Throughout history, gold and real estate have been two most reliable investments.
Landlords were always the elites of the society and owning a piece of real estate was like
a dream for most people, even today, prices have risen so much that owning a home seems
unreal.
However, in the last few centuries, the financial system has developed so much that it presents
an alternative way to grow wealth.
Warren Buffett is a living proof that with smart long term investments in the stock market,
you can do pretty good.
Here in this video, we will explore which one is a better investment?
Is real estate is still a great investment as it was in the past?
Or the stock market is a better alternative in the 21st century?
Real Estate vs. Stock Market
There is a lot of debate around it.
Real estate investors claim that real estate is the best investment ever, but stock market
guys claim the opposite.
Both of them are right to a certain degree, the truth is somewhere in the middle.
But to find out where exactly, we have to take an in-depth look into each of them.
Let's start with the fact that real estate is expensive, no matter where you are.
People often work an entire life just to own one property, that was the case with your
parents probably.
To make a single real estate investment, you need a lot of savings.
On the other hand, you can start investing in the stock market with as little as 5 dollars.
Of course, it depends on the stock, but most companies, even great companies such as apple,
are traded at around 300 bucks per share, you can become an investor in one of the largest
companies in the world with just a few hundred dollars.
But the cost doesn't stop there, it's no longer like the old days where you have to pay a
broker, with apps like Robinhood, you can purchase stocks for absolutely free.
But when it comes to real estate, the transaction fee is quite expensive.
That doesn't necessarily mean the stock market is better.
Risks that come with the stock market are much higher.
It's difficult to analyze the market and individual stocks in particular.
We might be at the peak of expansion period where the entire market is overvalued, and
your investment will probably fall by 20, 30, or 40 percent if you don't cash out right
before the market crashes.
If anything history taught us that, nothing is too big to fail.
For instance, Apple is a huge company, so was Nokia once upon a time.
In fact, Apple was already once on the brink of bankruptcy.
Stock prices change every day for different reasons.
That can trigger an emotional response and push you to exist the market at a loss, which
is what happens quite often, even with professional investors.
But with real estate, it isn't like that.
As long as it's in the city, the land beneath it will always be valuable.
And even during crises, they often restore their value pretty quickly, since everyone
needs a roof over their heads.
Real estate covers one of our most important needs.
When you buy a property, you can sleep well and be confident that you are not going to
wake up the next morning with the news that your property lost half of its value.
What also makes real estate attractive is that it provides passive income.
With rent prices going up, you don't even need to work, its one of the few investments
that can provide you with a strong, stable income that has a dividend yield of 7, 8 or
even 10 percent.
Whereas, it's extremely rare for any company to pay a dividend yield of 5 percent or more.
Some companies pay, of course, but they are risky stocks where you might lose much more
by the drop of the price than you can possibly make out of dividends.
But it also works the other way around.
Real estate doesn't appreciate as much as the stock market.
In 2019, on average, home prices appreciated by 3.8 percent while the S&P 500 was up to
28 percent, which is almost 10 times more.
In the past decade, Amazon had a total rate of return of 1209 percent, or Netflix had
three times that number at 3767 percent.
You will never find such returns in the real estate world because, in the stock market,
companies constantly innovate to stay ahead of everyone else.
In 25 years, amazon grew from nothing to over a trillion-dollar company.
However, the business world is ruthless, today you are at the top, tomorrow your competitors
will take you down.
It isn't like real estate that sits in the corner and keep getting your monthly passive
income.
When it comes to taxes, there are two approaches.
The stock price can go to a thousand percent, but you are only getting wealthier on paper.
If you want to materialize that wealth, you need to sell that stock where you have to
pay a capital gain tax, which is 20 percent for long term investments and can go as high
as 37 percent for short-term trades.
With real estate, there are multiple ways to avoid taxes and use that cash to grow your
wealth.
For instance, instead of paying for the entire property upfront, you can deduct the portion
of your mortgages attributable to interest payments on your tax returns.
You can recover the cost of income-producing rental property through depreciation.
Depreciation expense often results in a net loss on investment property even if the property
actually produces positive cash flow.
This loss, as well as expenses, such as utilities and insurance deducted from ordinary income.
Even if you end up selling the house, you can avoid paying capital gain tax if you purchase
another property.
Tax benefits are quite decent in real estate.
But of course, its not all sunshine and rainbows.
Unlike stocks where you can read the financial statements of the company, do some research
about the company and decide whether it worth your money or not, real estate requires much
more work.
To find one properly rental property, you might need weeks if not months.
That's just part of it.
Once you start renting it out, you will come across whole different types of challenges,
such as finding decent tenants who can keep paying the rent and would take care of the
house.
The house constantly needs some maintenance, something always breaks and needs to be replaced.
All that is going to occur additional cost and expenses.
That also means it might be difficult for you to move to a different city or a country
because your property might need you there all the time.
However, investing in the stock market doesn't have all those headaches.
You can be wherever you want.
You can simply follow the news and the performance of your portfolio from the comfort of your
smartphone.
2.
Stock market - Endless Opportunities
What I like about the stock market is that it can teach you more about the business world
than your 4-year bachelor degree would ever do.
Every time you analyze a company before throwing your green dollars into it, you have to read
its financial statements, understand its cashflow, study its past to have better clarity about
its future decisions, get to know better its products and their sales.
On top of that you have to understand deeply how the economic machine works, the role of
banks in the economic cycles and so on.
So if you ever want to start a business, that knowledge will be the backbone of your startup.
But the stock market isn't just about buying
and selling stocks.
The financial system is so complex that there are more ways to make money in the stock market
than most people know, such as shorting where you sell a stock when it's high and buy it
back when it's low, sounds complicated?
Well, I have explained that in one of the previous videos.
And then you have futures, options, you can earn money by predicting the future price
of the crude oil.
We can't discuss all of that in this video, but you get the picture, if you master the
stock market, the door of opportunities will be opened in front of you.
Even if you don't have the time to do all of that, you can keep your savings in an index
fund and be confident that in the long run, you can expect a 10 percent return.
3.
Leverage
When you buy a stock, its just a digital document on the screen of your smartphone.
You almost have no control over it since your single stock isn't going to give you much
influence when the company has another 5 billion stocks.
Whereas real estate gives you complete control over your investment, you can touch it, feel,
and control it.
Besides the passive income it can provide, as we have discussed earlier, you can use
leverage.
Let's say you have 25K dollars, putting $25,000 into securities buys $25,000 in value.
Conversely, the same investment in real estate could buy $125,000 in property with a mortgage
and tax-deductible interest.
4.
Where should you invest?
So, where should you invest?
The answer is - it depends!
If you are keen on passive income, then real estate is your choice; however, if you want
to aim for higher returns, the stock market is undoubtedly is a better option, especially
if you are an amateur investor with little money to start.
But, you should also take into account is what you find interesting.
If you find it too boring analyzing companies and going through endless paperwork, then
maybe it's just not for you.
Factors such as the place you live also play a role.
Maybe in your city or even a country, things are different.
So you have to draw your own conclusion based on your circumstances.
That's it for this video.
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Thanks for watching and until next time.