You are given $100,000 to invest in either real estate or stocks. Pick one.
It’s a popular topic, isn’t it?
What do you invest in, real estate or stocks?
Why not both? Well, for the sake of this post, let’s say you had to pick only one.
I think the answer to this really depends on what point you are at in your life.
Here are a couple of factors to consider.
- Length of stay in a city
- Amount of work you are willing to do
- How much risk you can take
- Diversity of investments
Are you a mover?
Let’s face it. To get started in investing in real estate, you should be physically present in that location.
This can be a big factor if you are not settled down. Maybe you are still exploring the world and moving from city to city in search of your dreams. Maybe you are focusing on your career and are willing to relocate to your next best job offer. Maybe you are looking to go on a long backpacking trip around the world sooner or later.
Or maybe you are looking to settle down in a particular city for the next number of years.
This is important for real estate because real estate requires your physical presence.
You may want to check out the properties for sale. You might want to drive around the neighbourhood. You would want to visit properties in-person.
After you buy the property, maybe you will live in it for the tax rebate. This requires you to live in the location.
Or maybe you will put it out for rent right away. To put it for rent, you may need to furnish it with appliances. You might need to do repairs. Yes, you could hire a firm to do all of this for you, but at the cost of your margins.
Maybe you will remodel it. Will you hire a remodelling company? If you do, you might want to visit the property to check up on the progress. Badly-managed firms will do a terrible job, wasting away thousands of dollars from your wallet.
Will you remodel it yourself? In that case, you will need to be physically present.
You get the point. There’s a bunch of stuff in real estate that benefits from your physical presence. If not yours, a third party. But a third party can be costly, especially if you don’t know the right firm.
Some people that are not that rich af coughmecough, and others would want to maximize their margins and prefer to do the work themselves.
Stocks on the other hand, require an internet connection. That’s it. As long as you have a computer device like your phone and an internet connection, you are good to go.
The point: some important aspects of real estate requires your physical presense, whereas stocks do not
Amount of work for real estate
Let’s briefly walk through the steps of getting a real estate investment.
- Find a property.
- Get a mortgage approval from a bank.
- Make an offer.
- Get the property inspected by a professional.
- Once offer is accepted, sign and get everything sorted out through the notary.
- Get your keys!
- Get (good) property insurance.
- Do repairs when stuff breaks apart.
- Make sure to pay city taxes.
- Make sure to pay condo fees if the property is a condo unit.
- Figure out whether you want the property furnished with appliances or not (initial cost will pay off in the long run)
- Find an agent to put your listing for rent, or do it yourself.
- Find a reasonable rent price based on supply & demand, as well as your mortgage payments
- Filter through applicants.
- Sign a lease agreement.
- Handle repairs whenever the tenant reports something as broken. Do it yourself or hire someone.
- Contact your agent to put your property for sale.
- Prepare your property for in-person visits by potential buyers.
- Go through the offers that come through and negotiate them.
- When an agreement is reached, finalize the transfer via a notary.
Amount of work for stocks
Now, let’s walk through the steps of buying stock.
- Find a stock you would like to buy
- Buy some of the stock(s) through a broker or by yourself online.
- Sell stock through a broker or by yourself online.
See the difference?
I mean, the work required for real estate is not hard per say. There are many resources to help you along the way, but there’s just way more steps.
It’s true that sock traders will need to read A LOT in order to keep up with the financial data that goes around everyday. You could argue that the daily work required in order to succeed in stocks could exceed the work required by real estate. I think this depends on the trader - not everyone does high frequency or day trading that require them to sift through a ton of information. Long-term investors could spend considerably less time than that of short-term investors. Just like they do in real estate.
There could be a stock investor that spends more time on their investments than a real estate investor, and vice-versa. Itis really up to the investor to choose how much time they will to spend on their investments.
If you boil down to the work that is required, real estate has a lot more stepping stones than stocks.
The point: real estate requires more work than stocks
What’s riskier? Real estate or stocks?
The answer is that it depends.
Putting 100% of my investment money in some cannabis company I never heard of before is pretty risky.
Putting 100% of my money in some condo in the middle of nowhere is pretty risky.
It really depends on how it’s done.
The question shouldn’t be about the risk. It should be about the leverage.
Whens times are good, I see people getting a higher return on investments (ROI) in real estate than stocks.
When times are tough, people in real estate suffer bigger losses too.
I think that real estate can give you bigger wins and bigger losses, due to leverage (borrowing money).
You see, in real estate you can put down 20% cash for a $500,000 condo, and have full ownership rights to the condo. You are considered for 100% of the $500,000 when it comes to appreciation and rental income.
This is huge.
There isn’t a stock out there that gives you the return of a $500,000 investment for $100,000 of your own money.
There are Margin Accounts, but they only lend you up to 50% of the total purchase price. So if you put in $2,500 towards a stock, you can borrow up to only another $2,500.
In real estate, you can choose to borrow up to 20x your spending amount! (5% down payment)
Here is an example of how leverage in real estate gives you a profit.
Option A: Put down $100,000 in stocks. Sell it and get a 10% return. That’s $10,000!
Option B: Put down $100,000 for a 20% down payment on a $500,000 property. Let’s assume that monthly mortgage payments, maintenance, fees and taxes are covered by the rental income. You sell it for a 10% return at $550,000, giving you a net profit of $50,000 + equity* (the mortgage principle that has been paid back).
Due to leverage, Option B was able to net a profit 5x that of Option A.
This doesn’t even take into account the amortization. Through the years, you will be paying off the principle, giving you more equity on your property, which will give you a bigger margin when you sell.
Of course, the opposite could happen and you could be at a greater loss.
If your $500,000 condo depreciates to $400,000 and you sell it then, you will have a loss of $100,000. After paying back the mortgage, you might not have much money left.
The point: Real estate can give you a bigger leverage, which can give you higher returns but also higher losses.
Real estate has historically served as an effective protection against inflation.
Let’s say you buy a $500,000 condo by putting down $100,000 and borrowing the other $400,000.
If inflation goes up to 3%, then the condo would go up to $515,000 in value. Note that the “value” of your condo hasn’t changed, but the price to buy it has. Since you only invested $100,000, you are getting a return of $15,000 on a $100,000 investment. This is not factoring in the other costs of owning the property, of course. That’s a 15% ROI. Take away the 3% inflation and you have a 12% ROI. All from the inflation! This is a massive advantage real estate has over stocks.
For stocks, if you get a 10% return on your stocks but there happens to be a 3% inflation, then you are going to have to take 3% off of the 10%, leaving you with a 7% ROI.
The point: Real estate protects your money from inflation. Stocks don’t.
In real estate, if you want to pay 20% down payment on a $500,000 condo, then you are going to have to hand over $100,000.
In real estate, your down payment goes towards one property. That’s it. You can’t take 10% of your down payment and put it towards a riskier investment. That just doesn’t make sense.
In stocks, you can buy stocks as you see fit. If you want to invest $100,000, you could put half of it in “secure” investments like globally balanced ETFS like Vanguard index funds, and put the other half in some riskier investments of your choice. Or you could put 10% in each sector (financial, technology, health services, etc). It’s up to you, really.
The point: stocks give you more options on how to invest your money