I get this question asked to me a lot. “Why would I invest in Real Estate, why wouldn’t I just leave my money in the Stock Market.”
I see a lot of these financial papers or financial write ups that show financial comparison of a stock performance or of a stock index performance as it relates to Real Estate or Real Estate indexes as well. One of the things they show is just an increase line. So for example a graph, they will show the price of the stock or that index from 20 years ago and then they show increase of that stock and maybe a leveling or an increase or whatever. Then they will show at the end here is where we started, here is where we are now and has risen
Then they will take the same Real Estate analysis and they will show the same thing. Maybe they will show Real Estate didn’t improve at the same rate of appreciation or the same increase as compared to the stock. When they are doing that all they are really showing or comparing si the price of the stock vs the price of the Real Estate or the price of the property. So if you bought the property for $300,000.00 and they are showing over 20 years that property is now worth $600,000.00 compared to the Stock where there’s a bunch of stocks that you bought worth $300.00 and now they are worth $700.00.
The other variable is the amount of income you are earning on a regular basis. Stocks, they may have some small dividend but not a great dividend and if they do get a dividend its paid out at the end of the year. With Real Estate now you have a cash flow monthly that you have from your rents, from your leases. It better be a profit, it better show contribution to your overall return.
So for example, if you have monthly expenses of lets say $1000.00 and that covers your principal interest, taxes, insurance and you got a bit of money in there for interest. So lets say your total cost is about $1200.00. But you are renting this out for $1500.00, you have a cash flow there of $400.00-$500.00. A cash flow in the form of income. Those numbers aren’t built into the comparison when they are trying to show the difference between Stocks and Real Estate.
The other component that is not shown in there is Principal Pay Down. As you own this property the longer you own it the more principal that gets paid down with every mortgage payment that you make. Of course assuming you have a blended payment and not just an interest only payment. So as your principal gets paid down, that again contributes to the net value of your real estate.
The fourth component I guess is really how much your individual investment is growing. So although you purchased a property lets say worth $300,000.00 well all you may have put into that is $60,000.00 so the growth of your $300,000.00 or the amount in which the price has appreciated is there, but now the amount of return you are getting on that $60,000.00 that you invested is exponential almost. Because you have a $60,000.00 investment there that’s returning a certain amount from income and a certain amount return on the appreciation and a certain amount return from the principal pay down.
There is all different ways in which you can compare this but bottom line is Real Estate by far outperforms most stocks from a financial perspective.
The other consideration, is how you can control or what kind of control you have in stocks vs Real Estate. So you know for example that if you Invested in a blue chips stock like lets say IBM and lets say something happens and IBM is not performing and all of a sudden your stocks that you bought at $25.00 is now down to $15.00. There is not much you can do to go influence the price of that stock. All you can do is maybe sell, take a loss and move on. So you do not have any way in which you can change and improve the performance of that stock.
In Real Estate there is all kinds of things you can do. So if all of a sudden you decide you want to sell or if there are no renters coming to it. You can put a little bit of maintenance on it, you can change the way you market it, you can fix it up, you can add another room to generate more income. Some people put in multi-plexes additional washer and dryer that are coin operated, they start charging for parking. They will make changes in the unit themselves. For example, they will put a new Kitchen and instead of charging $600.00 now they can charge $800.00. So you as an owner of that property, yes you are more hands on but at the same time you have more control over that investment.