What is Not Considered in Stocks vs. Real Estate Comparisons

What is Not Considered in Stocks vs. Real Estate Comparisons

I noticed in the many stocks vs. real estate comparisons that I have reviewed as well as discussions that I held with others that there are a few very important considerations that are often overlooked. Below are just a few:

1️⃣ Leveraged Returns

While stocks may afford the opportunity to leverage through options trading or buying on margin, these strategies are usually reserved for highly experienced investors whereas buy and hold investors buy stocks all cash without the ability to leverage.

Real estate, on the other hand, allows for leveraged returns. Investors or syndications invest or raise funds for a down payment and control the whole asset (having only invested their cash to cover a portion of the asset‘s full price). While debt is a two-edged sword, this characteristic of real estate provides for great returns for investors.

2️⃣ Cash Flow

Usually, the charts that I have observed only compare stocks, real estates and other asset classes on the basis of appreciation. By now, you probably know that real estate pays you in more ways than just appreciation. One of the greatest benefits of real estate is cash flow from operations (rental income).

While stocks also afford investors the opportunity for cash flow from dividends, there is usually a trade-off between high-growth stocks that do not pay dividends (Tesla) and mature organizations with less growth (Coca-Cola) that pay great a dividends. With real estate, investors can enjoy both cash flow and growth, given the right opportunity.

3️⃣ Debt Pay-Down

With stocks, equity is usually built purely from appreciation. Since there is very often no use of leverage, that is the primary wealth driver. On the other hand, real estate employs an additional wealth-wealth builder: debt pay down.

Using leverage, not only are the returns greater, but equity is built as debt is paid down using the cash flow from the asset. This means that debt service paid from the income the property produces, not your own funds. Wealth is built in the process. Debt-pay down is not taken into account in many of the comparisons between the returns of stocks vs. real estate.

Other Considerations

Other important considerations are tax benefits and risk. With real estate, there are insane tax benefits that often even allow investors to take paper losses. These come from characteristics such as depreciation and laws that allow for investors to defer or avoid tax all together. This may include 1031 exchanges, which allow investors to trade up their assets for a ‘like’ asset and defer capital gains tax, or refinances, which are not considered taxable events.

Real Estate is a very unique asset class for its variety of wealth building levers. Next time you read or are told that stocks are the only way to grow your wealth passively, consider the above characteristics of real estate that make it one of the most powerful wealth building tools. These are the reasons that most of the world’s wealthy have either built their wealth through real estate or hold it in real estate.

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Rodney Robinson II
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