuckerberg’s shares because they use Facebook daily.

        1. Its because having a home is a necessity in life and moving can be a huge life upheaval event, especially if everyone in an city is doing the same to their tenants. It means moving kids out of schools, moving, which is a huge cost burden already for low income families. It can completely disrupt lives that are already difficult from the outset. Using facebook and where you live are on completely different levels. I agree it is a moral judgement, though. You can decide where you stand on your own, but don’t be surprised if people judge.

  8. I was dying to buy Apple back when the stock was a few dollars. I wish I’d been more focused on investing back then, but spilt milk. Lack of free cash was the primary obstacle.

    Anyways, in our early 50’s now and we’re a few years past the 7 digit milestone. Most savings are in our 401ks, in index funds the entire time. CAGR has been about 50 bpts less than the S&P500 over 26 years despite having some bonds and about 35 bpts of fees. Within the 401K I’ve held all sorts of crazy fund allocations, but it’s stabilized. I have little fear of losing money when I invest in my portfolio, though it certainly may happen. 20% stable value 20% Min Volatility, 60% Global Market, to simplify. If it does crash, I’ll just wait for it to come back.

    We also bought a house for my in-laws a long 2 day drive from where we live. Long story, but mil has passed, hopefully it’s another decade or even two before fil passes. However, once he does, we’ll sell immediately… it’s in hurricane country and has been flooded once already. Luckily we know contractors locally, and the repairs went well.

    We are interested in buying housing where our youngest goes to college (though we don’t yet know where that will be.) That could save us rent, get us in-state tuition, maybe allow us to collect rent, and RE in many college towns seems to be doing well. There are many benefits to real estate investing, but until recently we really just have not had the cash flow, given our other choices (our oldest is special needs, so a lot of money has gone towards his treatment.) Not afraid of losing money if we do this, though it could happen.

    Perhaps our most dangerous big purchase was my wife buying into her business as a partner. I rejected the first offer, the numbers were punishing. It was a matter of inexperience, not venality… they restructured a decent deal. Cash basis IRR has been about 5% so far, below projections, mostly due to the cost of rapid expansion. Better solutions have been found, and the latest numbers could bump IRR to 30% from inception in a few years. If we eventually get most of our equity out of it that bumps the whole thing roughly another 10% overall.

    I’m pretty comfortable with unknowns, and money is not really a strong a motivator for me – except maybe in the more statistical sense of building a number we can retire with. I enjoy investing; it’s like fantasy baseball in some respects. Anyways, sometimes life and money become hard to separate, so you take some risk. Having salaries helps make taking those risks easier to endure.

    Btw, am an alum of the Undergrad School of Business at Cal, Go Bears!

    1. Go Bears!

      Yes, having at least one stable salary to let the other person or you take risks is nice. We haven’t had my salary since 2012 and hers since early 2015. Now that we’ve got two children, we’ve got to be extra careful when investing, hence, my desire to go back to work and bolster our finances for 3 years. It’s also nice to get out of the house!

  9. Sanjay Singh

    Sam,
    While you and many on here may not agree with me, I think we are set up for a lost decade in both stocks and RE. Stocks are high because of the FED and artificially low interest rates. For a living I now trade stocks and options, but that doesn’t mean I am going long my entire portfolio here w SPY at nose bleed levels. Financial policy will eventually change and many will be wiped out. The millennials have yet to experience a bear market or a significant pullback in stocks. They will shift their thinking with regards to equities vs RE. I typically hedge my plays and will not touch Tesla, it is tulip mania in its finest and will come down to earth. Why would Elon be proud of $420 secured? Bc he knows that is his exit strategy, to get taken out of public markets so there is less scrutiny on financials…. With regards to RE, Demographics are shifting in America and the coastal cities are benefiting while the heartland is not. You keep suggesting investing in the heartland is the best considering coastal cities but there is no industry for the future in the heartland to support RE. I live in the DC metro and will probably never move again. I worked in tech for IBM, Oracle, and Salesforce – they all have a presence here and allow work from home options. Most people I have grown up with, perhaps they are underachievers, live in the same area and never plan on moving. The world has changed and technology has allowed us to be connected with the world instantly requiring less mobility to earn for a living. Also, I am at the higher end of the millennials (38) and most that I know are renting, not marrying, and not having kids. If they do have kids, they have 1. I have 3….My situation is different in that I hustled in my 20s. Most of my neighbors are at least 10 years older – if they are my age they either got help from parents or their parents gave them their business. You may think I am a small sample size and that is fair. I did travel quite a bit in tech nology sales and noticed the same with friends I made in Texas. I also lived in Texas after undergrad for 8 years and all of the people I met still live in the Houston metro.

    With all that being said, I rather buy an overpriced house than an overpriced stock or index at the same notional value. The house while rented is cash flow neutral or positive at best and will be a significant asset with the use of leverage over time. Stocks are fickle and can turn on a dime….its funny to me how so many people in the Bay Area I know and have read about are opposed to Trump but are so proud of their financial success from stocks and RE with low rates. This country is drowning in debt, somebody will pay.

      1. Sanjay Singh

        negative? I guess you didnt read what I wrote. I live in the DC metro and I am investing in my community and family.

        Living in the SF bubble makes you blind to opposing views. When I was young I used to be like that too.

        Why did Jack Dorsey just say he is moving employees out of SF?

        1. I’m just wondering if living in Texas for eight years made you salty about the future?

          As an investor in Texas property, I’m trying to understand if there are any holes in my thesis. For example, maybe there will be lots of migration to Texas, but after five years people will just want to leave because they hate it there and get too negative.

          I used to live in the Washington DC area as well for four years and didn’t really like it. But maybe things have changed.

          How do you plan to invest in the lost decade?

          If I was blind about opposing views, why would I enjoy your negativity? I love different points of view.

          1. Sanjay Singh

            Texas has probably the best upside in the country when you consider home prices, job growth and migration trends. I am not salty about Texas, I love that area and would live there if it wasn’t for family in the DC metro. DC metro is mixed at best for me too but its great to invest in as occupancy levels remain high on rentals. One thing about Texas people forget, you will get hit with hurricanes in Houston. I dealt with Katrina evacuees and went through Rita myself. Dallas is a great alternative but they also face Tornados. People who live in that area live there for life, thats what I experienced working in the oil and gas industry for 8 years. Do you consider Texas the heartland? If so, I would single out Texas as the best inside of NY and CA to invest. Plus no state income tax.

            My plan in the lost decade is to preserve what I have and wait for opportunities like Warren Buffett who is sitting on a pile of cash. In the mean time, I am hedging my equities with shorts on the SPY and IWM.

            Why do you think Dorsey is moving people out of SF? I am noticing that with many companies considering alternatives to the Bay Area.

    1. Sounds like you have been short the S&P 500 and a lot of stocks in this big run up. I’m sorry.

      Although it hurts to lose money, it’s important to recognize when you are wrong and change your investments. Sooner or later you’ll be right, but you should do a better job with your finances given you have children.

      Good luck with your trading.

      1. Yeah, some of the smartest people I know have been short the market for the possible years and it has definitely hurt their finances and their disposition.

        David Eihorn from Greenlight Capital is a famous example of being too smart for your own good. That said, he’s still a billionaire!

        1. Sanjay Singh

          David Einhorn isnt short the market, he runs a hedge fund. He hedges his longs in the event of a downturn.

          “The fund returned 13.8% last year and has averaged an annualized return of 12.7% since it began.”

          1. When the S&P 500 return 31% in 2019, underperforming the market by 17% is really bad, especially as a professional money manager. Take a look at his 2018 in 2017 performance as well. Pretty dismal.

            Not sure what your current financial situation is. I think it’s great if you can make enough money to trade the market. But I would suggest getting a stable income in addition to trading the markets, because anybody can trade the markets.

            1. Sanjay Singh

              Not everyone can trade markets bc how many people do you know who hedged on days like today and yesterday? People don’t even know how to hedge….and a job is stable until it isn’t. This is not our fathers generation where you have job for life. Robotics and AI are taking over. Andrew Yang was the only candidate talking about it surprised he didn’t get more traction. The area that he received the most support is from the Bay Area interestingly enough. The people in your area get it bc they develop it.

              Anyway, its always nice to see the S&P500 was up 31% in 2019 when you forget to mention that it started from a meltdown level in Q418. Earnings are not keeping up with valuations. I will keep my hedges on and larger cash positions for when the real meltdown occurs. I see you mentioned that in one of your latest posts too. Good luck – remember everything is temporary.

      2. Sanjay Singh

        I am not stupid enough to be net net short. I am hedging my longs which I have plenty. Don’t fight the fed……I guess you aren’t responsible for this reckless debt we have as a country as long as your personal portfolio is up? People in this country are so self focused, what happened to empathy and doing what is right by your community?

        Good luck with your unhedged longs.

    2. NIRAV DESAI

      Nosebleed levels?
      How do you get to that valuation? Please provide some metrics. Fairly valued, yes.

      Nosebleed, only Tesla

      My wife is an elder millennial, like yourself. She, and her friends are all having 2 kids. Maybe you need to hang out with a different crowd?

      1. Sanjay Singh

        Have you heard of CAPE? I would suggest looking at that compared to historical levels. Also, look at equities around the world the past 10 years….the US outperformed easily, some are even down. The Shanghai Composite is down over the past 10 years, aren’t they the 2nd largest GDP in the world? Spain is down.

        If you are from India then we know Indians and arranged marriages….I am talking about Americans. Do you think perhaps you being older she wanted nothing to do with millennial men? I am telling you what I see out in the “field” among older millennials – most of my friends + associates are mixed background. Plus most millennials dealt with divorced parents and they want to have nothing to do with marriage as a result.

        Lastly, birds of a feather flock together. Married people hang out with married people…..

        The average American household consisted of 2.52 people in 2019. As shown in the statistic, the number of people per household has decreased over the past decades. The U.S. Census Bureau defines a household as follows: “a household includes all the persons who occupy a housing unit as their usual place of residence.

        1. NIRAV DESAI

          If you use CAPE to value stocks you’ll never own any. You would have sold all your stocks 5 years ago.

          CAPE has no predictive power. Even Schiller himself has admitted this.

          China is definitely the world’s 2nd largest economy. But it is still classified as an emerging market. If you look at funds that filtered out state-owned companies, they have done extremely well. The fund I own is up nearly 12%/year over the past 5 years.

  10. How could Tesla go bankrupt?

    They’re building the cars that everyone wants while competitors have to ramp up spending on electric vehicle technology which will kill off their ICE vehicles.

    No 3rd party dealer network to deal with.
    Massive technology lead
    Better cars
    etc

    I’ve had TSLA as my number 1 position since late 2016 and early 2017. $1T+ marketcap before 2030.

    1. Sanjay Singh

      why was Elon so proud of $420 secured? Nobody now questions that. A tesla is not proven like a toyota w 1mm miles so the better cars comment is off base. How many people are buying EV vs ICE? You may live in the bay area and see more Teslas but that is not a sign of the broader country. Most people cant afford an EV yet alone understand how and when to charge them.

      Tesla is a great company but no way they hit 1T in marketcap…. and fully autonomous driving is at least 5 years out.

    2. There are Tesla product which seem solid, then there is Tesla the company. The company has never made a profit. Check their PE – there is none. The sold $25B in cars last year, and manged to lose $775M doing it.

      There is a good chance in the long run then will turn things around (like Amazon), or they could fade away.

  11. You ask rhetorically whether investing in an index fund and just riding it will have you outperform the masses? I argue yes since the majority of Americans do not invest outside of their 401k and even then, your options in the 401k may not outperform index funds. You may not be richer than the billionaires out there but you will already be way ahead of the curve just by starting to invest.

  12. John Bailey

    Note sure there is one best way. Depends on not only ones abilities, but ones situation as well.

    I have had the opportunity to see one real estate investor create a $10 million fortune from $100-150k in 20 years and another create a $10 million fortune in the stock market from even less, but over a longer period. One was my uncle and the other a customer when I was a loan officer.

    The odd thing was that the guy that created the real estate fortune also did pretty good in the stock market and my uncle who did quite well in the stock market also did pretty well in real estate. Both did well in the other domain, just on a smaller scale. One skill they shared was the ability to move their cash flows into the other domain when their preferred domain became expensive and the other presented clearly better bargains.

    My preference is the stock market due to two factors. First is that while I was in the Army investing in real estate was hard, due to all the moving. Second is that my uncle influenced my preferences in several ways, most notably by giving me 100 shares each in McDonalds, IBM and Exxon when I graduated high school. My experience in overseeing the housing of 8,000 soldiers and their families in Germany did nothing to make me want to get into real estate.

    1. This is just my take on investing in real estate:

      1. Do it only if one can buy in cash (No mortgage), leaving extra cash to cover living expenses for at least one year.
      2. Do it only when one doesn’t need to move around
      3. It is an investment only if one doesn’t live in it and can rent it out (hence location, location, location)

      Of course this is an over simplification, but those three conditions above will guarantee ROI.

  13. Sam, surely the optimal approach from a risk reward perspective to achieving your end of 2022 goal is to go for the extra 60k p.a. by further monetizing financial samurai? (which is great by the way!)
    As you say, with a 2 year time horizon the only way you could generate 1.5m in equity or real estate markets would be to roll the dice on some super punchy equity bets unless your portfolio is big enough that 1.5m is a relatively modest return % wise

    Interesting article. The idea of ‘getting rich’ in the title rather implies that you’re talking about achieving rates of return substantially beyond capital markets expectations for equities and real estate, i.e. absolutely smashing it. My perspective would be that conceptually, equity has a higher potential than real estate for serious wealth creation. A unique aspect of equities uncommon to other asset classes is the ability of a company with a sustainably high return on capital to reinvest its earnings at book value and thus compound at that high rate of return. The earnings generated by real estate cannot compound in the same way hence you are reliant on either stratospheric price appreciation or extremely aggressive use of leverage to achieve the same rate of return as equities that are exponentially compounding their earnings.

    HOWEVER, I don’t disagree with the arguments you make in the article i.e. that identifying companies with a sustainably high return on capital, not being on the wrong side of some unforeseeable event that undermines the company’s profitability and having the stones to back your conviction with a meaningful portion of your net worth and then the discipline to then sit on it through periods of volatility whilst the compounding of earnings works its magic over a long period of time is bloody difficult to achieve.

    I guess you could say greater fortunes have been made through owning equity in growing companies but more fortunes have been made in real estate.

    In terms of ‘getting rich’ through Real Estate though, this implies multiplying your initial capital many times which presumably could only be achieved through a lot of leverage and hence more risk than most would / should take? Property development clearly something else but I understood the focus of your strategy to be more about buying and holding for price appreciation and yield.

  14. Vyacheslav Preobrazhensky

    Do you distinguish between rental properties, primary residences, and vacation homes? Or are they all equally easier to get rich off of than stocks?

    How do you reconcile the fact that primary residences and vacation homes are cash flow negative (maintenance, HOA, etc.) whereas stocks pay out dividends?

    1. There definitely are differences, and I’m not positive on vacation property as an investment. It is a luxury purchase.

      For your primary residence, all you’ve got to do is calculate the rent that you are saving by not renting if you want to get a dividend payment.

  15. Sam, your comparison doesn’t seem to be fair as you are comping a very volatile stock (TSLA) to a real property in a part of the country where demand is greatest (SF). It looks different if, say, you compare buying AAPL to a house in Victorville, CA. Which one do you perceive to be the better or easier investment to make in order to get rich?

    Using Tesla as the representative of stocks in general and an ocean view SF house is flawed in my view. That said, I do see you point. But it all depends on risk tolerance and time horizon.

    1. Sure, people are free to use other examples if they wish.

      I was also only able to buy about $50,000 worth of Apple stock years ago. But I have no problem paying $1.24 million for a property back in 2014.

      Can you use some of your examples with the actual dollar value you have spent purchasing the stock and property?

      I can safely say I wouldn’t be willing to invest $1,700,000 in ANY single stock.

      1. I paid $750k for my house in LA in 2010, now it’s increased about 40% (220% on a leverage basis). I have bought stocks over time since then as well equating well over the amount of my house purchase. The appreciation of the equity is much higher than the 220% leveraged return on the property. So in that instance the stock market was a much easier and effective way to make money. To be fair, on the flip side the market could’ve also turned for the worst. But over the long-run (say 30-years since that is the standard mortgage) stocks have already proven to historically beat real estate. I think what you were trying to say in your article is that real estate is a safer way to millions because not many people have the balls to plop down their life savings into stocks, but do that all the time on houses. But it’s not necessarily the “easiest”.

  16. If you feel this way, dont invest in stock.

    People feel confident in stock because they know how to choose a good company. It is not an easy job. You have such perception towards stock market, it means ,you still don’t have the knowledge to analyse a company.

    If you look at Tesla, it is not making any profit yet. Of course, you will feel risky buying a company like this. This is why people prefer to buy blue chips, which is proven profitable to many years.

  17. FOMO never works out in the long run. Better strategy: step in front of the bus- rewarded many times over.
    I was assigned 100 shares@353, a result of a put. Continued to research the company(already own a Model 3) and buy more on the way up. Sold original 100 shares @950, had to take some risk off the table. Holding 200 shares long term. Be greedy when others are fearful!

    1. Awesome! This is why I’m not worried about the average American. I have yet to meet anyone who has lost money on an investment. Everybody I have met is making huge gains. If this is the case, there’s no way the economy and can’t really declinr that much.

      Let’s rock!

      1. I’ve lost money on investments – look up Nortel Networks or Pengrowth Energy. :) Overall, I’ve gained over time making investments in AAPL in 2006 (putting a full 8k in my ROTH with my “play money”) or MA when it IPO. But I’ve definitely lost money on investments too…

        Maybe I’m your first individual you’ve met who’s lost on an investment?

        Love your articles.

        1. Nice investment in Apple in 2006! That must be a nice nut now. But it’s funny, the investments/money doesn’t seem real in our Roths, IRAs, and 401(k)s. It just seems like funny money to me!

          Wealth, to me, is tangible and provides utility. Hence another reason why I like real estate so much.

  18. You’re comparing a single stock to a house, which is silly. I would feel much safer dumping $1.7MM (and have done so) into a mutual fund than a rental property (though have both):

    + Higher rate of return
    + Similar tax treatment
    + No maintenance
    + More liquidity
    + No tenant calls
    + No transaction costs
    + No vacancy

    – Admittedly more volatile over very short time periods

    1. I’m a silly guy.

      What is the difference between a single company and a single property? Wouldn’t that be the proper comparison compares to a REIT versus an S&P 500 ETF?

    2. Comparing one for one is a logical comparison.

      Hard to bet big on a single stock due to the volatility and uncertainty.

  19. Real estate has risks, too. What’s your time frame?

    Ten years?

    Take driver-less technology. It appears likely that it will vastly reduce the amount of space in cities that is currently used for parking lots and garages. All of that land being available to be re-purposed is going to lower real estate prices.

    Then too, driver-less technology and, potentially, other forms of transit. are likely to cause people to be willing to live with a longer commute, also taking the pressure off of properties closer to large urban areas.

    Huge workplace automation and more telecommuters (as the tech improves) will also impact on people needing to be near expensive areas.

    20 years?

    By that time we could be looking at peak population. A declining population is going to take pressure off of real estate prices, even if those that remain want more of it.

      1. Never bearish. Just more bullish about other things, at times.

        I may not speak for everyone but I know that I, personally, cannot time the markets. I can, however, make informed decisions about what areas are likely to do better than average over time, providing I don’t have to specify exactly how much time. Which, if I were buying put options, I most definitely would have to.

        I don’t sell short, or try to invest in things that try to leverage (borrow money to buy more). Then I would be on a timeline I do not control and I would be gambling as, again, I cannot time the markets.

        Market already down? Don’t sell it then, but keep on buying at least as much each month as you normally would. You should seldom have an unusually large amount to invest at one time when the market is way down, as this would imply you had been holding cash, which would imply you were not fully invested . . . because you thought you could time the market.

        Our portfolio averaged 30% last year, without taking what I would consider to be undue risks. I would have been sick if I had held a huge portion of it as cash, or something close, earning 1 or 2%, just so I was ready to pounce if the markets went into serious correction mode.

        A good friend bought a new house last year. Nice house, good neighborhood. It has appreciated maybe 1 or 2%, providing he could immediately sell it without realtor’s fees, closing costs, improvements, repairs, and taxes.

  20. Sam, In your description of buying Tesla stock in the article, do you see any correlation between your purchasing/selling behavior and how you have described gambling in a recent past article that highlighted a conversation(s) you had with your father ? If they are not the similar, then what are the traits that buying/selling stocks different ?

    1. Not sure. I like to go the easiest route and accept what people say about me. In this case, I’m a gambling addict who needs help. I’m OK with that because at least I recognize my problem.

      I view life as one big gamble. Everything is rational.

      What about you?

  21. Simple Money Man

    It’s definitely easier to get rich off a stock because all you have to do is click a button. The hard part is picking the right one. Real-estate is more work so it’s not easier.

  22. Just a quick comment about you feeling relatively safer investing $1.7M in one asset (real estate) because in addition to owning the land, you have insurance on the property.

    I agree that these things provide piece of mind. I would suggest that if you ever were in a position to park a sizable chunk of your capital in one stock like you did with a house, you similarly purchase put options at at a floor you feel comfortable with, which in a lot of ways is like buying insurance on your house. It can help give you that piece of mind you referred to.

    Granted the price of options is much more expensive than home insurance given the higher probability the former will payout than the later, it still might be something to consider.

    1. True. Options are decent hedge. Although if I’m a believer in the long term and have enough liquidity/cashflow, I’m just not going to bother.

      Maybe during insecure moments where I spend a huge sum, don’t have liquidity, and want to hedge until I get liquidity.

  23. I think everyone goes about investments a little differently. I’ve recently read “A simple path to wealth” by Collins, and unknowingly, I’ve been following that for a long time. I used to invest in individual stocks – lost a few thousand day trading, then lost a few 10s of thousands by investing in my company through an ESPP before the tech bubble collapsed in 2000. That was a good lesson to stick to long term index based mutual funds.

    My wife and I have taken to investing in ourselves. We both earned several advanced degrees and have done fairly well in our respective fields as measured by our incomes.

    Having high incomes (closing in on 7 figures), and investing long term in index funds has worked out OK for us. We should be able to retire in 5 years at ages 55 with 2 houses and 3 kids college educations paid off and enough income to live the rest of our lives with above average life styles (travel, entertainment, eating out, …. and such).

    1. Sounds good. Haven’t read Collins book. But sounds logical enough. I think he retired in his 60s?

      That’s fine. But I want readers and myself to achieve financial independence way sooner than the average person.

      Collins also SOLD his real estate in 2012, which was the bottom of the recent market cycl. He has a really good negative post he wrote on real estate. I would naturally be bearish on real estate too if I sold in 2012. I almost did, but luckily nobody wanted to buy!

    2. Hi David,

      It’s fantastic that your advanced degrees paid off to 7 figure household income. But a common problem for millennial is that more degrees mean mean more debt and less time to accumulate wealth. And very often, you increase your chance of unemployment or underemployment. A lot of my friends doing all side hustles including airbnb, flip house, RE related things is because they can’t find high paying jobs…Could you share how did you and wife managed to have 7 figure income?

      Thank you!

      1. Gonna guess anesthesiologists if it’s close to 7 figures for the couple or CT surgeon if it’s 7 figures each.

      2. My wife and I are 50 years old. We both got our undergraduate degrees at 22 (back in early 90s). I am in technology/software and my wife is in Pharmaceutical research. I have MS degrees in computer science and management, my wife got MS and PhD Biology. We used our tuition reimbursement programs through our companies to pay for the advanced degrees getting them part time while working full time – it took a long time.

        Lots of hard work, and long hours (50 and 60 hour work weeks), we climbed the corporate ladder, always working for someone else – I’d love to be self employed, but I’m too risk adverse. We always maxed out our 401Ks and got decent matches, and have been investing outside the 401Ks, saving for the kids college since they were born, paying down the houses, have good lives, but still living within our means.

        Our household income (total combined – not each) is somewhere around $850K. We’ve been lucky – no health issues, no tragedies, but also no winning the lottery or inheritances.

        I’m not saying this to brag. I think it is interesting to share details (anonymously) about other people’s financial situation.

        1. So, by just about any standard, you are rich with 850K annual salary. Live within means. Isn’t an 850K annual salary relatively endless means? I mean, what can you not afford? 1M+ primary home, luxury vehicles, best restaurants, vacations only limited by free time, etc. By any definition, you are wealthy!

            1. Just computed my taxes, and if I total up federal, state, medicare, SS, and property tax I’m at $315,000.

              Even after taxes, that is a lot of money. If I spent ever penny of it, I would have a much nicer life style. As it is, I’m trying to save a bunch for retirement and pay off my mortgages, so I live a fairly normal life.

  24. Good article Sam.

    What do you think is the biggest risk when evaluating rental properties? Say you analyzed the demographics, migration trends, job market, etc and narrowed it down to few properties. If one of the properties has HOAs for example, would you avoid it given the risk that HOAs can and will always increase every year? What are some of the hard lines that you draw or risks that you won’t take?

  25. When you’re committing to real estate you’re locking your money up into something much less liquid (again if you’re trading stocks instantly for free). Potentially looking at real estate at a 30 year fixed mortage – what if when buying a stock you went with this same commitment? (I need to hold Tesla for 30 years — okay maybe not 30, but how about 5? Will it be higher overall in 5 years?). Instant returns are gratifying, but as you mentioned you didn’t want to see your money vanish, yet you believe some day when you’re an old fart it will be worth 10x. It’s all a mental game :)

  26. I too prefer real estate over equities with the biggest reason being the tax code benefits the former far more than the latter.

    The increased liquidity of equities is a double edged sword and makes you subject to common behavioral finance traps that can cause you to make mistakes or even if you do make a profit still make you feel unsatisfied (I actually had a recent post on this very thing where I made a nice profit on Tesla but now have huge regret because of a behavioral finance mistake I made).

    The only thing I am worried about in real estate is possible demographic trends. I have read and watched several articles/videos on a possible crisis because of the demographic cliff of baby boomers retiring (to be fair it effects both real estate and equities). As a lot of the wealth is concentrated in this retiring generation and values of assets are incredibly high there is a good possibility that they will have no one to sell it too as millennials can’t afford it and as boomers need to live by selling these assets the excess supply will potentially drive down prices.

  27. Dr. Remoulak

    Good thought provoking read Sam, but as a long term holder (and fan) of both equities and real estate, I give the former a significant edge in my book, both in terms of long term financial performance and the effort involved in each – equities being zero and real estate being fairly significant (tenants, repairs, town inspections, accounting, legal). Having said that. I’d also advocate for a mix of both and do sleep better during the larger market gyrations knowing that the first of the month is never too far away :)

  28. Dear Financial Samurai,

    Hello from a fan from Singapore!

    1.7million on a house… hmmm… in a house there is concentration risk ( being in real estate), geographic risk ( what if no one jobs growth slows in the area?), illliquid risk, tenant risk (damaging property), non letting risk (in all months of the year), interest rate risk, and not to mentioned all the cost associated with owning a property… taxes, maintenance, insurance, commission etc.

    Personally betting on one company to be the next telsa is risky and probably not much difference on betting one house to grow at 5%p.a..

    What you really want is to NOT look at your stock price EVERYDAY, nor weeks nor months.

    Given at your stage, it’s understandable that you are concern with risk, afterall it took you many years to accumulate due to grit, hardwork and also some luck. which may not happen in the future.

    If i were you, i would diversified in a globally diversified funds in a low cost, match up with some quality bond funds to reduce the volatility and drink beer. Why would you want to risk all the funds you had anyway? With this, you can continue to maintain your lifestyle and do what you love.

    1. Buy a diversified globally stock/bonds in a low cost fund.
    2. Re-balance to its original allocation once a year.
    3. Drink Beer
    4. Repeat

    The investments time instead which you research would be better spend with your family or writing.

    Time to debate!

    Cheers,
    Isaac

  29. Simon Paddock

    Seems to me like the reason why it’s easier to make money in real estate is that it more people want it. In a typical lifetime, most people aspire to buying several homes in succession as they leave home, have families, retire etc. Each home purchase is a large transaction usually leveraged. How many people aspire to owning stock? How many people are willing to take a 25 year loan to buy stock? If you get an asset that most people actually need, not just want, and that asset is limited in the way SF real estate is, your chances for making cash are better. Just don’t invest too much in economies in decline. Bulgarian villages, for example!

  30. I’m surprised you had 243k sitting in a 1.75% interest account. Maybe that’s emergency money. I tend to keep a small amount in cash accounts. My credit union pays 3.0%. Love it. The remaining emergency money goes into fairly safe traditional funds, target funds, or robos like Wealthfront which has done fabulous overall.
    I also love the housing game but on a much smaller scale. My home is paid in full. I want to save enough to get a smaller rental going next.
    My buddy had about 55 rentals at last count! All are owned out right. The catch is they are super cheap. I wouldn’t say he’s a slum lord but these are most definitely low income types. He’s been doing it for over 20 years and had made incredible returns.

  31. Jeez Sam…if the stock market returns average 7% over long periods and your bay view house does 5% every year which is the better long term investment?

    And if the index fund 7% return is just “average” because that’s what everyone else is getting then what is 5%?

    And if the total US stock index fund has a long term black swan like the nikkei crash it’s probably not going to do nice things to property values in Bay Area just like Tokyo real estate values cratered.

    Not saying real estate is a bad way to get rich but it’s not as passive as index investing…drop money in and rebalance once a year…

    1. Why not invest in both?

      And if you put down only 20% on the property and it goes up 5% a year, that’s a 25% annual return on your cash excluding cost of funding and expenses.

      1. Leverage is the primary advantage of real estate for sure.

        I’m using your numbers and using a 30% stock 70% bonds allocation for a 7%ish rate of return in a reasonably conservative allocation.

        https://www.financialsamurai.com/historical-returns-of-different-stock-bond-portfolio-weightings/

        If we take more risks and go with a 60/40 split and an 8.7% average or all in 100% stocks in VTI for 10% avg returns which is still less risky than 100% on TSLA.

        On your side you have 5% annual property value improvement + rent less expenses and mortgage.

        Doing both is a good plan but I wouldn’t look down on average returns from an index fund. You can get rich doing the simple 3 fund strategy.

  32. Yes, I should have rented out my house in Ft. Lauderdale 4 years ago when my job forced me to move (and paid all closing costs and taxes on the house that I had bought 2 years earlier as a short sale that they also paid the closing costs for). But I did invest the money and it has done well, and I don’t have to worry about home maintenance issues. But you are right that I often think of buying a stock and then fear and don’t.

  33. I completely agree with you if you’re saying owning your primary residence is the best way to generate long term wealth. Many studies have shown that, as well as the utility value you stated.

    However, I disagree that real estate beyond your primary residence is easier to accumulate wealth than investing in stocks. Dollar cost averaging into index funds has to be the easiest way for 90 percent of the population to create wealth. You set it and forget it. Check it every 10 years and see how much more money you have. You can’t do that with a rental property. The hard part of stocks is the volatility. If you can overcome the psychology of owning stocks you kick real estates butt over the long term.

    Another big factor for owning stocks is the stealth factor. Everyone knows who the big land owners are in town. People know or assume they’re rich. Does anyone know who has the biggest brokerage account in their town? Probably not. You could have millions and no one has a clue.

    P.S. I feel your pain in Tesla. I bought a half position in AMD. I believe in the company and the CEO but second guessed my way into investing less than I originally wanted. Another benefit of stocks. Keeps you humble.

    1. “The hard part of stocks is the volatility. If you can overcome the psychology of owning stocks you kick real estates butt over the long term.”

      Which is why I like real estate. The volatility can get very disconcerting. During the 2008-2009 crash, I didn’t worry much at all about my real estate holdings. But with stocks, it was quite a stressful period.

  34. Paper Tiger

    As Peter Lynch used to say, do your homework on stocks in areas with which you already have some experience and knowledge. Real estate has always been one of those areas where I have felt inadequately prepared to meaningfully invest. We have 7-figure equity in our primary home and I have several investments in domestic and globally-focused REITs but I have done nothing else in physical real estate.

    I have had a thought lately related to my daughter who is a Junior in college. When she graduates, I am thinking of forming a partnership with her. When she starts her first job, I will help her buy her first condo. When she moves on to another job, we will rent that one out and I will help her buy her next condo. You get the idea. I figure she may move 3-4 times before she ultimately marries and wants to do her own thing. Who knows how it will work out but this is a way for me to start to think about rental real estate and a plan for a good entry and exit without going too crazy. A lot may also depend on where she is working and how good I feel about the prospects for real estate in those areas.

    I looked closely at buying her a condo at the college she attends. I wound up not doing it and now kind of wish I had. Although college kids can be awfully hard on the property which is what kind of scared me away and it was on the other side of the country which makes it difficult to personally manage.

    Maybe this is just a wacky idea altogether but we’ll see…

    1. I like the idea of buying property where a child plans to go to college for 4+ years. But of course, it depends on the town/college.

      If my boy is going to MIT, I’d probably buy a property in Boston. Georgetown… same for Washington D.C. UC Berkeley… maybe a condo in Berkeley. UCLA… probably.

      Tough to say.

  35. What resource do you recommend (probably a spreadsheet) for calculating a real estate buy profitability/cash flow? I have one but it doesn’t help me with factoring in tax savings and I’d like to “double-check” it for accuracy/completeness

  36. I live in the bay area, Oakland to be specific, and simply can’t afford to get into real estate in this area. I would love to, but despite making decent money, it will take 5-7 more years of saving to get a down payment for a house anywhere I would actually want to live.

    Do you have any suggestions for my situation? REITs don’t have the same benefits you mentioned above. You often also mention real estate investing platforms, but with those you can’t take advantage of improving the property’s value since you don’t control it.

    1. Patrick, you have to start somewhere, and REITs, eREITS, and specific REC deals make sense.

      It’s good to start small and work your way up. When you start small, losing money doesn’t hurt as much. You can learn from your mistakes and get better.

  37. Someone suggested this back when you were talking about earning more money to ‘fully’ retire at 45, but I’m sure there would be a huge market if you wrote an E-book on how to first get going on investing in physical real estate. I have a lot of money in index funds but would like to diversify into real estate more but am not sure how to really get started. I have money in REITS, but no physical real estate. You could charge similar to what you charge for your 1st e-book and I feel like it would sell well (I would be a buyer!)

    In terms of index funds, you say “Investing in index funds over the long-term is a great way to build wealth. However, by definition, index fund investors will never outperform the market. And if you never outperform the market, are you really getting rich?” The problem with that statement is that most people underperform the market because they time it wrong and buy high and sell low and pay too much in fees when they’re buying and selling. Buying and holding index funds is historically a great way to get rich. If the average American has only $20K saved for retirement, then most readers here are probably rich! Getting ‘average’ returns from the stock market is one place where being average is a good thing!

    1. Thanks, I’ll consider it! I’m in the process of writing a traditional book… so I’ve got to get that done first by year-end.

      As for your second part, I really encourage folks NOT to compare their finances to the average or median American because the bar is so low. The data doesn’t lie. We’ve should aim higher with our one and only life.

      1. Sam-

        You’re usually spot-on and I know by your tone you weren’t actually serious about that statement, but it was still wrong. If someone is able to save $50k-100K/year and throw it into ETFs and make “average” returns of 8%, they’ll have millions in no time. I’d argue (like the post above) that one of the best ways to destroy wealth is trying to “outsmart” the market.

  38. I really enjoy your site, but the last two topics have “hit it out of the park” for me. I’m in property and casualty insurance. As I mentioned in a post on your last topic (buying a rental property for each of your kids) I purchased 3 rentals in 2010, 2011 and 2012. Prior to 2010, I devoured as many books as possible, on the subject of real estate investing. I became obsessed with the idea of leveraging a bank loan and then rental income and appreciation, to subsidize my wealth.

    In my business, I insure all walks of life. Doctors and accountants, realtors and plumbers, you name it. One common denominator that I noticed was the correlation of wealth and rental property. Which also seemed to correlate with freedom and happiness. This piqued my interest to create another income stream.

    I also invest in and max my Simple IRA. The fun thing about real estate though, besides all the tax advantages, is that it is real. I can drive by my rentals on my way to work. They are sitting there, solid and tangible. I can choose to actively or passively manage them. Presently, I manage two of my three residential rentals. They are occupied by long term tenants that take care of the home and pay their rent on time. I address what needs to be addressed, and things run smoothly. I’m fairly well under market rent because they are such great tenants and I appreciate their assistance and so I attempt to “give back” by keeping their rents below the going rate. The third property, was turned over to property management two years ago. It just seemed to be a magnet for knuckleheads. Eventually, all three will transition to property management when they are paid off and I’m ready to just get a check each month. From my personal experience, real estate has been without question, the greatest multiplier to my networth.

    1. Very cool Jim. You just reminded me that with real estate, we can drive to our rental properties and teach them more! Things such as:

      * How to be respectful to tenants
      * How to write a lease agreement
      * How to negotiate
      * How to remodel
      * How to expand a property
      * How to market a property online

      Having real things that are touchable and visible help with education. And as parents, our responsibility is to educate our children as much as possible.

      1. You got it, Sam. Everything from the difference between an asset versus a liability, taxes, cash flow and customer service. Heck, even the operation of a lawnmower can be taught pretty hands on with a rental property.

        1. Jim,

          Thanks for sharing your story! I am inspired and just starting to get into real estate investing. Would you be able to recommend a few books that have been helpful for you and your investment journey?

          Thank you!

          1. Hey Sandy!
            There are so many great books out there. My favorites are: 1. The Insiders Guide To Making Money In Real Estate but DeRoos and Kennedy. I also loved Cash Flow Quadrant by Robert Kiyosaki. It was transforming, for me. A little off the topic, but required reading for my girls when they enter 9th grade was/is The Automatic Millionaire by David Bach. It’s simple and straightforward. Remedial for Sam’s audience I’m sure, but a great foundation. I actually bribe my kids to read it. I offer them $100 to read the book. It’s simple and straightforward information. The catch is, I tell them that I may ask them questions as they are reading it. Not a test, just for discussion and comprehension. Funny thing is, not a single one of my two older daughters have asked to collect upon finishing the book! They actually learn to enjoy the concepts and see the value of this basic money advice as exponentially more valuable than the $100. My youngest though, I’m pretty sure she’s going to want the money when she gets there. Anyways, best of luck to you! Keep us posted!

            Jim

  39. Very good points, the utilization of public schools certainly make the math friendlier. Very interesting regarding the driverless car theme and the implications for suburbia RE moving forward. Perhaps, a middle ground should be appropriate when buying where I don’t pay a massive premium to be on top of the Metro North train stops, but also do not live in the middle of nowhere assuming this does not come to fruition over the next 2 decades, not to mention the lack of convenience until then.

  40. The only problem with stocks is most of the volume is in options today and it is hard to understand the inflated prices of real estate with ultra low interest rates. In the Orlando market, it is now almost impossible to get “rental deals” as anyone in the investment groups can tell you.

  41. Great article! I’m currently 43% equities to 57% real estate not including home equity. I’ve invested more of my earned income from my job in equities, but it looks like real estate is doing better for me due to timing and leverage. I started my first job at the beginning of the recession, and I maxed out a 401k every year, but I also bought two small rental properties during the recession for cheap, and later sold/1031’d both and upgraded to bigger properties with more cash flow, bigger mortgages, and more space for tax depreciation. I’ve always run the investment properties as a business with a separate bank account and reinvested 100% of the net cashflow into things like capital improvements and mortgage pay down. Now I’m on autopilot – I contribute about the same amount from w2 income into equities per year (includes employer match) between my 401k and 529 plans as the amount of net rental income that I reinvest into real estate per year (right now this is all going to mortgage paydown because I’m too busy to buy and manage a third property). Assuming that equities outperform real estate over the long run, I think/hope my allocation will change over time in favor of equities, but so far I think I’ve done better with real estate.

    1. Put options…. but they are expensive. If you try to protect yourself with no “deductible” you’ll just earn the risk free return…

  42. Kurt Huffman

    To your statement – with real estate, we simply need to understand demographic trends, valuations, and job growth – I would add: interest rates. Although you paid cash, most people use OPM (other people’s money, i.e. a mortgage) to buy real estate. As interest rates rise, the amount people can afford for housing goes down as more of their monthly payment goes for interest. In other words, real estate investing is similar to bond investing, but with less volatility and less risk of going to zero.

    1. True on leverage. In the example in this post, I wanted to keep things apples to apples. Leverage is great on the way up, but not so great on the way down.

      I’m a believer in low interest rates forever in America.

  43. Great article. The chart on home tenure is fascinating to me. It is like a light switch flipped and homeowners realized the wisdom of staying in their properties longer.

    One other noteworthy component of getting rich of real estate versus stocks is the leverage. Going out to get a loan to invest hundreds of thousands or more in the stock market would simply be impossible for most/many investors (and probably not advisable). However its quite straightforward to get a real estate loan for that amount (or significantly more). And in the case of commercial loans banks will review the property’s cash flow to be confident that the cash flow will cover the debt service with a buffer for your profit. The power of the leverage when things go well create a lot of wealth for the real estate investor, such as this last decade. Doesn’t by any means guarantee success, but with discipline and research it seems reasonable to replicate.

  44. Thanks for the content Sam…Repeat post, but for those in the NYC burbs, I am really not sure what RE will look like 10-20 years from now. I am young, early 30’s with a growing family so won’t need to sell for quite some time. I am just terrified that the lost decade in housing prices in Greenwich/Westchester will continue for the next decade as demographic trends worsen. I guess at the least, I will gradually pay down my mortgage and provide shelter for my family. However, at worse, prices continue to defy the rest of the nation and logic by weakening and the cost of renting would have been comparatively the more cost effective option…This decision would be much easier in nearly any other part of the country!!

    1. I’m in Northern NJ, very similar in terms of no gains in the past decade and escalating prices. I think about it as follows:

      – High taxes are justified with more than one kid in public school (our schools, like your district, are excellent). It’s more cost effective than private
      – Taxes + utilities + upkeep are a huge total amount but I really don’t know how much less renting would be for an equivalent house
      – While no gains, there is an effective “floor” on real estate prices IMO due to the good schools, proximity to public transportation and general safety of the areas
      – Speaking of TSLA… if Elon solves for fully autonomous driving in the next 10-20 years (long shot I know), the suburbs are going to get pretty interesting again!

      1. True on the suburbs. I say the suburbs and traditional non-prime locations are already heating up due to the ubiquity of Uber Pool and Lyft Line. And with the rise of remote work, even more so.

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