Real Estate Vs. Stocks
I believe that, if implemented, the material in this real estate vs stocks blog will be some of the most valuable & profitable information for your LONG TERM wealth accumulation strategy.
BUT, I’d be remiss not to talk about real estate in comparison to other wealth-building strategies available today – particularly, stocks.
I used to put a lot of money into stocks, every week stockpiling my favorite brands and then balancing it out with a healthy amount of index funds.
If I didn’t have time to actively buy I would just stock up on a Vanguard index fund. Index funds (particularly the S&P 500 and Vanguard 500) are some of the safest (and most popular) stocks in the world — as they are traditionally more resilient to the whims of Wall Street because they are well balanced & diverse.
Stocks offer a “singular growth approach,” and I ultimately liquidated out all of my stocks and put everything into real estate using the dual approach strategy that I talk about in my book, “Why Real Estate & How to Get Started.”
Keep in mind, I am not telling you what I think you should do, I am simply telling you what I have done, and that it has worked out pretty well for me thus far.
The biggest problem I see with stocks vs real estate as a wealth building strategy is this: to do it right, and keep it safe, requires manual labor.
Can you make great returns from stocks? Yes.
Can you make great returns from stocks passively? No.
Not without paying someone to manage it for you, and the fees of doing it that way are greater than any fee you will pay for buying & renting real estate.
Real estate investing the way we teach (balancing across types of rentals, diversification in markets, capital allocation via non-variable + variable returns, etc) is the safest way I know of to protect your assets, create long term growth and income.
Also, let’s be clear: no asset class bunkers through a recession. Every asset class in the world loses value in the midst of an economic correction: except real estate.
If you buy right (which is completely in your control as opposed to stocks) you can not only survive a recession, your portfolio returns will IMPROVE during a recession.
In “The Great Recession” from 2007-2009, the people who were invested in income-producing assets and real estate backed assets were fine. “Taylor, wasn’t the great recession caused by the real estate crash?”
No. It was caused by poor lending guidelines, greedy banks, and a lack of simple common sense — people were buying 15 homes on an income of $80,000 and they couldn’t make the payments. If you get a credit card and go hog wild, is that the credit card’s fault?
One last point: many people have asked me recently how I can be so sure about my claims here. And I think it is a fair question but, perhaps, the wrong question.
Here are your options:
- Keep money in an account. Guaranteed loss of 2-3% per year in buying power.
- Bet on people needing a place to live. Very likely to be the case (unless culture suddenly pulls a fast one and we start preferring tents over houses).
- Bet on China or “XYZ” company not innovating anything to disrupt XYZ supply chain costs or labor costs or anything related to company performance in America
I’m not looking for 100% — I’m betting on the odds and looking for my best chances of success.
It’s real estate. I bet on the longest lasting asset class of all time, where the supply & demand curve is always in my favor (until we start selling real estate on Mars).
Anyways, moving on. In this article, I will outline the performances of a traditional index fund, such as the S&P 500, and compare them to an average real estate investor using our diversification strategies.
One major difference we need to discuss is leverage.
The maximum amount of leverage you have via stock investing is you can loan against a certain percentage of the portfolio value. But I will show you in just a minute how this doesn’t really compare to the kinds of leverage you get in real estate investing.
With income-producing properties, we have real leverage, multi-dimensional leverage:
- $500,000 cash will buy you the portfolio value equivalent of $2,500,000…
- Your tenants will pay the remaining debt for you…
- While they pay your debt, you can leverage against the equity in the portfolio (meaning, get your cash back)
- The equity is always growing via THREE vehicles (appreciation, debt pay down, and income), as opposed to just two in stocks (appreciation & dividends)
- You are getting appreciation benefits from total portfolio value including value that you didn’t pay for— for instance: $2,500,000 will appreciate at 3% into $2,575,000 — but you only paid $500k for it… if you only appreciate the $500k as is the case with stocks, you get $15k as opposed to $75k)
Also, let’s revisit our topic of inflation.
Do stocks effectively “invert” inflation to make it work for you?
When I ask people this question, most of the time their first answer is “YES!” Because they see a stock dividend of, let’s say 7%, which is higher than 3% (average inflation), and they think “yes it is reversing inflation.”
The answer is NO.
Notice the question was, “are stocks inverting inflation to make it work for you?” Investing in a good index fund will OFFSET inflation, but it does not INVERT inflation.
Here’s what I mean…
We know inflation is decreasing the buying power of $1 by 2-3% per year. The beauty of real estate vs stocks is that in one year, the price of that real estate might go from $100,000 to $103,000 — but your debt did not go up. Debt does not inflate.
It takes more dollars to buy the same property a year from now than today — but, it doesn’t cost you more in debt. Once you lock in the debt, the amount you must pay for the asset remains constant. Imagine the effects of this over 3, 5, 10 years!
This is what inverting inflation actually means. When you invest in stocks vs real estate, the returns are not “inverting” inflation, they are offsetting inflation + (hopefully) producing a bit of return.
And might I add, to be successful as an income-producing stock investor you have to work hard, trade often, and typically be pretty active.
When you invest in properties, you get cash flow, appreciation, debt pay down — and you effectively invert inflation because the house requires more and more dollars (due to buying power decrease) without you having to spend more and more in debt.
All of this happens behind the scenes because 90% of it is passive.
When I truly understood this, I took all my money out of stocks and I put it into real estate. Forget the fact that real estate has been around much longer than stocks. Forget the fact that real estate is in limited supply and therefore the demand will always increase…
Forget all of that.
I went from “offsetting inflation” via passive income, to offsetting inflation (CHECK), producing monthly income (CHECK), earning appreciation via equity (CHECK), and securing asset values way higher than what I paid for them, while someone else paid for them for me (CHECK!).
Many people will read this and think it sounds too good to be true, but my friends — this is the way the rich & wealthy have protected their wealth for generations.
You need to learn the game, learn the markets, and we can help teach you that with very little risk.
Let’s compare STOCKS with GOOD real estate investing the way I’ve taught you in this article.
We will use an example figure of $1,000,000.
If we go back 5 years to the S&P 500 – probably the only kind of stock you can get away with being a “passive” investor in due to its diversity, here are the numbers:
Total growth of capital: $581,448
Percentage growth rate: 158%
A growth rate of $116,289 per year.
If you left this money in a bank account it would be worth (average) $903k in buying power… so clearly putting money to work somewhere is wise.
Better in the S&P than in a bank account. But let’s compare and contrast.
The markets we are currently in have appreciated 6-8% for the last 5 years and have been producing a steady, 15-25% income during the same period. And we have tenants paying down our debt, thus increasing our cash equivalent (equity) every month.
But let’s slash it down to give you average and maybe even worst-case numbers. We’ll set appreciation to 3% and returns of assets to 17%.
Using my dual investment approach, we’ll place 30% into a non-variable fund and 70% into assets…
This is the benefit of finding & partnering with a company such as Wealth Cap — the work required to find properties, fix properties for less than they cost to own, rent them for good returns, etcetera — it’s a lot of work.
Here are the numbers:
- $300,000 goes into a non-variable fund (assume it is the Wealth Cap Fund) at a non variable return of 12%…
- Keep in mind, this is already higher than the average of the S&P 500 for the last 5 years — which turned 11.6% return with volatility…
This fund will generate $36,000 per year of income for 5 years and you’re left with a total income of $180k plus the original $300k safe & sound ready to be returned.
$300,000 turns into $480,000 over the course of 5 years.
Now let’s get into the assets.
Out of the $1M, $700k buys you assets using leverage. Using leverage, the “cash” to “portfolio value” ratio will be about 4x. That is approximately $2.8M in assets while owing $2.1M in debt that your tenants will pay off.
This means you’re using $700k to purchase ownership of roughly 18-20 units (homes), assuming the total value of each home is roughly $150,000 (which most of the homes we make available to investors are in that ballpark)
Our returns range from 15-20% so let’s meet in the middle and say 17% — this 17% is specifically referring to “cash” — so you are going to shoot for 17% returns on the cash in the portfolio, not 17% of the “portfolio value” which includes money that is borrowed.
(Example: If $30,000 buys you a $120,000 house, you will earn $4,500 per year which is 15% of $30k, not 15% of $120k)
Here is the math:
Total cash from portfolio + fund: $775,000
Total cash equivalent (equity): $1,240,000
Total growth of capital: $2,015,000
Percentage growth rate: 201%
$403k per year… versus stocks growth of $116k per year.
If you take cash & capital only, the rate of growth for this portfolio is going to be 177% — still higher & safer than the safest stock options by orders of magnitude.
Remember, real estate is multidimensional, meaning you are pulling in returns from MULTIPLE places, as opposed to linear or “one-dimensional” returns.
Hopefully I’ve made my point about real estate vs stocks.
Everyone has different opinions (and different skill levels). The beauty of real estate is that you do not have to be particularly gifted or ACTIVE to see exceptional growth & rate of returns.
Real estate is the oldest investment class in the book and frankly, supply & demand works only in favor of real estate.
If at any point in reading this article you’ve thought,
“Setting up a plan based on MY current situation would be nice,” I want to give you a chance to do that. You can talk with a member of our investment advisor team and we will take great care of you!
In your service,