Choosing what asset type to invest in is almost as important as the investment itself. A lot of potential stock investors chose to instead allocate their capital towards rental properties or land. This is a trap and will cost you thousands if not millions of dollars per year.
These are the 5 reasons why investing in stocks is better than real estate; First, liquidity concerns if the market goes against you. Second, the compounding returns in stocks. Third, tax on real estate is high. Fourth, hedging your investments is easier in stocks. Fifth, there is no human variable in stocks.
Simply put, investing in stocks has more upside with less risk.
Here at Chronohistoria I publish articles on stock research and tips. If you enjoy content like this then feel free to subscribe to the free newsletter to stay up to date.
Without further ado, let’s jump right into the 5 reasons why investing in stocks is better than real estate.
Reason 1: Liquidity Concerns
Liquidity is how easily you can ‘liquidate’ your investment back into cash. Real Estate is notoriously hard to liquidate or sell your property at a good price.
This is because as your investment appreciates in value the amount of people who are willing to buy it decreases.
For example, if you buy a home in the U.S for around $300,000 and over 10 years it doubles in price to $600,000 then it would be much harder to liquidate the asset. This is because the ‘pool’ of potential buyers has changed from homeowners to investors.
Now what happens if your local housing market begins to crash? You will want to sell to get out but can’t because nobody wants to spend $600,000 worth of capital on a house when the market is crashing.
Without liquidity your investment is worth nothing. This is because you can’t convert the property back into cash. For example on that $600,000 investment property now you either sit on it and hope someone buys it or you sell at a significantly less rate, around $400,000.
This is what happened in the U.S 2008 housing crisis. The market for real estate plummeted and everyone tried to sell at the same time. Nobody was buying and as such people foreclosed on their property and went bankrupt.
With stocks, you will never have to worry about liquidity concerns so long as you buy good stocks with high volume.
Reason 2: Compounding Returns in Stock Investments
Here is a 20 year chart on the SPY. The SPY tracks and invests in the top 500 U.S companies by market cap. As such one share of SPY holds a tiny amount of TSLA, GOOGL, AAPL, MSFT, and other big names present within the SPY stock.
On average the market returns a 10% gain per year. This returns compounds from the previous year. Over time this means that your investment will double in value in under 10 years. It will then triple in value in the next seven years after that. This process will continue and there is always liquidity to sell your investment instantly.
What this means is that your investment will constantly be growing at a stable rate. Over time this rate will speed up and eventually will turn into a runaway snowball effect that will far outstrip any real estate returns.
Remember that $600,000 house investment we were discussing earlier? Well in our theoretical scenario the market was crashing and you had to sell at $400,000 due to liquidity concerns.
That means over 10 years your real estate appreciated at around 3% per year. Meanwhile in the same amount of time your investment in the SPY has doubled your capital and you can sell instantly.
Oh, and when selling U.S stocks….there is no insane “real estate agent fees.” Your money is your money, take it out of the market or keep it in.
Reason 3: Tax on Real Estate is to High
Two things in life are unavoidable, death and taxes. I can’t help you with death but when it comes to reducing your tax I know a thing or two.
According to U.S Census.gov the average U.S family pays around $2,500 in property tax every year just to have that real estate. This means that every year that you hold onto your real estate investment you will have to pay tax on it. (Source)
In 1997 the U.S government passed a law allowing you to forgo paying capital gains tax on a house if you meet certain criteria. First, you have to have owned the property for more than 2 years. Second, you don’t pay income tax on the first $250,000 of profit for single people and $500,000 for married couples. (Source)
This is huge as in the early 90’s capital gains tax prevented the housing market from having liquidity as nobody was willing to sell.
The problem with this capital gains tax however is the dated limitations of $250,000 of profit. Most homes nowadays go in the range of $600,000-$800,000. The taxpayer relief act of 1997 needed to be a percentage gain and not a flat rate.
Simply put, if you buy a real estate investment property you will far outstrip the $250,000 gain and thus have to pay capital gains tax. This puts Real Estate with all its faults in the same tax boat as stocks.
However with Stocks you have significantly less risk and more capital appreciation. The only difference is that with real estate you are paying property tax the entire time you hold on to the asset.
Reason 4 : Hedging your Stocks is Easier Than Real Estate
Hedging is simply taking out an investment that will gain in value as your primary investment decreases. By doing this you are keeping yourself in the market and prevent your downside risk.
With real estate your house can burn down and you will have to fight your ‘insurance’ company to get it replaced. With investments you simply inverse your position and gain money if your investment ever starts to decrease in value.
What this means is that you can have two investments that protect each other. You can’t do that with a home easily. This is because to have a good real estate hedge you will need to buy another property to protect the downside of the first property.
Why would you buy two properties when you can just buy two stock investments and have more upside with less risk?
Here is a nice chart to depict how hedging in the market works.
Notice how at month 9 of the above chart you are technically even in total investment even though your primary investment went down (investment 1). This is the secret weapon for investing in the stock market.
Even when your investment loses money you will gain money. It’s a scenario where no matter what you are protected from your downside.
This is why millionaires use wealth managers who are trained to protect investment downside. Right now the industry calls this hedging protection “risk adjusted returns.”
With real estate you are unfortunately at risk of your property declining in value and hurting your financial well being. Stocks on the other hand allow you to easily have the option to hedge your investments and protect your downside. With real estate you have to buy insurance that will further eat into your ROI (return on investment).
Simply put, real estate is riskier than stocks while also having less return.
Reason 5: There is No Human Variable in Stocks
This above image is of your rental property when the ‘human variable’ has been inserted into the financial equation.
Simply put, the human variable is chaos.
Your renter or tenant could leave the gas on and blow up your property. Or instead perhaps your renter leaves the water running during the winter and now the basement is a frozen ice rink.
With real estate you are going to have to fix things in order to protect your investment. This is going to further cut into your ROI and take money out of your overall wealth.
The worse case scenario could happen and you lose nearly everything except the value of the land itself. There are simply too many possible scenarios to list. Further, since you can’t properly hedge with real-estate you expose yourself to a high risk profile within your investment.
That’s why I hold nearly no real-estate in my overall portfolio. I recommend clients don’t expose themselves to real-estate either as the market can generate higher returns over time.
So Why do People Invest in Real-Estate?
This is the million dollar question. Why do people invest in real estate if it’s such a bad idea?
It’s true that you can make good returns in real-estate in a very quick time period. If you buy the right real-estate portfolio and flip it while staying under the 2 year and $250,000 mark for the 1997 tax relief act you can make an insane amount of money.
However for the average investor the amount of discretionary capital to buy 5-10 investment properties and sell for less than $250,000 ($500,000 for married couples) is hard to come by.
Even then, if you have the millions to invest then chances are you are better off exploiting the compounding returns found in the market.
The real reason people invest in Real-Estate is a combination of the tangible value and the ‘feel good effect’ of owning property.
You can touch and see a house. You can’t do this with stocks. That’s alluring to most amateur investors. Further, the concept of being a ‘landlord’ or ‘landlady’ has a certain ring to it.
Don’t fall for this trap.
Instead invest in the stock market. 10 years from now you can buy that property you want with cash and still have funds left over. If you buy the property now you will pay interest on the principal/loan, homeowners insurance, HOA bills, maintenance and damage repairs.
There you have it, the 5 reasons why investing in stocks is better than real estate. At the end of the day it’s your choice, however next time you’re thinking about buying property please… just look into some solid growth stocks. There is less risk, more upside, and more liquidity.
Here at Chronohistoria I am here to help people learn how to generate above normal market returns. As such if you like content like this then feel free to subscribe to the free newsletter to stay up to date.
Further, you can check out some of the other posts below.
What is the time frame for you short squeeze? Well here is everything you will ever need to know to determine how long it will last.
Do you still own a stock after its delisted? How do you sell it? Don’t worry the stock is still worth money and here is how to sell.
Making 1% a day in the stock market is hard but defiantly doable. Here are 3 simple steps to helping you achieve this return.
Until we meet again, I wish you the best of luck in your investment journey.