Are Stocks a Better Investment Than Real Estate?
Stocks vs. Real Estate
In Arizona, Nevada, California, and Florida, real estate prices soared in 2004 through 2006. Yes, they soared in other parts of the country too, but these four states experienced the best of the boom, and then the worst of the bust.
During this soaring phase, it seemed every client who walked in the door asked if they should invest in rental real estate. It began to feel like a broken record.
As they would tell story after story of their neighbor or co-worker who just flipped a house and made $50,000 in a matter of a month, we would suggest to them that every time they heard the word ‘real estate’ that they mentally insert the word ‘technology stocks’ instead. Some listened.
After the real estate market crashed, we found a whole new group of people in our office in 2009 and 2010, asking if they should short sell their homes, or let them go to foreclosure. For many readers, it would seem strange that our clients would even ask us this question, but understand Arizona is a non-recourse state which means someone can walk away from their home and the bank cannot go after them for the remaining debt.
We sought to build a network of resources for those whose homes were severely underwater. One lady turned out to be a phenomenal negotiator and was able to get many of the banks to modify loans on behalf of our clients.
We were on the phone with this lady one day when she said "Well stocks are a much better investment than real estate right? You're a financial planner, so of course, that's what you tell your clients."
We were speechless.
She went on "After all if you would have put all your money in Google when it came out with its IPO, you'd be set now, right?"
We responded, “Yeah, and if you put your money in a hundred other stocks we could name off, right now you'd be broke.”
Which Investment Is Better
To determine if one investment is better than another, the first thing you have to do is define “better.” You have to know what makes a good investment for you.
Start with a few questions such as:
- What are your goals and which investment is most likely to help you accomplish them over your allotted time frame?
- Do you want to be a hands-on manager of your investments, or a passive investor?
- Do you need your investment to produce income soon, or are you looking for capital appreciation?
- What are the tax consequences and minimum purchase amounts needed to fund the investment?
Then evaluate the characteristics of both stocks and real estate to determine which might be most appropriate in light of your goals.
Similarities as Investments
Stocks and real estate have many similarities as investments. Some similarities include:
- Both stocks and real estate involve trade-offs between risk and return.
- Both can be bought by novices, but shouldn’t be.
- Both can make you a lot of money, or lose you a lot of money.
- With both stocks and real estate, if you use leverage (borrow money to buy the investment), you can lose more money than you invested.
- Both stocks and real estate can be easily bought through publicly traded funds like stock index funds or REITs (Real Estate Investment Trusts). This is usually the best choice for those without the knowledge and experience to evaluate individual stock and real estate purchases.
- Both stocks and real estate can produce income; stocks by paying out dividends, and real estate through rental income.
Too many inexperienced investors buy stocks and real estate thinking they are going to make easy money. It doesn’t work that way. Consistently making money using any investment requires experience and knowledge.
With all the similarities, what are the differences?
Stocks (assuming they are publicly traded stocks) are usually more liquid, meaning you can sell them quite easily. It can take months or years to sell a piece of real estate, depending on the location and market.
Both stocks and real estate can be appropriate investments for retirement. Is one better than another? No. It entirely depends on your individual goals and circumstances.
This non-recourse rule does not apply to all types of debt one may carry against a property, nor does it apply to all states. Seek the advice of a real estate attorney who knows the rules of your state before going through a short sale of foreclosure.