For most people, real estate will always be more desirable than stocks. In this article, I will share why real estate will likely build you more wealth over time. Real estate will also most likely provide more happiness. Owning an asset that provides more wealth and happiness is tough to beat!
I’m all for owning both real estate and stocks to build wealth. However, I’ve noticed there’s been a growing amount of rage against homeowners and real estate investors.
There are a lot more voices saying that owning real estate is a terrible way to build wealth. Some are even rooting for real estate investors to lose money.
You don’t see this type of schadenfreude and rage against renters or stockholders by homeowners. I want to address this issue full on so you can make better financial decisions.
For most of my post college life, I’ve had a larger exposure to real estate over stocks. I needed a place to live so I figured it was better to pay down a mortgage than to pay someone rent as soon as I mustered up the down payment.
When it was time to buy another property, I simply rented out my old place for positive cash flow, and enjoyed my new place until it was time to rent it out again and buy a new place.
I’ve gone through this buy-rent-buy cycle four times now and it’s been by far the easiest way to make and save several million in tax-advantageous dollars. Real estate is an important part of my passive income portfolio. It has enabled both my wife and I to remain stay at home parents to our two young children.
Within the next three years, our plan is to go through another cycle and buy a property in Honolulu close to the beach. We’ll then rent out our current San Francisco primary residence and hopefully build even more passive income.
The main reason why there is so much rage against real estate is due to the human condition. We crave what we can’t have. I get it.
Saving up for a down payment in a city where the median home price is close to a million dollars or more is difficult. It is also annoying to see your peers buying their first homes with the help of Bank of Mom & Dad.
After you’ve gone to a fancy schmancy private university or built up a growing business and you still can’t afford to buy a home like your parents did when they were 28 years old, you get pissed!
Finally, when you witness real estate prices go up and you don’t own, the rage continues to boil.
Just don’t confuse your disapproval of owning real estate for your own inability to buy real estate yet. Real estate is one of the key ways people have been building wealth for centuries.
The more expensive the city, the more negativity there is towards real estate. This makes sense. But try not to let your frustration destroy your objectivity.
At each stage, there is risk of rejection or failure.
It takes a lot of discipline and sacrifice to save $300,000 for a down payment on a median priced home in New York City. Therefore, most people don’t and get pissed at those who do or have the means.
The human condition assigns luck to the achievements of others and skill to our own.
Due to more stringent lending standards since the financial crisis, the average credit score for those qualifying for a mortgage has averaged over 720 (excellent). Once the pandemic hit in 2021, the average credit score for approved mortgages shot up even further to 770.
Putting 20% down has now become standard. Some banks aren’t even allowing existing customers to take advantage of all-time low mortgage rates. Without a minimum amount of assets, these customers are being shut out of refinancing their jumbo loans.
Given the tightness in the mortgage industry today, the chances are even higher that you will be denied a loan. Therefore, you will naturally hate the real estate market even more.
In a competitive housing market, it’s common for your offer to get rejected multiple times. Each rejection beats you down because you always dream about what your life would be like in the property you are pursuing.
Get rejected enough and you’ll either put out some crazy high offer to your detriment or get really bitter at the entire process.
Once your offer is accepted, you need to then muster up the courage to transfer a good chunk of savings into escrow. Then you’ve got to assume a mortgage in most cases. Plenty of people get cold feet and back out from their offer.
It takes guts to take such concentrated risk. If you backed out only to see the property resell years later for lots more than you could have bought it for, of course you’re going to be pissed off.
The barrier to entry to buying stock is pretty much ZERO. Robo-advisors like Betterment can build you a stock portfolio for free starting with just $500. You can open up any brokerage account with $100 and buy stocks for free nowadays.
When anybody and everybody can buy stocks, stocks simply becomes less desirable. In contrast, when there is only one panoramic ocean view property on an oversized lot with a hot tub, of course the desire for such a property will be higher.
Know the human condition.
There is also one very important paradox stock owners who rent fail to realize. Let me explain.
If you are a renter, you are short the real estate market. You are a price taker and are at the mercy of any rent increases over time.
You are neutral the real estate market if you own your primary residence. Once you are neutral the real estate market, you simply ride the ups and downs. Even if your property increases by 50%, you can only profit if you sell and buy another property.
Only when you own two or more properties are you actually long the real estate market. Your non-primary residence properties can be improved upon, rented out, or sold for potential profit.
Shorting the real estate market or the stock market over the long-term is a bad move. If anybody decided to short the S&P 500 index their entire life, they’d be considered a buffoon.
Yet, people who are against homeownership somehow think it’s OK to rent all your life. This logic makes no sense. And the reason why there is such an inconsistency in thought is due to a lack of knowledge or simply blind rage.
Now, of course stocks have shown to be solid long-term investments over the long run. I’ve got about a quarter of my net worth in the asset class.
But this is an article addressing the housing haters who believe real estate is a terrible investment. Let’s continue!
Every physical real estate investment you make puts you in charge. As CEO, you are able to make improvements, cut costs (refinance your mortgage), raise rents, find better tenants, and market accordingly. Of course you are still at the mercy of the economic cycle, but overall you have much more leeway in making wealth optimizing decisions.
When you invest in a public or private company, you are a minority investor who is putting his or her faith in management. Sometimes managers commit fraud or blow their companies to smithereens while making mega millions for themselves.
Mortgage rates are at all-time lows. As a result, homeowners can refinance their mortgage, save on living expenses, and enjoy their homes. Meanwhile, stock investors are getting whipped around due to fears of a global economic slowdown.
Check out Credible, my favorite mortgage marketplace where pre-qualified lenders compete for your business. You can get real quotes in under three minutes and it’s free.
Thanks to cheap mortgage rates, qualified real estate investors can borrow money at 30+ year lows. Given the cost of capital is lower, the returns tend to be higher. Cheap interest rates also attract more borrowers, bringing more liquidity to the real estate market. This in turn puts upward pressure on prices.
The year-over-year national home price appreciation is actually accelerating during a pandemic.
Even if real estate only tracks inflation over the long run, a 3% increase on a property where you put 20% down is a 15% cash-on-cash return. At this rate, in five years you will have more than doubled your equity. Just don’t get caught being overly levered in a down market.
Not only can you deduct the interest on up to $750,000 in mortgage indebtedness on your primary home, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for at least two out of the last five years.
Thanks to depreciation, a non-cash expense, you can shield your rental income as well. All expenses associated with managing your rental properties are also deductible against your rental income.
If you are in the 32% marginal federal income tax bracket or higher, all the more reason to own your primary residence.
Real estate is something you can see, feel, and utilize. Life is about living, and real estate can provide a higher quality of life compared to a rental that is not properly maintained. I always believe in buying real estate for living first, cash flow second, and principal appreciation third.
With stocks, there is no utility unless you spend the dividends or sell positions to purchase something. As a majority investor, the feeling of owning my primary residence is 10X greater than the feeling of owning a hefty amount of Apple stock for the past 10 years.
Stocks have certainly performed well over the years. However, there is simply no utility that comes from stocks. Stocks are just digits on a screen.
To extend your wealth, I encourage investors to regularly turn funny money into real assets. Real assets don’t just lose half its value overnight as some stocks do.
It is much more difficult to analyze a company’s income statement, cash flow statement, and balance sheet than it is to analyze a property’s financial statements. This is why it’s often better to just buy an S&P 500 index fund for your stock allocation and call it a day. If you buy an individual stock, it may do incredibly well, or you might lose your shirt because you misjudged competitive pressures.
For example, anybody who bought Blue Apron stock at the IPO is now down 90% because they misjudged Amazon coming into the market and crushing them. Hopefully you owned Amazon instead. Anybody who bought Lehman Brothers or Enron lost everything.
Anybody who decided to short Tesla stock over the past several years given its financial issues has gotten their face ripped off. There is one JP Morgan Tesla stock analyst who has issued 25+ sell ratings in a row, and he does this for a living!
With real estate, it’s easier to estimate rental income, occupancy levels, new supply, job growth, population growth, and demographic trends. People will always need a place to live. The same cannot be true for owning an expensive laptop computer.
Your house value could be tanking and you would never know it since there isn’t a daily ticker symbol. During the 2008-2009 downturn, I still got to enjoy my vacation property in Lake Tahoe 20 days a year even though its value was plunging.
Meanwhile, looking at the TV or computer screen just made me mad at how much I was losing in my stock portfolio. When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom.
Here are the historical returns for Fundrise, one of my favorite real estate crowdfunding platforms for non-accredited investors. Past performance does not guarantee future performance. However, notice how steady the returns hav been, especially when the S&P 500 was down.
After a while, making money for money’s sake is a pretty empty feeling. Money needs to be used for something, such as buying real estate to raise a family.
Every time I drive by my rental property I feel proud to have made the purchase in 2003. It reminds me of the time when I was 26 years old and still trying to make a name for myself at the job. Those regular 60-70 hour work weeks are fun to reminisce about today.
I have zero sense of pride with my stock portfolio. Partly because nobody sees it and nobody uses it. But the reason is mainly because my stocks don’t do anything directly to improve the quality of my life.
It makes a parent proud that the home they purchased is providing shelter and wonderful memories for their children. Stocks don’t make you feel good unless all you care about is money.
Real estate is local. If you’ve made a good decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy.
Look at prices in superstar cities such as NYC, Hong Kong, Singapore, London, Paris, and San Francisco. They fall the least, recover the soonest and gain the most.
Of course if tech ever collapses, my real estate holdings in San Francisco will be crunched. Therefore, it’s always good to diversify your real estate holdings as well, just like stocks.
I believe in the heartland of America, which is why I did sell one of my SF rental properties in 2021 and reinvested the proceeds in a fund that purchased 17 various properties around the country. With the acceleration of the work from home trend, some 18-hour cities are likely going to benefit from demographic shifts away from big cities.
At the same time, tech stocks and the NASDAQ is going gangbusters in the new decade. So it’s hard to see San Francisco Bay Area real estate collapsing when tens of thousands of residents are 20%+ richer despite a global pandemic.
I recommend exploring investing in secondary cities like Austin, Memphis, and Charleston where valuations are cheaper, growth rates and cap rates are higher, and population growth is growing faster. CrowdStreet, is my favorite real estate platform that focuses on the secondary city real estate market.
There are two organizations not worth fighting against: the Federal Reserve and the Central Government. Not only do you get generous mortgage interest tax deductions and tax-free profits, the government sometimes bails out overextended homeowners during bad times.
In 2010, I got a free loan modification on my vacation property mortgage from Bank of America, even though I didn’t need it. The government forced BoA to cut my 30-year fixed mortgage from 5.875% down to 4.25%.
Programs such as HARP 1.0 and HARP 2.0 allowed folks without hefty down payments to get in on the action. There are 12 non-recourse states such as California and Nevada which don’t go after your other assets if you decide to stop paying your mortgage and squat for months.
Just look at how much the government is doing to save the economy today.
When you die, you can pass on your real estate holdings to your children using a stepped up cost basis. This means they won’t have to pay any taxes on the assets provided that your estate is below $11.58 million per person when you pass as of 2021.
All the people who are anti-housing could have been saved if their parents decided to invest in real estate 30+ years ago. Life is so much easier once housing is cheap or free.
If you’re willing to provide an education for your children, perhaps you should also be willing to provide housing just in case they need it.
Think about what your children will say 30 years from now about prices today. They will likely be envious of how cheap we could have owned real estate. Heck, look at the global real estate price chart above. The United States is so cheap compared to New Zealand.
If you are a parent who wishes to achieve financial freedom, one goal is to buy one property for each child you have. Not only will you build your real estate portfolio, you may also provide your children subsidized housing in the future if you so choose.
In a bull market, the average person’s day job income will likely never catch up with their local real estate market.
For example, if the San Francisco median home price jumps from $1,600,000 to $1,700,000 (+6.25%), the median household income of $96,000 would have to jump 104% just to stay even. Is there any wonder why long-term renters continue to fall behind?
If you don’t believe me, just look at the average net worth of homeowners and renters as reported by the Federal Reserve. The net worth difference is staggering. If every renter saved and invested the difference, the gap would be narrower. However, we all know that it is very easy to consume instead. With housing, you are at least paying down principal each month as a form of forced savings.
The good thing is that real estate goes in cycles. You are finally seeing some softening in big cities like Toronto, New York City, and San Francisco due to more supply and some residents moving away. Healthy downturns will usually last 2-3 years before stabilizing and then resume their upward trajectory as the old is replaced with the new.
Hopefully during soft times, folks who want to buy homes will have already aggressively saved and figured out ways to boost their income. Otherwise, it’ll be the same cycle of angst, anger, and despair over and over again.
Of course homeownership will be wrong for some people. Some people will buy at the wrong time. Others will unfortunately buy a lemon that needs a lot of fixing. While plenty of people will ignore my 30/30/3 rule for home buying and spend way too much money.
As a result, they will constantly feel stressed when they should really be enjoying their home.
However, just because you can’t afford a home yet doesn’t mean that real estate is a terrible investment. Please don’t let your frustration about the high cost of real estate derail your objectivity.
I’ve been a renter and homeowner for decades. I’ve gone through the frustrations of being a landlord and the simplicity of just owning passive real estate investments. Real estate has lost and made me money. Therefore, I believe I’m providing you some objective perspective.
In my opinion you should at least get neutral real estate if you’ve found a city you want to live in for the next 5-10 years. Inflation is too powerful of a force to combat. After you own your primary residence, then you can choose to get long real estate by owning more real estate or more stocks.
The next time you hear someone shout why they think real estate is a terrible investment, try to understand their background first. Once you do, everything will be more clear.
Explore real estate crowdsourcing opportunities. If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise and CrowdStreet, two of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Both platforms are free to sign up and explore.
Refinance your mortgage. Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Buying purchasing power is way up because mortgage rates are down to all-time lows. Take advantage by at least refinancing your existing mortgage. Alternatively, look for a cheap mortgage to buy a property from a “doomer” who thinks the world is going to end.