What’s The Better Investment Real Estate or Stocks?

Troy Sharpe:  What’s the better investment? Real estate or the stock market. I get this question all the time. Today we’re going to go through and help you understand the differences and maybe figure out which one is better for you.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®)  and host of the Retirement Income show. I had a gentlemen come in the other day and we sat down, we’re having a cup of coffee, we’re going through his portfolio and his investments and I  see that he’s got a ton of real estate investments. He’s living off the income and he loves it, but he wanted it to diversify a little bit so he wanted to learn a little bit more about the stock market because he’s never  invested in stocks. That’s where this video is coming from and the position we take here is that whether you’re invested in stocks or real estate, you have  to understand that those are nothing more than tools, just like a hammer.

If you’re putting something together, it’s a construction project and it calls for a drill and screws and you use  a hammer, you’re using the wrong tool. We want to have multiple tools to help get the job done. When it comes to building wealth, real estate stocks,  bonds, mutual funds, these are nothing more than tools. When we look at real estate, you have to decide whether you are talking about your personal residence, your home, or an investment  property that is going to generate what we call passive cash flow. Going back to 1940, the average price in this country, or excuse me, not price, but the average appreciation  of home values in this country after inflation is only about 1.5% per year.

Now, that doesn’t mean that your house is going to grow at 1.5%.  You may live in an area where there’s a lot of demand and your home has appreciated a lot more than that. That’s absolutely possible and probably likely for many of you, but when we go back to 1940  and we adjust for home sizes because homes are much bigger today than they were in the past. You’re looking at about 1.5% per year. Whereas after inflation, the stock market has averaged about 7%  per year over a long period of time. When you look at those two numbers, you say, “You know what? The stock market is going to grow a lot more than real estate,” but here’s the key difference.  With real estate, typically you get to use leverage, which means you’re borrowing other people’s money.

Lenders typically require you to put 20% down. If I go buy a home  for $500,000 or an investment property, I’ll have to put 20% down or $100,000. Now, if that home goes up 3% in value, I’ve made  3% of $500,000, $15,000. On my $100,000 down payment, that’s 15% return. Even though the home only went up  3% on the money I’ve put down, there’s a 15% return. Now, it’s not exactly that simple because you have mortgage costs. You have origination fees,  lender fees, all these fees that are tied into the mortgage, but the principle is the same. When you get to use other people’s money for your investments, this is called leverage and that  creates a tremendous opportunity to create wealth over the long haul. If you have investment property.

Investment property is when you buy a duplex or a single-family  home, or maybe an apartment triplex, something like that and you have income coming in. That is where most of your appreciation is going to come from, or most of your gain over the long term is  from that rental income. Hopefully, the building goes up and the real estate goes up in value, and as the debt is paid down, of course, you’re using other people’s money. You are going to build a lot of wealth.  With rental real estate, it’s the same concepts working, but now instead of you paying the mortgage yourself and paying all those interest costs, now you’re getting other people to pay those interest costs.  Real estate can be a very powerful tool, but that doesn’t mean that the stock market can’t be a powerful tool as well.

Real estate is not liquid. There are massive fees getting going with  real estate, but the stock market anyone can open an account. You can open it with $1 or $2. Now in the stock market, you can use other people’s money, but that’s foolish.  That’s what we call investing on margin and that’s the quickest way to go broke if the market turns south. We don’t want to borrow money to invest in stocks, whereas with real estate, that’s what  we have to do unless we have a whole lot of cash. The stock market money is liquid, historically about 7% compounded returns after inflation, and if we look at small caps or international  markets, they historically perform better than that.

When we want to build wealth and we want to look at what are the different tools we can use for investing, understand real estate is a great  tool, but there are limitations and downsides, just like every other investing tool, same with the stock market. The proper thing to do is use correct proportions of the various  tools that are available to you. Maybe 20% of your money towards real estate, maybe 30% of your money towards stocks or mutual funds or bonds or whatever it may be. You want to have diversification. Portfolio diversification is very, very important because that mitigates risk. We don’t want all of our money in assets that move in tandem. We  want what we call non-correlated assets.

That means that when the stock market is going up, for example, that doesn’t necessarily have an impact on the price of real estate. Those are what we  call non-correlated assets. Sometimes they will move in tandem. Sometimes they’ll go up and down together, but not always. We want to have diversification. We want to have  multiple tools in our wealth-building toolkit, and it’s not necessarily what’s better, one or the other.

It’s how do we utilize both to create the most wealth for ourselves and our  family so we have security and we’re able to live the life that we deserve. If you like this video, please share it with a friend or family member. Hit that thumbs up button, which is the like button, and subscribe to the channel, and  hit that little bell icon so you can be notified when we upload more content to keep you more connected to your money.