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Investing 101: Stocks vs Real Estate

If you are trying to decide whether to invest in real estate or securities (stocks and bonds), I’d like to share my thoughts with you on the advantages and drawbacks of each investment asset.  Before I begin, though, I would just like to disclose that this advice is for beginner-to-intermediate investors in real estate and stocks as this is where my experience lies.

Securities

Securities are financial instruments that hold monetary value and can be publicly traded.  Stocks and bonds fall into this class and are the common securities that people are familiar with.

Pros

The immediate advantage that securities have are that they are easier to liquidate than an investment like real estate.  You can buy and sell securities in the same day; however, the time that it takes to settle the transactions and collect your funds is about 3 to 5 business days.  With this type of liquidity turnaround time, investors can buy, sell, and then repurchase assets within a matter of days.

Investing in securities offers more diversity than real estate.  With real estate you can invest in land, single-family residential dwellings, multi-family residential dwellings (apartment buildings, duplexes), commercial property (storefronts, malls, hotels, resorts), and farms.  But, with securities, you can invest in Real Estate Investment Trusts (REIT) that cover most of the aforementioned real estate classes (single family dwellings excluded), but you can also invest in stocks, bonds, mutual funds and exchange traded funds that are exposed to a variety of industries, such as information technology securities, oil, energy, semiconductors, defense, retail,  pharmaceuticals, and marijuana to name a few.

There are also low barriers to entry for investing in securities.  Online brokerage accounts are now offering $0 fees for buying and selling stocks.  But, even if you pay a brokerage fee, it is still cheaper than the expenses of real estate.  Additionally, if you are just starting out in investing, you can purchase securities based on your budget.  For example, if you only have $20 dollars to invest, investing in securities is still possible.  The one exception is with mutual funds, as some mutual funds require a minimum investment amount.

In addition to being a low barrier to entry investment class, stock investment expenses are also front-loaded expenses, which I consider to be a positive for securities.  With securities, if you have $100, $1,000, $10,000, $500,000 or more, you buy the stocks based on your cash on hand.  Also, you may have brokerage fees associated with either buying and selling securities (stocks), but those fees are minimal - $0 to $7.95 on average for self-directed accounts - compared to real estate investment transactions.  Unlike the front-loaded expenses of securities, Real estate transaction expenses are continuous, meaning the average investor usually pays settlement fees at the close of the deal before acquiring the real property.  Settlement fees can be $2,000 and up, depending on the property and other variables.  Additionally, investors - especially small-time investors - usually have to take mortgage loans out on real estate investments; thus, the continuous expenses of paying the mortgage loan, which can have 10-, 15- and 30-year terms.  So, as you can see, real estate investment costs can last the life of the investment.

Stocks are also low maintenance investments.  You can literally buy stocks and bonds and just hold onto them for years, and even decades.  You may just want to log onto your account from time to time, or check on the health of the company, the sector of your investments, or the stock market overall, but if you are confident in the company that you bought a stake in and your strategy is to hold the stock for awhile, then you could buy it and take no action at all.

The low maintenance of securities makes them a “low headache” investment.  If you are not familiar with the market and its turbulence, or you don’t do well with uncertainty and a lack of control (more on that in a minute), then that is the most headache you’ll face.  But, if you understand the market fluctuations and are playing the market long-term, then you will receive few headaches from securities.  But, with real estate, may have to deal with paying for a leaky roofs, leaky plumbing, tenants not paying their rent on-time, if at all, tenants destroying property, and doing remodels to properties to ensure they remain relevant and habitable.

Cons

One of my major drawbacks that I have with real estate is that you have little control in securities.  Unless you are a major investor and own a majority of shares, you will not have any control and very little insight into the direction companies take.  The performance, or lack thereof, of the company will be out of your hands.  You can watch your investment widdle away like Sears and there’ll be nothing that you can do.  And, there is a possibility that should the stock fall, it may happen suddenly and you’ll be taken aback by it.

The second downside to investing in securities is that you really don’t own the companies that you invest in; you are really just a passive investor.  Again, if you seek to have a control or say-so in the direction of an investment, you will have very little - aside from frequent voting - input as to the direction of the company unless you are a major shareholder.  Outside of that, you are just a speculator and can only observe the performance of the company and invest or divest based on your observations.

Finally, securities will experience frequent fluctuations in price.  One minute your investment will be making money, the next it will be losing money, then it will be making money again, and so on, and so forth.  If continual swings in losses and gains are too nerve-racking for you, then I’d suggest not investing in securities.

Real Estate

Real Estate is land and the improvements upon it, which could include crops, minerals, and buildings.

Pros

The advantage of real estate over securities that comes to mind is the fact that you actually own and control real estate and real property as opposed to being a passive investor.  You make the decisions on the operations and direction of property.  Meaning, if you want to, and legally can, reclassify the property from residential to commercial property, then you have the power to make that change and don’t have to get a board’s approval - unless you own the real estate jointly with others.  Also, if you want, after tenants have paid for the property, you can convert it to your personal use.  If your real estate holding is raw land or designated as commercial property, you can decide what business to operate there or just lease it out to someone else, and  you can choose to whom you wish to lease it to (barring descriminating practices).  The point is, with real estate, you control the strategic vision and operations of the property.

Real estate also has great growth stability.  With real estate, you don’t get too many fluctuations in value as frequently as stocks do.  Aside from certain periods in history - the 2008 mortgage crisis being the latest event - real estate doesn’t have value drops.  With stocks, valuations can fluctuate weekly, daily, or even hourly.

Real estate investments also provide investors with a routine income stream in the form of periodic revenue that is more than likely greater than the routine payouts in securities, if you even receive stock payouts.  Real estate investors usually collect rent payments from their tenants.  These payments are typically made on a monthly basis.  The difference between the rent and the monthly expenses of property maintenance and loan payments would constitute the landlord’s revenue.  This is one of the benefits of real estate.  If your property is producing revenue on a routine basis, you will see payouts more frequently than you will see in securities as not all securities (stocks) pay dividends, and the ones that do typically pay out on a quarterly basis and will, more than likely, be less than what you would receive from a rental transaction.  Securities investment revenue comes at the conclusion of ownership and not by way of routine payouts; whereas, real estate revenue may occur throughout the life of ownership of the property and also at the conclusion of the ownership by way of real property value appreciation.

One reason why I really like real estate as an investment is because it is a tangible asset.  You can see it, touch it, and smell it (flowers, grass, soil).  You know you own real estate because it is there, you are walking on it or sitting in it and you have the keys to is so you know it’s yours.  With securities, you own a piece of paper that says you have a stake in something.  Although I own shares of some of the biggest tech and entertainment stocks in the world, I hardly doubt that I can walk into the headquarters of any of these buildings and get clearance to any further than the lobby.

Real estate is also a meaningful specific investment.  You only need to know one industry.  If your niche is residential property flipping, or multi-family dwellings, then you can focus on those investments and make money.  With stocks, due to the fluctuations in the market, you need to diversify into other markets to ensure a specific year-over-year growth rate.

Cons

The first downside to real estate investing that comes to mind is the high barriers to entry.  With securities, you can begin investing with as little as $20 dollars with some brokerages, and possibly even lower than that.  You don’t need any credit checks, any pre-approvals from a lender, no financial statements to fill out in order to start investing.  You just need to be ready, willing and able to open an account and have the funds - sometimes as little as $20 on some platforms - to invest.  With real estate, you need to have access to $50,000 on up, depending on which state you live in.  In the DC metropolitan area, where I live, $50,000 isn’t going to buy you anything - not even a tear-down yet alone raw land.  If you don’t have cash, you’ll need to get approved by a lender, you’ll need good credit, and you’ll need to be able to put more money and effort into the dwelling to either flip it or make it marketable or habitable.

Another downside to real estate investing you really need to set up investment property as a separate tax entity to ensure liabilities are low and you maximize profits.  If not, those extra rental dollars are going to count towards your wages at the end of the year; thus, putting you in a different tax bracket and increasing your expenses.  With stocks, you don’t need to worry about doing as such.  Note: I am not a certified financial planner or certified accountant.  Please check with a professional or your state’s department of revenue agency for guidance on taxes and anything else mentioned above.

Real estate has maintenance costs that seem to, at least in my case, come far too often.  Real estate profits can easily be exhausted to fix plumbing issues, replace a roof, or repair damages to the property done by tenants or through natural wear and tear.

Of all of the downsides I expressed, I think tenants can be either one of the biggest downsides, or they can even be a blessing.  But, normally, they are a downside to owning real estate and I’ll tell you why.  Tenants have no vested interest in the property.  They know they don’t own the property and that their tenancy is, more than likely, not permanent so they just don’t take care of your investment.  Tenants usually want more services than what they are willing to pay for, and they are usually good at manipulating the terms of the agreement of the lease.  Being as though tenants are normally habitual renters, they know the legal system as it pertains to leases and they’ll use it to their advantage.

Real estate is also an illiquid investment.  If you want to get out of owning real property, you have to make it available for purchase via some sales platform - typically a real estate platform - and buyers will have to show interest in your property.  If you are lucky enough to receive an offer on the same day that you list the property, it could be another 30 days before the buyer can settle on the exchange as they usually are securing funds through a lender and a due process (home inspection, property appraisal, financial disclosures, etc.) must take place.  Real estate can be, on an estimated average, a process that takes about 60 to 90 days to complete before you see any cash.  Some real estate deals can take a year or more.  With securities, every sales transaction that I have initiated - assuming I sold my stocks at fair market price - has taken less than 1 minute to offload and about 5 days for the transaction to settle and the money to appear in my account.

Real estate is also subjected to regulation and litigation.  Stocks have regulations and litigations (see my publication on the “wash rule” and on “cash liquidation violations”), but they aren’t as pervasive as in real estate.  With real estate, each state has a due process to evict tenants.  You can’t just decide to terminate a renter’s agreement, even if they are at fault, and put them out in the same day.  Tenants especially know that laws favor them when it comes to evictions in cold weather months, so you will definitely have a time doing so during these periods.  You also have rental laws such as lead paint laws if your structure was built before a certain date.  And, you could be liable as a landlord should someone get hurt on your property.  Stocks have far fewer regulations that you are likely to encounter.  You will usually, but not in all cases, receive one or more securities violations notifications - trust me, I’ve gotten 1 before (see “wash rule” and “cash liquidation” publications) - before any action is taken against you.  You can’t say that you haven’t been warned.  So, in the words of George W. Bush, “Fool me once, shame on you.  Fool me twice… can’t get fooled, again.”  Classic!

My final drawback to real estate as an investment vehicle is that I am, and this is just my personal opinion, unsure about the future of real estate.  As I follow securities and real estate news, I hear that the younger generations aren’t buying homes like the Baby Boomer and Generation X generations.  Technology has disrupted the housing market and the middle class is continually shrinking.  The fresh memories of the housing collapse of 2008 appears to have made people cautious about investing in real estate.  And, the bigger developers are building modernized multi-family dwellings and mixed-use developments (MUD) that can make older multi-family dwellings look obsolete.  Housing disruptors such as AirBnB model are also making the future of real estate look very nebulous.  As a result, small-time real estate investors could be stuck with a property you can’t offload.

Conclusion

I love real estate; it is a passion of mine.  In my spare time, I find working with my hands to build something, or turn an outdated property into a modern wonder, very therapeutic.  I love looking at real estate and seeing the possibilities for its future state being.  However, as an investment vehicle, I have soured on it.  As a small-time real estate developer, the expenses have outweighed the benefits for me.  At this juncture in my life, I prefer to maximize my time, which is the most valuable thing that could ever own.  Securities allow me to be less hands-on, and I don’t worry as much about stocks as I do my real estate holdings.  I take losses in my stocks, but I don’t have to worry about an HVAC unit failing, or heavy winds ripping up the shingles on a roof at one of my rentals.  I don’t have to worry about water infiltration or a tenant telling me a window just miraculously broke and they didn’t do it so I have to fix it.  When a stock stops performing for me, or my losses start piling up for a particular stock, I sell it before the losses become too great and I pick up another stock that I’ve been analyzing and hope for the best.  With fewer headaches from stocks, I can focus on other ventures, such as my consulting business (BAQA Strategies), my website (ajsmith365.com), and develop training content that I have on my online platforms at Skillshare and Udemy.  But, again, this is my own personal experience.  Everyone’s circumstances will be different.  I encourage you to do your homework, understand what your passions are and what your personality type is like, and then decide which investment vehicle is right for you.




 
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