There is a never-ending debate between real estate versus stocks as a better investment. Currently, ~50% of my net worth is in real estate while ~30% of my net worth is in stocks. Perhaps the main reason why is because I believe real estate is less risky than stocks.
With real estate, you don't wake up one day and see the value of your real estate decline by 20% due to a 5% quarterly earnings miss like with stocks. Instead, real estate is much less volatile because it provides shelter and generates rental income.
As I've gotten older and thankfully wealthier, I had thought I would like stocks more given there is no maintenance required in owning stocks. However, the opposite seems to have happened. Wealth is about stable ownership. Stable ownership is what real estate provides.
As stock valuations rose during the pandemic, I became more hesitant to buy stocks. And with interest rates were so low, I had little desire to buy bonds. The more capital I have, the LESS I like volatility. And stocks are much more volatile than real estate.
Therefore, my capital has naturally gravitated towards real estate, which is a long-term beneficiary of inflation and an increased desire for all of us to live better post-pandemic. After all, we are permanently spending more time at home.
Why Real Estate Is Less Risky Than Stocks
Let's go through some reasons why real estate is less risky than stocks. Ironically, due to lower risk, you could actually end up making much more money from real estate than stocks.
1) The Government Believes Real Estate Is Less Risky
According to Regulation T of the Federal Reserve Board, you may borrow up to 50 percent of the purchase price of securities that can be purchased on margin. This is known as the “initial margin.” Some firms require you to deposit more than 50 percent of the purchase price.
After you buy stock on margin, FINRA requires you to keep at least 25 percent of the total market value of the securities in your margin account at all times. The equity in your account is the value of your securities less how much you owe to your brokerage firm.
The 25 percent is called the “maintenance requirement.” Many brokerage firms have higher maintenance requirements, typically between 30 to 50 percent.
On the other hand, the government is actively encouraging first-time homebuyers to only put between 0% – 3.5% down and borrow the rest through the following types of loans:
- VA loans, which are backed by the Department of Veterans Affairs, offer 0% down payment options for borrowers who qualify.
- USDA loans, backed by the Department of Agriculture, offer 0% down payment options for borrowers who qualify.
- FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5%.
2) Financial Institutions Agree Real Estate Is Less Risky
Just like you and me, a financial institution's goal is to make as much money as possible in a risk-appropriate manner.
Yet I hear absolutely no pushback at all from brokerage firms wishing they could lend at a greater than 50% margin. If brokerage firms thought stocks were less risky, they would lobby hard to expand the margin cap.
After all, a brokerage firm earns a margin interest that pays far more than the interest rate it pays on its client's cash holdings. But brokerage firms know some of their clients could go broke on margin and won't have the capacity to repay their margin debt during swift downturns.
Most lenders are gladly lending up to 80% of the value of the real property (20% down payment, 80% LTV). If you've got great credit, some lenders will even let you borrow up to 90% of the property's value (10% down payment, 90% LTV).
If lenders thought real estate was riskier than stocks, lenders would lower the percentage amount a client could borrow. Many of these financial institutions run both a brokerage and a mortgage business. Therefore, they see both sides.
3) The Median Purchase Price For A Home Is Much Greater
In 2024, the median purchase price for a home in America is roughly $420,000. This is clearly much greater than the median purchase price of a stock. The median retirement account balance is under $10,000 in 2024 ($5,000 in 2013).
The median 401(k) balance by generation according to Fidelity is not that much better. It is clear the average American is not saving enough for retirement.
Yet, despite the median house price being at least 30X greater than the median retirement account balance, real estate investors can borrow up to 100% of a home purchase versus 50% for stock margin buyers.
This fact also signifies that financial institutions believe real estate is less risky than stocks. The greater the purchase price, the more a financial institution has to lose. Therefore, lowering the client borrowing amount would make more sense. Yet, the opposite is true.
4) Average Mortgage Rates Are Lower Than Average Margin Rates
Mortgage rates and margin rates follow the Fed Funds Rate and 10-year bond yield. Mortgage rates and margin rates are also dependent on the brokerage firm and your financial health.
However, overall, the average homebuyer can borrow at a lower rate than the average stock margin buyer. If you check online, you can get a 30-year fixed-rate mortgage for between 6% – 7%. Although mortgage rates have come up since 2020, mortgage rates are still lower than stock lending margin rates.
For a more like-for-like comparison, you might be able to find a bank that offers a 1/1 ARM that charges 1%. However, the average margin rate is closer to 8 – 10%, Really shop around if you want to go on margin.
Therefore, a lower average borrowing rate for real estate investors also signifies that real estate is less risky than stocks.
Banking 101 states that riskier borrowers buying riskier assets are charged higher interest rates and vice versa. One of the reasons why you should shoot to have over an 800 credit score is so that you can get the lowest interest rate possible.
5) Real Estate Holds Its Value Better During Stock Market Corrections
When stocks are correcting by 10%+, real estate tends to hold its value or rise in value. The first reason is due capital flight to safety. Capital flees riskier stocks and goes into bonds and tangible assets like real estate. The second reason why real estate tends to hold its value is that interest rates decline as bonds get bid up.
During the March 2020 stock market meltdown, I wrote a detailed article highlighting how real estate gets impacted by a decline in stock prices. It was my way of saying that readers should consider buying real estate. The S&P 500 alone was down ~32% in that month. Some individual stocks were down much more.
It is my belief real estate outperforms stocks the most when the S&P 500 is down about 15% – 20%. It is only when the S&P 500 declines by more than 30% and stays down for longer than six moths that the pull of a recession starts to weigh on real estate prices.
6) The law and government are pro-housing
Roughly 65% of Americans own homes. As a result, both the government and laws are very pro-housing. With the NAR settlement on real estate commission price fixing, the President and many politicians cheered it was a huge win for homeowners.
I agree. A decline in real estate commissions means residential real estate owners should see an immediate 1% – 4% boost in their real estate values. The fact of the matter is, because our politicians want our votes, they will always do things favorably for the majority of Americans who own their homes.
Why Investors Can Make More Money With Real Estate
When an asset class is deemed less risky, the returns are usually lower as well. However, because real estate is less risky than stocks, investors can ironically make a greater absolute amount of money in real estate for two reasons.
The first reason is due to the higher confidence a real estate investor has in investing more money in real estate due to lower risk.
The second reason is due to real estate investors being able to borrow more money to buy a more expensive investment due to lower risk.
How interesting! Let me share a real example to demonstrate.
Making Money With Stocks Is Hard
When Donald Trump got permanently banned from Twitter on January 8, 2021, it made me think more about Twitter as an investment. The stock was lagging many of its peers and I found myself wasting more of my time on the platform.
As someone who is not a fan of social media, I thought perhaps engagement might be going way up given I was being drawn more to the platform. When engagement goes up, advertising revenue and profits tend to go up. Therefore, I decided to buy an initial 220 shares at $47.08/share worth $10,357.69 on January 20, 2021. See below.
My ultimate goal was to buy a $50,000 position for this particular investment portfolio (normal exposure size). However, the stock began to move higher soon after. I wanted to wait for a better entry point. But it never came.
Twitter stock kept going up after it reported solid results and gave a clear profit target for the first time. Now that the stock is in the $70s. I have no interest in buying more after a 56%+ increase in under 40 days.
A 56% increase so quickly is great. However, being up $5,849.71 does not move the needle in terms of the portfolio or my net worth.
I should have bought $50,000 of Twitter stock all at once. But I lacked the confidence to buy more, let alone to go all-in plus margin. A $25,000+ gain would feel so much better to go revenge spend on fun things.
Update June 2021: Twitter stock tanked after its earnings results. As a result, Twitter is now trading around $55/share. Just like that, Twitter lost 30% of its value in a couple months. Yet, real estate continues to do very well. I'm buying more Twitter in the low $50s, but I don't have huge conviction like I do with real estate.
Making Money With A House Is Easier
Now let's compare a house I bought in 2019. One day, a larger house in my favorite San Francisco neighborhood with panoramic ocean views became available for purchase. I thought it was a good investment so I haggled and paid cash.
Today, the house is supposedly worth 19% more according to Redfin. A 19% return over two years is ho-hum compared to a 56% return over 40 days in Twitter stock. If only I had bought with a mortgage. I could have earned a higher return. Oh well.
However, a 19% gain equals about $340,000, which is 58X more than the $5,849 Twitter paper profit. Further, after inviting four sets of real estate agents over for a valuation assessment, the consensus is the property is worth 10% more.
I was fine with investing 169X more in a house than in my initial Twitter stock purchase. The simple reason is I felt real estate was less risky. The house had a significant purpose: to shelter my growing family. I planned to own the house for years, fix it up, and maybe sell it. Today, it is a healthy rental.
Granted, I would have had more courage investing more money in the S&P 500 than in a single stock. That said, I probably would have only invested at most one third the amount in the S&P 500 as I did in the house. Further, I would have bought in multiple tranches.
Also, I realize this is a simplistic comparison in paper gross profits between a stock investment and a house investment. I've purposefully kept the comparison simple to illustrate a point.
If you want to go more into the nitty gritty, you can read: The Return On Rent Is Always Negative 100%. As an investor, it's important to face facts and remove as much emotion as possible.
Updating Real Estate Valuation Algorithms
What I'm really excited about is the likelihood Redfin and Zillow will be updating their valuation algorithms. They must to catch up with the robust price movement of single-family homes all around the country.
I've been closely following sale prices for 3 – 5-bedroom homes since the pandemic began. The number of homes sold for above Redfin's estimate is rising. Therefore, it sure seems like the online pricing algorithms need to get revised upwards.
Here is an example of a single-family home that sold in February 2021 for $337,925 above Redfin's estimate. These occurrences are now much more common.
No Confidence, No Invest, No Make Money
If you do not have enough confidence to invest in a risk asset, then you either won't invest or invest enough to make a difference.
Since starting Financial Samurai in 2009, I've come across plenty of people who let their savings pile up in a savings account. The reason is because they were too afraid to invest in the stock market.
I was one of them when I left a good-paying job in 2012. Instead of investing directly in the S&P 500, I invested in a structured note with downside protection. The price for this protection was liquidity and giving up most of the dividend for five years. Hoarding cash is a suboptimal reality that is completely understandable after the Global Financial Crisis.
Sure, there are examples where some investors went all-in on their favorite multi-bagger growth stock. But for the average American without a trust fund and who has a family to support, buying a property that provides a purpose is an easier, safer way to build wealth.
More Confident In Being A Home Because It Provides Utility
So long as you can afford the home, even if your home is declining in value, it's nice you aren't being constantly reminded about its depreciation. Instead, you're hopefully enjoying the utility your home provides while making wonderful memories as well. This utility is what will make a potential real estate investment loss much more bearable.
When it comes to stocks, no amount of ownership joy will make up for a stock loss. Stocks simply provide zero utility. And funny enough, Twitter is now below where I initially bought it for. What a waste of time. The hardest thing about buying stocks is timing both the purchase and the sale correctly.
Personally, I have no problems paying millions of dollars for a home because four people get to regularly enjoy it: me, my wife, my two children. Providing a comfortable home for my family is my duty. Although getting to the top of the property ladder doesn't give me more happiness, it gives me greater satisfaction.
I hope my forever home will go up in value over time. But if it doesn't, that's still OK because it will have been enjoyed by four people for years to come.
You Can Make More With Real Estate
Given real estate is less risky than stocks, it is ironic the average person can make much more money from real estate. We have the government's support to partially thank for this anomaly. But we can also thank our ability to courageously take more calculated risks for potential financial glory!
Personally, I'm going to maintain my current asset allocation of stocks and real estate into the future. However, I've become more partial to private real estate syndication deals to diversify my investments. I also want to dampen volatility and earn income passively.
Check out my two favorite platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private real estate funds. Fundrise has been around since 2012 and now manages over $3.5 billion for over 500,000 investors. For most people, investing in a diversified eREIT is the best way to go. Its investment minimum is only $10.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. They also potentially have higher growth due to positive job and demographic trends. If you have more capital, you can build your own select fund.
I've personally invested $954,000 in real estate crowdfunding across 18 projects and a couple of funds. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$270,000.
Both platforms are long-term sponsors of Financial Samurai and Financial Samurai is an investor in Fundrise funds.
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. 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.
Why Real Estate Is Less Risky Than Stocks is a Financial Samurai original post. Make more money investing in real estate with lower risk. Join 65,000+ others and sign up for my free weekly newsletter.
Sam,
Long time reader who first wants to say thanks. I appreciate the work you have put into this site, I really like your writing style and agree with most of your investment/life philosophies.
My question…a friend is very excited about Cadre. Have you looked at their platform and their investment approach? Would love to hear your thoughts on Cadre versus crowd street and/or other modern approaches to real estate investing.
I am not an investor, I max out the 401k and work my tail off in the hopes of acquiring a significant pension.
But my real estate experience/knowledge support Sam’s post.
Bought new construction home largest model in cul-de-sac for $220,000+ in Southern California early 2000.
Did all upgrades myself:
Painted: Kitchen , Dining Room, 2 Bathrooms, 2 Bedrooms with top of the line paints with different textures.
Painted the Balcony
Painted the garage door and installed matching fake shudders.
Epoxied garage floor
Poured colored concrete patio.
Installed water sprinkler system and sod grass.
Landscaped a few shrubs and lava rock.
Built stone and wrought iron fencing for rear portion of property.
Painted inner fencing.
Improvement cost over 4 years approximately $10,000.00+ (Plus my Labor).
Sold the house in late 2004 for $515,000.00.
Bought a second home in early 2006 for $240,000+ largest model in Cul-de-sac.
Improved the property with Sod.
Sold 11 months later due to receipt of orders for $305,000+
Learned that Real Estate agents do not care if it is the seller or the buyer who loses or gains the profits!
$10,000.00 + or – is only a $300-500 gain/loss for them.
The agents secretly work with the appraisers to ensure the property meets the necessary appraisal value to ensure the sale goes through!
That’s why the properties currently being sold are selling at higher than the Redfin and Zillow valuation!
Be advised neither of the homes I sold were at the level I sold them at the last time I checked on them!
The recovery from the 2007/2008 collapse has not truly occurred!
Also if a $15.00 minimum wage hike occurs then you can bet commercial property throughout the midwest and southern states will collapse along with millions of small businesses.
Large companies are an investors best choice to be in, if Congress should decide to crush the conservative small businesses throughout the heartland of America.
Just remember the fallout of the last 40% pay-hike in 2006 that was the impetus that led to the 2007/2008 economic collapse!
A 100% + pay hike will destroy the Working class all across the country with the exception of the democrat controlled urban areas that already have to have $15.00 wages for their impoverished population to breath.
If you live in the heartland get ready to send your children to the urban centers of New York, California, DC, and Illinois to serve underneath their established unionized (Nepotism and Cronyism) government systems.
If you max out your 401k every year, you are definitely an investor. Unless you let the funds sit in a money market / stable value fund.
Sam
Thanks for the incredibly fast response!
My wife and I do get excited knowing that we have surpassed the technical millionaire status as we were both raised in poor/impoverished homes.
However My 401k plan is mainly in place to withdraw only enough money in retirement to pay the tax difference on my pensions and social security.
I do believe it is essentially just an overrated banking account that may or may not provide me with my principle contributions and will assuredly collapse once Putin and Xiang Pi decide it is their political advantage.
How do you feel about my poverty versus poor commentary?
Do you feel there any value to your audience?
Quite alarmist comments.
Mo
I do seem to have a minority opinion!
“Paul Revere”
Gave early warning that the Red Coats were coming!
At least in the history books written before the 1990’s.
Remember Putin is in his late 60’s!
If he is going to restore the Soviet Union to its former boundaries he is going to have to do something extreme within the next 10 years.
What are your thoughts?
Sound good. Yes, but writing / commenting on topic is probably best. A guest post would be better. Thx
Sam
Good morning
I just googled “Guest Postings” and although I really appreciate your offer and willingness to let me engage with you and your readers on the separate topic of poverty.
In order for me to provide professional grade postings I would clearly have to focus more time on the subject of poverty itself rather than just providing my life’s experience and wisdoms derived from it!
I am currently not in a position to allot that much time to the effort.
I was enjoying the story telling and there was something therapeutic about it!
Thank you for indulging my antics and engagement with your other readers!
I am a bit slower than most and did not realize initially that most of your commenters are regulars who have already established their relationships with each other.
I will continue to read and respond to your articles, will clearly have to tone down my language so as not to offend those who have been thoroughly indoctrinated!
I may spend some time practicing my writing style and content and come back to you in the future if you are still engaged with this site at that time.
You are truly inspiring!
Thanks again!
Chris
70% in real estate and equities. What is your remaining 30% asset allocation if you don’t mind saying?
I’m currently 50% equities, 30% real estate, and 20% Crypto (full disclosure).
Some of the 30% allocation is actually in municipal bonds as well. The rest is in alternative investments like venture debt, venture capital and real estate crowdfunding, which can be added to my real estate percentage. Then there’s the value of my business and risk-free investments.
See: Net Worth Composition By Level Of Wealth
Where are you on your financial journey? I’m encouraging as many people as possible to build business equity.
I’m semi-retired but continue to work full-time as I build a more comfortable buffer. In all honesty, I keep moving the goal posts and this “buffer” is currently 2X from my initial target. I’m only 40 years old and I have a fun job so I’m in no rush to pull the perverbial cord.
Interesting asset allocation – thanks for sharing. Despite my proximity to retirement I am very pessimistic about the bond market and have dumped my entire position over the last year. I ultimately see crypto replacing bonds longterm. If the crypto market tanks, I’ll still be fine with a 20% portfolio hit.
Peter
Be careful with Bitcoin, “Bernie Mad-Hoff” is probably turning in his grave for not having been the mastermind behind this “Ponzi-Scheme of all Ponzi-Schemes!”
But if it works out for you “God Bless your personal success for having taken the chance at the right moment in time!”
Apparently Bitcoin allows people to hide in the shadows as they utilize it to purchase their criminally procured human trafficked sexual pleasures of all types!
You name it they can have exotic women, men and children without being tracked by government authorities from any country!
So it might actually survive as a true underground currency because most Socialist and Communist government systems are beholden to the criminal and immortal behaviors of men!
Clearly the United States is currently at the crossroads to joining the rest of the world in this ultimate endeavor!
“Go Democrats!”
Immoral behavior
(I truly hate auto suggestions)
Chris,
Thanks for the unsolicited financial advice, kooky assumptions, and displaying your illusions of higher moral superiority!
Best of luck in life.
Peter
Peter
Good Afternoon
Clearly you have failed to review my previous postings and have decided to enter the arena with what are clearly nerf balls!
First off your ridiculous attempt of the use of larger words than you are qualified to utilize like “unsolicited” are comical!
Remember you are corresponding with unknown readers, via a community involved blog site thereby requesting and antagonizing those with opposing opinions to respond accordingly! The very definition of solicited input!
As far as your disparaging remarks of me having “Kooky Assumptions” (a word I have not heard in twenty years) for which I can only deduce that I hit an exposed nerve as to how you are utilizing your 20% of invested bitcoins and your desire to divert that inherent criminal sexual deviancy attention from your direction!
You are assuredly correct in that I do have delusional thoughts of moral superiority above the majority of the readers on this or any other site for that matter!
I trust in myself to be an honest broker even to the detriment of my own success!
I am a self diagnosed “Virtuous Masochist” , which basically means “Super Hero!” Think “Captain American” or “He Man”! Your choice.
By all means you should continue to bring your decrepit character traits to the table for further conversation!
I can guide you to becoming a truly good man if you sincerely desire the education of it?
Bitcoin will either prove itself as a massive criminal Ponzi scheme or will become the international monetary denomination that the entire world uses for currency and the ultimate demise of the United States as the leading World Power!
By all means continue to promote it to your personal advantage and profit!
Who in this world really needs freedom over personal wealth anyway?
“Go Democrats!”
Whippee!
PS:
Can you let us all know what your trafficked preferences are when spending your Bitcoins?
“You should never jump into a cockfight with nerf balls”
Regards
Chris
I am curious if Zillow and Redfin want you to think your home is worth less since they’re trying to buy them. I’ve noticed this pattern more and more since they started these transactions.
Funny you should say that. An upcoming post discusses this topic directly!
I believe this is one of the reasons why the estimates are lower for sure. Thy are our competitors now.
Check it out: Use Bad Pricing Estimates By Zillow And Redfin To Your Advantage
Hi Sam!
Just purchased rental property #1 and wondering whether I should be concerned about rental deferment by the government becoming a more regular occurrence that could negatively impact rental property owners. As you own several rental properties yourself, what are your thoughts? Do you see this becoming a semi-regular occurrence in future?
Baseball cards are less risky than real estate. I put 2 million into rookie cards and I’m up 20 percent! I put 10k into real estate and I’m only up 56 percent. I made 400k on my baseball cards and only 5600 on real estate.
Therefore, I must conclude baseball cards are a better investment.
Of course real estate is less risky than stocks. However, risk is correlated with reward.
Congrats! I have a whole collection of 1957 cards, which include a lot of rookie cards like Roberto Clemente. I’m still looking for my dad‘s Mickey Mantle and Ted Williams rookie cards.
Have the Sandy Koufax rookie card from 1956 in mint condition. One sold for over $200,000!
Touché! Well played. You made a grumpy guy laugh my ass off
In real estate rate/AAPER :-) depends on property appraisal plus your own credit rating, bankruptcies, short-sales own credit-worthiness and how long you’ve been doing this business successfully etc.
Glad Robinhood opens you an account and offers decent margin and it doesn’t care even if you hoodwinked banks in RE (or got burnt) a few times – nor as much for FICA credit score.
Sunny side RE case with squeaky clean credit/background with some grease to hands – definitely stands a better chance – as you are running a business.
On Robinhood – you are individual investor- there ends the matter
I think real estate and stocks are different animals. I have never believed it wise to compare apples and oranges.
-Stocks are limited liability / RE is not.
-Stocks are fractional
-Real estate (typically) requires or involves debt. Stocks already have an impounded debt in the companies capital structure which is non claimable on the stockholders other equity.
-Stocks are liquid and Settle on standardized terms.
Sure, they are different animals. But they are also two of the most invested asset classes. Given money is limited, there is an opportunity cost to which to invest in and how much.
With REITs, real estate ETFs, and real estate crowdfunding, you can invest in fractional real estate shares.
I guess it really just comes down to personal preference. My net worth is a few million dollars, mostly invested in the market, and I’ve always been fine renting. Stock plunges don’t scare me as I know prices will eventually go up again, but if I owned a house and had to move during a market downturn I’d feel like such a sucker. Plus I know people who were foreclosed during the crash in 2009, and I don’t think they’d agree that RE is less risky!
Yes, personal preference and situation are key. Hence why there is a never-ending debate. I personally invest in both.
Folks who had to foreclose in 2009 would be akin to stock investors forced to sell due to margin calls. Yes, both would feel like “suckers” as you say, give the rebound.
Investing in a risk-appropriate way is important.
Thanks for your informative letters on various topics. Tax season is here. Could you write about your experience about filing tax return with multiple K-1 forms of real estate investment from crowdfunding?
Do you need to file State tax returns each year even there are no distributions? From tax filing point of the view, is that investing in stocks much more feasible?
You bet! Here you go: https://www.financialsamurai.com/what-tax-documents-do-i-get-for-real-estate-crowdfunding/
Sam,
I have counterpoints. Not on your point about real estate being less risky than stocks. It’s a no brainer that real estate is less risky than stocks. However, where I disagree is that real estate outperforms stocks.
Your point #4: Average mortgage rates are lower than margin rates. Yeah, if you include the outliers for margin rates. Robinhood charges 2.5% for margin. If you do not know where to look to find good rates, sure. But there are low cost margin brokerages out there.
Another point that I will disagree with. You say that making money with houses are easier. Yes, if you are living in a highly price sensitive market like San Francisco, LA, NY, etc. then you can make money on the cash flow plus price appreciation. However, housing prices do not fluctuate/increase as much as San Francisco’s houses or NY houses. If you exclude outliers such as these markets, then you have to carefully select houses that cash flow. Which is harder than waking up and buying the S&P 500 at the touch of a button.
Open to hearing your counterpoints. I believe that real estate is less risky than stocks but in terms of performance, stock investors generally outperform. Both are still good asset classes.
Hi David,
To clarify, I didn’t say real estate outperforms stocks. That’s a hard statement to make as there are so many variables. I believe the average American can make much more money from real estate (absolute dollar amount) than with stocks.
Real estate in lower-cost cities and across the heartland are the hottest in the country. Check out the data. SF single family homes may be tame by comparison. While condo prices in SF and NYC have fallen.
Sam
After about 12 years of investing, I can say that real estate has slightly outperformed stocks for me, but I had many things lined up in my favor, like I started in real estate in 2009 when prices were crazy low, I reinvested all cash flow into principal paydown, I have 1031’d multiple times, and I’ve refinanced whenever it made sense. I never count on appreciation when modeling things out, so I’m always pleasantly surprised when I get a new appraisal. Real estate (not including home equity) is 51% of my NW and stocks/bonds are 49%. There has been risk along the way, including a tenant who stopped paying rent during COVID, and a broken pipe that caused extensive damage just below the amount of my deductible. All things considered, real estate has been a great investment for me and if I didn’t like my job, I could quit today and live off the cashflow, which feels really nice.
Thanks Sam, you’ve given me something to think about.
I think you are 110% on point. While I only have about 14% of my net worth in real estate, I’ve always wanted to invest in more. But with prices skyrocketing in my area, the cap rates and cash on cash returns are terrible. The best I could figure was to operate an AirBnB and even that would end up being a part-time job minimum. I know there are crowdfunded options, property managers, etc. We will take the dip into RE eventually, a mistake that we made was NOT keeping our first primary residence and renting it out. Whoops!
Even so, I don’t think stocks are risky if holding them long-term. The stock market will go up on average. I was listening to a podcast the other day and the CEO of Spotify was talking about how our technical/startup ecosystems are 20 years ahead of Europe. Trust in American Capitalism.
Yes, long term, stocks aren’t that risky. But eventually, we should consider using some of our gains to pay for life.
When you buy real estate and enjoy it, you don’t have to think about the end game.
I still prefer real estate to stocks this year. Way less volatile and nice income production.
I like to hold all my REITs (25% of my entire portfolio) in my Roth IRA. It eliminates the drag of all taxation (corporate level and individual) and the investments throw off about 8%-10% yearly income via dividends. Many offer yearly increases to the dividend. I can spend the income if needed or re-invest. Perfect for an early retiree.
I do too. However, REITs tumbled more than the S&P 500 did in March 2020. Hence, REITs are actually higher beta and not the most appropriate real estate investment for investors looking for less volatility.
Which REITs provide 8-10% yearly income via dividends? That’s pretty high.
Related: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
Interesting point on the government’s borrowing rules on margin versus first time homebuyer mortgages downpayment amounts and loans. I also much prefer real estate to stocks, but I do invest in both and plan to have both in my portfolio indefinitely.
It’s true that making money with stocks is hard. I haven’t tried to pick single stock winners in well over a decade. I’m happiest as a passive investor and try to keep my investments pretty diversified.
I like how REC has made real estate investing accessible to everyone and how you can gain exposure without actually needing a downpayment or having to worry about maintenance. I love owning my own home, but definitely don’t want to deal with property management of investment properties.
Lots of great points in your post, thanks!
I think Tony’s a little bitter back there. The only thing stopping us from owning real estate is our own energy and work ethic. I want to save up for a down payment on a home first and then figure out if I want to deal with tenants on a rental property.
Have you ever thought of making more money off an Air B&B?
I’m likely doing a dumb thing and investing my down payment savings in the stock market. Everyone says not to do it, but I have no fixed timeline for when I have to own and can afford to wait out a potential dip when I think I’ll be ready to buy four years from now. The mix of domestic and international index funds is earning me more than the money market where my emergency fund is parked. Balls to the wall baby! And if I’m totally wrong, that’s okay, because I’m creating a couple other passive income opportunities to get closer to buying real estate.
Short version, I am likely at the shallow end of the socioeconomic pool compared to all you successful guys and gals, but I plan on getting into real estate in some form or fashion as soon as I can, even if it’s only through Fundrise in the foreseeable future.
Great attitude! Do so with as much knowledge and lack of FOMO as possible. It is FOMO that gets people to borrow too much, buy too much, and get them in trouble.
People like you are the reason that rents are unaffordable everywhere and will continue to be so for the foreseeable future. Real estate should be nobody’s retirement plan. Housing should be a human right, not a way for the already-wealthy to shore up their retirement accounts. Stop pushing real estate.
If I can’t afford real estate, nobody else should. Just because you worked a lot and saved a lot for your down payment doesn’t mean it’s right that you get to own property and I don’t.
Excellent trolling, Tony. For a second, you had me convinced you believed any of that nonsense.
Comrade Tony,
Renounce you’re American citizenship and move to a communist socialist country then. I hear Cuba has nice weather pretty much year round.
Housing is a right….good one Tony. I love comedy!
The second paragraph makes me realize this sarcasm of post – good one!!
No, it’s not sarcasm. It’s not fair that Sam and other people were able to buy property in stocks during the depths of the global pandemic in 2020. Now that stocks and Property have moved, they are wealthier while I am not. That’s just not fair. And the more Sam writes about real estate, the more people might get more interested in real estate. And that makes it more difficult for me.
I choose not to follow Sam’s advice, and only my own. So when he is writing about things that I do not agree with, that doesn’t help me.
I’m sick of people trying to build well for their family. What about me?
I think Tony is yanking our chain. Enough Tony, enough.
I admire the commitment to saying insane things.
My bad Tony.
I believe homeownership is one of the best ways for net-yet-rich people to eventually get rich over time.
I wouldn’t fight the government or the trend.
If Tony is just playing around. Be reminded that we live in a free country. And we can spend our money anyway we want. Real estate is not for everyone. If you’re serious about investing go with the REIT way. If you want real estate returns.