Don’t “Get Rich Quick”, Get Rich For Sure
In this article, you will find the direct comparison between real estate investing vs stock market investing and discover which is the more powerful investment to deliver larger returns over a longer period.
Andrew Carnegie famously said that “over the last two centuries, about 90 percent of the world’s millionaires have been created by investing in real estate.”
Learning how to multiply money and escape the rat race is the way to creating true wealth. It’s not a get rich quick scheme, but it’s how to get rich for sure. Learning to invest your income is the best way to multiply your money.
Everyone knows how to trade time for money, but most never learn how to get paid while they’re sleeping. Out of the several investment options, there are two prevailing ones, stock market, and real estate investing.
The Volatility of Stock Ownership
Owning a stock means that you have a small ownership portion of a large company. Stock market investing has a lower barrier to entry, meaning virtually anyone can purchase a stock.
Here’s a tip, if everyone can do it, don’t expect anything other than average results….
First, you need to decide what type of stock you want to invest in: blue-chip stocks, tech companies, energy companies, medical companies, penny stocks, etc.
Next, you must be a master at timing the market. Buy low, sell high is the motto. Make sure to buy and sell at the right timing or you could lose a large investment quickly. Be sure to buy a crystal ball.
Most stocks only show a true return on investment, or “profit”, when you sell the stock.
There are a few that pay quarterly dividends, however, these are usually more conservative, and therefore typically never pay high returns.
Assuming you picked the perfect stock because you saw the future, and you also know how to time the market (since you have a crystal ball), next is having to ride the wave.
Watching the surge and fall over weeks, months, or years. A financial roller coaster, where the heart-wrenching falls are with your precious money.
Optimistically, it will rise at some point, but you must watch the drama unfold with your money as the wager and it’s a financial bet you’re risking in case it collapses.
Remember, stocks are based upon companies, and these companies can close with a couple of bad decisions within a corporate office, the change of a CEO, new laws passed by the government which restricts that industry, or a various slew of other reasons, most of which you cannot control or predict.
Real Estate Ownership Proven for Countless Years
Real estate investing (specifically large scale residential) has been a solid and consistent investment for decades, dare I say even centuries.
If you think back hundreds of years ago, and hundreds of years into the future, we always have and always will require shelter.
As humans, we seek a place to sleep, as far back as the cavemen and as far in the future as you can imagine. Owning this portion of our daily lives can prove to be very lucrative.
Living expenses typically range between 30-40% of an average person’s income, and it’s the one expense they will pay before everything else, and also the last expense they will give up.
People will fight to keep this and cut out 90% of other bills and expenses before they lose their residence. This is a powerful idea, and if you own this real estate then you have discovered the golden egg.
Apartment Investing is our Favorite Type
Now expand this idea to make it all worthwhile. If you agree having one residence is attractive, imagine how compelling 300 residences in the same building would be?
Picture a 300-unit apartment building, and every person must pay $1,000 (or average rent) on the first of every month by a legally binding contract, known as a lease.
Someone is collecting this, why shouldn’t it be you? This may not be realistic to own the entire complex by yourself on the first investment, and that’s where apartment syndication saves the day!
The great thing when you partner with others who have a long, successful track record is that you benefit from the lessons they’ve learned from previous mistakes.
You can lean on them for wisdom and advice. Especially if they are co-investing with you. A knowledgeable apartment syndicator who is putting in his own money into the deal gives you security that he trusts this opportunity with his own cash.
What can be more comforting than that?
Real Estate Investing Versus Stocks
Now let’s consider the comparison between real estate investing vs stock market investing.
Wouldn’t it be nice if your stockbroker was investing equally in every single stock you purchase?
That would be quite comforting, but he doesn’t and that should be a red flag.
When the person advising you and controlling your money isn’t investing alongside you, then you should question their confidence level in that deal.
We believe an investor should never put money into a deal if we aren’t willing to put in our money first.
This ideology gives credibility and confidence to investors, knowing that actions are more powerful than words.
One of my favorite and most powerful differences between real estate investing vs stocks is what’s called a preferred return.
Preferred Return Makes Apartment Investing a Safer Investment
The remaining profits are split in favor of the investor.
This means that the first 8% of annual returns are given first to the investors, and then the excess profits are split with 75% going to the investor and only 25% going to the company.
The stock market would never even come close to doing something like that. This is basically a bulletproof safety net, regarding peace of mind.
The other incredible concept about a preferred return is that it’s an accrued percentage.
This means if one year the asset doesn’t produce enough to cover the 8% (for example it produces only 6%), then the 2% the investor should have been paid is accrued and carried over to the next year.
So, on the following year, before the company gets paid a penny, the investor must first receive the 2% from the previous year, plus the current year’s 8%, plus the 75% split for every dollar above the 8% preferred return.
I know this can be confusing, so we’ll save the juicy details for one of our upcoming articles to dive more into what is a preferred return and why it’s so powerful.
Real Estate Investing is Better Than the Stock Market
Real estate investing is better than stock market investing for a variety of reasons: natural appreciation, forced appreciation, tax benefits, monthly/quarterly distributions, depreciation, cost segregation, 1031 exchange, leverage, consistent cash flow, low-interest loans… which are my favorite 10 reasons, but there are many more.
- Natural appreciation describes the fact that properties go up in value over time. This creates natural economic equity, which turns into profit when you sell.
- Forced appreciation occurs when you increase the value of a property, think new kitchens, appliances, granite countertops, bathrooms, etc. This will force rents to go up, which increases the annual income, and therefore makes the property value soar in a short period of time. When you sell the property, you have now forced additional profits!
- Tax benefits are an incredible perk to real estate investing. You can deduct the entire mortgage interest payment from the income. You can also write off (deduct from your taxes) capital gains, cost of repairs, cost of maintenance, legal fees, utilities, travel costs associated with the property, and you can even deduct the gas used to travel to and from the property.
- Monthly/quarterly distributions means that you get paid several times per year, in addition to the big payday when you sell the property.
- Depreciation is a powerful tool the IRS gives property owners and investors. This offsets the income over a long period of time, without affecting the cashflow of the property.
- Cost segregation is an accelerated version of depreciation used to increase cashflow and reduce federal and state income taxes.
- Cashflow is one of my favorites and honestly the holy grail of real estate. Everyone says “cash is king”, but they are missing a key ingredient: time. The amount of cash over a certain period of time aka cashflow is the real magic. For example, $100,000 dollars sounds amazing until you hear that it’s over a period of 50 years, however the same $100,000 sounds a lot sweeter when it’s received over a period one month. Remember cash isn’t king, cashflow is king! And real estate is one of the best investments to receive a consistent cashflow.
- 1031 exchange is an advanced technique used by real estate investors to sell a property and not pay any capital gains taxes (or “defer”) as long as 100% of the proceeds goes into the purchase of a similar type of real estate within a given time frame. Imagine getting taxed on a $10,000,000 (25-40% purchase) versus having the option to keep an extra $3,000,000 in the pocket. I’m not sure about you, but I know which option I’m taking every time I have the chance.
- Leverage is another very powerful tool in real estate investing meaning you get much more than you pay for upfront. Think about it like this, if you have $100,000 to invest and you buy gold, you’ll get $100,000 of gold. That’s the same with nearly any product or service. However, when you buy real estate that’s leverage anywhere from 3-5x. Meaning you could purchase $500,000 worth of real estate with only $100,000. This leverage when combined with the power of a 1031 exchange, can be a very powerful duo.
- Low-interest loans are the saving grace to utilizing financing for cash-producing assets. If the asset returns at a higher percentage than the interest rate, you are essentially making money on someone else’s money. They risked the money, and you made the profit. How sweet is that?
Which Investment is Safer or More Secure?
These are all extremely powerful tools and tactics used in real estate investing which makes it a better vehicle to create lasting wealth.
These are almost exclusively found in real estate investing and not in the stock market. Lastly, we will consider the downside to each.
When the stock market crashes, you are going to lose money, how much just depends on how quickly you get out. With real estate investing, especially multi-family, when the economy crashes where does everyone move?
They typically move out of their homes and into apartments. Meaning occupancy goes up and we make more money.
Another fear we hear is about fire or flooding. Which is tragic and we never look forward to it, but it’s a part of nature. Luckily, insurance will cover these unfortunate circumstances.
This creates a beautiful safety net to protect your investment that doesn’t exist during a stock market crash.
The Real Vehicle to Create Wealth is Real Estate
The next idea to consider is the amount of time that goes into each. Stock market investing takes a considerable amount of time to learn the market, continually buy/sell stocks, and repeat this process until you decide enough is enough, and at that point the profits come to a screeching halt.
Whereas, real estate investing is a way to generate passive income. It will continue to pay whether you’re on vacation, in a medical emergency, or even over the next generations.
Apartment investing is the vehicle to create generational wealth that will pay for years to come even after you’ve lived a long and fulfilling life.
Most companies (and their stocks) which are here today will not exist in 5-8 decades, but every plot of land will be here forever and if you’re lucky enough to own a building on top of it that produces cash regularly, you and your heirs will be raking it in for years to come!
Like Mark Twain said, “Buy land, they’re not making anymore.”
We hope this article provided you clarity on real estate investing vs stocks! If you are interested in investing in multifamily real estate syndications, please visit Disrupt Equity’s investment page here. On this page you can go through our investors Frequently Asked Questions as well as submit a form to be notified of our upcoming investment opportunities!