As a 15-year student of personal finance and investing, I have read and researched extensively on the stock market and real estate investing. At the beginning of my financial journey, I was more in favor of the stock market until I read A Random Walk Down Wall Street. It was after reading that I realized someone invested in an S&P 500 index fund beats most professional traders in the long run. So, I had a choice—spend all my time researching stocks to be one of the few that beat the market or invest in an index fund. While I do like investing, I do not want to spend every waking hour researching so I chose to put my money in index funds. With my curiosity still set on investing I started to focus on real estate, an inefficient market. After reading dozens of books on real estate and buying my first single-family home, I was hooked.
Stocks
One of the biggest advantages of the stock market is liquidity. You can easily sell your investment through a brokerage account and get your money. This is one of the reasons you see such wild swings in the stock market. New Variant? Stocks tank. Rate hike? Tank. They can also go up a lot on good news. It is exciting to do well and then there is FOMO (fear of missing out) if you did not buy Tesla before it went to the moon.
The average return of the stock market is said to be about 10% annually. Using the Rule of 72 means you would double your money every 7 years. Investing early and letting your money compound overtime is powerful. This concept is the cornerstone to most personal finance books.
The stock market has its pros and cons, but I find the boring route the most effective—invest in index funds for 30+ years and leave it alone. Wake up one day to be a millionaire! Although with the current rate of inflation millionaire is the new middle class.
Real Estate
The masses have seemed to be caught on to real estate investing and a lot of people are getting the bug. I wanted to buy my first house in 2009 when they were handing out tax credits of $8,500 for buying. I was deployed on the aircraft carrier USS Ronald Reagan for most of 2008 and 2009 so I did not really feel the effects of the downturn. I was also in my early 20’s and poor, lol. I eventually ended up buying my first house in 2014 and remodeled it. It has been a great asset that has gone up quite a bit over the years.
One of the reasons I like real estate is because of leverage. Using leverage increases your return on investment. Using a VA loan or and FHA loan lets you get into the game with little to no money down. If you buy a property with no money down and it goes up $100,000 then you have an infinite return. If you had to put $10,000 down and that property goes up by $100,000 then you made a 1000% return or a 10x. I think when people compare the stock market to real estate, they only look at the stock gain and the real estate gain without taking leverage into consideration. The housing market may only appreciate an average of a few percent per year but if you are using leverage that number is misleading based on the previous example. You cannot really compare apples to oranges.
There are other benefits to real estate too like depreciation. You can reduce your tax liability by saying your property has depreciated in value when in fact it went up in value. Cash flow is another advantage—investors like to buy real estate for cash flow. Having someone else pay down your property debt is yet another advantage of real estate. There a lot of factors working in your favor once you understand how it works.
The real estate market is also a lot slower to move. The bad news is not going to disrupt your property value overnight. You can plan and be more strategic. The illiquid nature of real estate could be considered one of the cons along with upkeep and property management.
Lastly, commercial real estate allows you to scale up. Instead of owning 1 single-family property you could own an apartment complex with 100 units or more which is like owning 100 single-family homes in one location.
Conclusion
While you can certainly use leverage in the stock market to increase your returns, it is a lot riskier than using leverage in real estate due to volatility. I am sure there are arguments for why stocks over real estate, but I find real estate more attractive. Especially in the inflationary environment we find ourselves in today. Hard assets like real estate are hedges against inflation. Rents go up and debt gets inflated away.
