In yesterday’s Part 1 of this two-part post, we talked about the incredible amount of ‘noise’ hitting us constantly in today’s tech-forward information-overload world. More so than ever, we need to tease out the logic from the mere (unsolicited) advice. This is a time for reason, and sometimes being reasonable means breaking away from the masses.
The Showdown: Investing in Real Estate vs. Stocks
Before we get into the nitty gritty of this comparison, we need to be clear on what’s in each corner. When referring to investing in real estate, I’m talking about 1) Private Lending, or 2) Buying for Capital Appreciation. Of course, there are other forms of real estate investments, but for sake of conversation, that’s what I’m talking about.
The battle begins…
1. Seeing With Your Own Two Eyes
Perhaps the greatest reason for preferring real estate over stocks is the fact that you can walk up to the property you’re investing in. You can inspect the bones of a house. Get a home inspection and/or appraisal. It’s a tangible asset. When was the last time you visited company headquarters of Sony or Dell before buying shares? Exactly.
2. Collateral
Following up on #1, there’s something reassuring about knowing that your funds are parked in the very property you’re standing in front of. If you’re a private lender, you have the equity of the property protecting your capital as a recorded lien. Any collateral in your mutual funds if the company goes under? Right. This is the difference between investing and speculating.
3. Insurance
Home insurance — check. Mutual fund insurance — what? If your investment property burns down, your policy will protect you. If your widget company’s headquarters goes up in flames, yes, they likely have a policy to cover it. But production might drop, fears will arise, etc. Expect ‘adjustments’ in your share price. Protection comes in many forms.
4. Maintaining Control
When you invest in real estate, you’re the one calling the shots, making the big decisions. If you’re a private lender, then your flipper will be making those decisions for you but you’ll have his game plan in hand before deciding to invest. There’s a lot of power in that. You may choose to buy shares of Oracle, but that doesn’t mean Larry Ellison needs your input in deciding how to run the company. You’re in for the ride, good and bad.
5. Your Very Own Crystal Ball
What does the market hold today? Who knows!
When you invest in stocks, you’re speculating (or gambling — let’s be honest here) that prices will appreciate beyond your purchase price. You can be as informed as you want, but you don’t know what tomorrow brings (besides, when was the last time you really read the prospectus). In today’s world of a rollercoaster stock market, unpredictability rules the day. Whether a corrupt board or a war breaking out of Syria, ripples through the American market can come anytime and from any direction.
But investing as a private lender means getting paid off a fixed rate promissory note — no speculation. If the stock market does a somersault, you’re still getting 10% on your funds. That’s taking control! If you’re using a property for cash flow, you control the rents.
6. EQUITY
Last but not least, there’s the matter of equity. When you buy real estate or invest as a private lender, you (ideally) have equity in every purchase. There’s no need to invest at market value when there are so many opportunities to get equity from day one. How much equity is determined by the backstory of the property in question, but buying at market value is for speculators, not investors.
It’s also for stock investors — if Disney is selling for $50/share, then that’s what you’re buying it for as well. That price is determined by basic economics 101, the laws of supply and demand which means you ultimately have no equity stake when you buy. You’re relying completely on future returns, which we already stated are unknown (if this sounds like gambling, then I would agree with you). Any downtick at all means you’re immediately in the hole. Not so if you buy real estate wisely – the equity in the property is a nice financial security blanket. Get equity in everything.
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I could, of course, go on but I think you get the point. The power that investing in real estate has over the stock market largely comes from CHOICE. It comes from the ability to make your own wise decisions instead of having your financial future determined by the complex interaction of market forces beyond your control.
If you’re looking to invest your hard-earned funds profitably and safely in real estate right here in Hawaii that you can visit yourself, then visit HawaiiInvesting.com to get started. We’ll walk you through the process and get all your questions answered.
The author has a fundamental misunderstanding of ‘the stock market’ when he compares it to private RE lending. The proper comparisons would be:
* stocks vs direct (100% cash financed) RE purchase for capital appreciation and/or rental yields
* corporate bonds vs. private RE lending
Of course corporate bonds are 100% collateralized, returns are known & agreed upon and there are tangible assets behind the bond. Corporate bonds can also be borrowed against with next to no transaction costs so they’re very liquid compared to private RE loans.
Hello and thanks for contributing. I appreciate your viewpoint, however I don’t believe there is a “fundamental misunderstanding”. One can compare any two types of investment vehicles as long as the criteria for the comparison are known and out in the open, which they are.
Most people today are primarily only aware of the stocks, bonds and mutual funds as their investment choices, either inside or outside retirement funds. That’s no coincidence as it’s in these vehicles where the commissions are made on the 401(k) investments around the country.
But by educating people on the other choices available to them, such as private lending for real estate, they can compare them to the “de facto” mutual funds they’re more familiar with, and hopefully see the advantages.