Managing your money so that it grows and eventually makes you financially free is a goal that most, if not all, investors share. There are many, many ways to achieve this goal; the stock market and real estate being two of the most used methods of investing. Looking at history, both have been proven to be effective ways of generating wealth, however it is clear that real estate investing has much more of a potential to benefit you in the long run. There are five main reasons for this:
High Cash Yield
Both methods of investment have the potential to have high cash yields. However, when it comes to the stock market, the cash yield of a specific stock is really just a risk metric. Further, looking at realized yield, this only applies to stocks that pay out a dividend, which stay at around 2% per quarter with the S&P 500.
On the flip side, the cash yield on a real estate investment is something that is, for the most part, a concrete number that has much less room for variance. Though things can happen like an unexpected major expense, the rental income and the initial investment are two numbers that are known to be true. And as long as you’ve done your due diligence in terms of finding a deal where the numbers have been thoroughly checked and validated, the cash yield is more or less guaranteed.
Equity Build Up
When comparing equity build up for both the stock market and real estate investing, it is a no-brainer when deciding which asset is more effective. Once you buy a property, your equity has the potential to start growing immediately. As the property grows in value, all of that value becomes your equity. However in the stock market, the only way to gain more equity is to buy more shares. Whether those shares are bought using realized dividend yields or external cash, more shares still have to be bought; there is no potential passive equity growth in the stock market.
Leverage is one of the biggest advantages real estate investment has over investing in the stock market. When someone wants to invest in the stock market, like mentioned previously, they must purchase shares of a stock, in whole before any money can be made without much of an ability to borrow money. However, when it comes to real estate, you have the ability to put down a small percentage of the property cost and immediately start generating cash while paying the rest over a certain amount of years (typically 25-30 years). This also allows you to refinance, take some of the equity build up, and repeat the whole process with another property.
Real estate investing gives people access to the greatest hard asset in the world: land. Once you own a piece of land, it is yours and there are many different ways you can make a piece of land work for you. While, at RIA we focus on multifamily rental, there is potential for offices, retail space, single family homes, or even agriculture when you own land. On top of this, your land and even the buildings on it can appreciate in value over time. When you own shares of stock, all you really own is a very small piece of a publicly traded company that is purely a highly liquid store of value.
So overall, real estate investment can also be viewed as a store of value because of the value of the land and buildings, but there is an added bonus of having much more cash flow through the use of the land and the buildings on it.
Though there are tax-advantaged accounts, like the 401k, Roth 401k, IRA, and Roth IRA, that you can invest into the stock market from, these accounts are very limiting in terms of liquidating any gains. With real estate, you have the ability to deduct many expenses like mortgage interest, operating expenses, property taxes, and depreciation, as well as having the option to utilize the 1031 Exchange when the investor decides to sell. On top of this there are also opportunities to invest in real estate through some of the same tax-advantaged accounts, specifically the IRA accounts.