Stocks vs. Real Estate? A Case for Real Estate

Here at The Southern Stache, you can expect that half the time we will talk about reaching Financial Independence.  The other half, we’ll discuss more random ideas, philosophies, and ways to make us better, happier folks.  My Soylent Experiment fell into this latter category.  So, to restore the site’s balance, here is a contribution from another Southern Stache (my brother, David) Enjoy.

  

There are many ways to skin the Financial Independence cat.

There is merit and simplicity  to contributing money into an index fund consistently over time and taking calculated withdrawals to meet retirement needs.  There is value in the perceived security of working in a corporate/state/federal job with the intention of earning a pension for the rest of your life.    Those who chose the entrepreneurial route understand that financial freedom can be acquired with smarts and dedication.  Constantly being reinforced, over my 20 years of adulthood is that every person is unique and their financial situation is equally so.

One size does not fit all.

If a person makes sense of how their individuality affects their financial situation, his attempt to implement a thoughtful financial plan can be more successful.
I invest in stocks in Roth accounts annually. I contribute to my Thrift Savings Plan regularly. I have a handful of properties that provide income in addition to my regular job income. After in-depth experiences with each of these, I can emphatically say that, for me, rental properties have provided the greatest return, both financially and personally. There are exhaustive lists online that pit the benefits of stocks against rental properties. There are valid reasons supporting each side of the debate. Below are my own personal reasons that I prefer building cash flow using rental properties rather than passively investing in the stock market.

Control  – My own mother insists I am a control freak.  I admit I prefer to put myself in situations where my actions, or inaction, can impact an outcome to end up in my favor.  With stocks, the only control I have is what and when I buy or sell.  And despite my above average amount of study on the subject, I have not fared particularly well.  Things I can control with real estate, at least to some extent are:

– Rent rates
– Who I accept as a tenant
– Condition of the property
– What I pay for a property
– Lease terms (as long as it is legal)

For example, with my most recent purchase, the contract had the seller leave what some considered valuable furniture pieces in the property.  On the morning of the closing, these items were taken from the house.  Since there was a violation of the contract, I was now in a position for additional negotiation.  The seller accepted $3K less than the original contract selling price when he was faced with the other options of returning all of the removed items or postponing the closing while  completely removing the remaining junk and debris from the entire property (multiple dwellings and sheds).  With stocks, there are no practical opportunities to influence the purchase price.

Tangibility – I like knowing I have something of material worth. Unlike stocks which are managed with mouse clicks, I can drive by my properties.  I can have conversations with tenants.  And, with a little elbow grease, I can increase the equity of each property. Having something tangible represents something more real to me than letters and numbers on a computer screen.  This is more comforting to me than maintaining faith in a market that is controlled by invisible factors.

Stability – Dollar cost averaging into a broad market index fund over many years should provide a solid, continuous cash flow using the 4% withdrawal rate.  Rentals provide less downside risk than even this very conservative and widely successful stock investment strategy.  Assuming a property is purchased at or below current market value and provides immediate positive cash flow, I don’t care as much about the particular percentage point returns as I do about consistently seeing steady payments deposited into my bank account every month.  I will likely never see a decrease in principal.  And to protect against loss of principal, home insurance will rebuild my rental better than it was before should it be destroyed by natural disaster, fire, etc.  No insurance agent has yet to offer me a policy that would allow me to recoup my stock losses.  Of course there are a lot of “what-ifs” but if the numbers support a purchase as a stable rental, then the income should be stable long-term as well.

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Better Return –  Luck plays a role in the stock market (when selecting individual stocks), but not so much in selecting a rental property.  If you have the cash or ability to get quick, reasonably-termed financing, you can take advantage of a good rental property investment opportunity.  Unless you have massive cash (Warren Buffett or Carl Icahn), your dollars have no effect on the purchase price of a stock.  I currently have a paid-off house that I paid $31,450 for, which brings in $645/month.  After taxes, insurance, and repairs, the earned annual return is just over 20%.  I’ll take that stable return with the occasional late payment and an imposed $25 late fee over the burden of watching the stock market gyrations any day.  I do, however, understand that real estate markets differ and this may not be realistic for many areas but it is (in 2016) common to find these opportunities almost anywhere in the middle Georgia area.

My relationship with stocks include me losing about $40K attempting to take advantage of leveraged funds trading in my Roth account and earning conservative returns (below 3%) in my TSP because I attempt to time the market.  Yes, I know that simple dollar cost averaging is a better overall way to invest in stocks, and I knew it at the time, but I just can’t seem to stop tinkering with it so I have committed instead to funneling my money into rental properties.

Less Stress –  In reality, when I purchase a single stock or have a large portion of my Thrift Savings Plan invested in index funds, I continuously check my phone and television throughout the day.  Logically, this is wasted time.  With rental properties, I check my account at the beginning of the month to make sure my tenants paid and then I update a spreadsheet based on my bank statement and expenses.  This takes a total of about ten minutes and unless I get a call from my property manager saying there is an issue with a property, I can focus on other productive things in my day.  In retirement, I don’t want to feel that I have to be glued to the TV to ensure my livelihood isn’t threatened.
We can explore many other aspects of rental properties including tax advantages, leverage, using OPM (other people’s money), the personal satisfaction of providing decent housing to decent people, etc.  But when it comes down to it, I just enjoy real estate more than stocks. Feel free to agree, disagree, and/or contribute your own views and experiences.

3 thoughts on “Stocks vs. Real Estate? A Case for Real Estate”

  1. This is a well articulated and thoughtful contribution; especially for a reader who makes a conscious effort to avoid any financial/savings discussions (largely because there are so many ways to slice it and the details can be overwhelming). I really enjoyed and understood this perspective with ease! Beyond the standard 401k and % of salary going to savings account, I like the tangible approach real estate can provide. Something for me to think more practically about. Thanks for sharing!

  2. Real property is tangible. Paid off and rented properties are always marketable because you adjust to almost any market.
    As long all costs are covered by rental revenue one should never have negative cash flow.
    Thanks for sharing!

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