Based in Los Angeles, The Money Smiths is a blog comprised of thoughts related to personal finances, real estate investing, and musings on early retirement.

Why I Choose to Invest in Real Estate Over Stocks

Why I Choose to Invest in Real Estate Over Stocks

I recently had a conversation with a friend about investing in the stock market.  They were wondering when I would start talking about stocks to invest in and providing my favorite stocks for others to follow suit.  Much to his dismay, I told him that I don’t actually invest in the stock market. In fact, the only money that the Money Smiths invest in the stock market is through our company sponsored 401k accounts. I believe that we both came out of that conversation a little wiser, as he was able to understand why I invest in the way that I do, and I was able to understand a little more about why he felt that stocks were the best investment vehicle that he had access to.

The main reason that this conversation started was because he, quite plainly, didn’t understand that there are other options for one’s future that just investing in stocks.  He is actually a successful human, he has a well paying job and is sure to max out his 401k contributions every year. He does this because he’s been taught, since entering the workforce, that contributing to your 401k is a great way to make yourself rich in retirement.  While I don’t disagree that investing in a company sponsored 401k program is a bad idea, I do think that there are more efficient ways to make your money work harder for you than that method.

You won’t find me suggesting stock picks on this blog because quite frankly, I just don’t follow stocks.  I know that there are stories of people who have become incredibly wealthy from stocks by buying one at just the right time and riding it to its peak and selling out right before a drop. I’ve heard stories of the people who bought Apple stock for $22 during their IPO and are now millionaires.  In fact, there’s an article on Investopedia that suggests if you had purchased Apple shares from the beginning and still had them, you would have seen an ROI of 44,569.19%!  

Seeing and hearing stories like those are certainly exciting to read, but I just don’t understand how many people have actually successfully picked stocks like Apple’s more than once, and have successfully figured out where companies will be in 30-40 years. To me, this is a huge mystery that I haven’t placed all that much effort in understanding.  That’s because I have already found something that works for me and provides value that I can control to me, and allows me to have a clear path toward financial security in a short time.

To me, investing in real estate provides lower risk, greater diversification, and should yield better results than the stock market, when done correctly.  This isn’t to say that real estate is the only way to make money and that anyone with stocks should just get rid of them right now, but this is to say that I’m a believer in real estate investments over stocks for the average person any day of the week.

Let’s break down the reasons that I get so excited about real estate over stocks:


Real estate is a tangible “real” asset

I can go up to a house that I’ve purchased and physically touch it.  That in itself provides a sense of stability for me, and for many real estate investors.  Knowing that I have left the country to go explore new cultures for weeks on end, and I’ve been able to come back and still see my property standing and not having disappeared is fantastic.  This doesn’t mean that stocks disappear when you stop looking at them, but unless you make it a habit of printing out stock tickers that you invest in, you can’t really touch them.


Real estate can be leveraged easier

Real estate is one of the only investments that I know of where you can go to the bank and present that bank with 5% of the total cost of the property and they are willing to loan you the other 95% of the cost, (we actually bought our first house with less than 5% down!).  We were able to take that 5% and turn it into 100% of the property being placed under our names, in our control, and creating us money just that easily.

You can also leverage real estate in more ways than just your mortgage though, you can take our a Home Equity Line of Credit in which you can take the home that you already have a mortgage on, and place the equity that you have in that house against another loan to get another mortgage or for any other reason. While you can buy stocks on a margin, the amount of effort you would need, in my opinion, to make a bet on a stock with actual certainty requires much more than the average person has the capability for.


Real estate is taxed more favorably

We pay property taxes on our house, we were fortunate to find an area of Massachusetts that actually has a property tax rate that I find reasonable.  When it comes time for taxes, we are able to write off a large portion of those taxes against the income that we generate with our property, which results in an actual tax obligation that is much lower than what someone would have on a standard primary residence.  There are also other legal ways to avoid paying taxes with real estate, if I find that I want to sell a property and move my money into a better one with stronger cash flow, I can initiate a 1031 exchange that allows me to sell that property tax free. This can certainly backfire if you decide to get out of the real estate game and sell off all of your properties, but we’ve committed to ourselves that we don’t plan to ever sell out of our properties, because worst case scenario in our heads still involves cash flow being produced every month, even if managed by someone else.

Stocks have tax consequences that include capital gains taxes on any profits that are made during a sale of stock. If stock investors receive dividends, they are required to pay taxes on dividends that they receive as well. These dividends don’t even come with a sale, they just happen automatically and you get hit with them no matter the situation.


Real estate is less risky

The way that we reduce our risk when buying real estate is by working within a buy-and-hold strategy.  House prices certainly go up and down, just like stocks, but in general - just like *some* stocks, houses continue to appreciate in the long term.  We also reduce our risk through buying more property, this is similar to diversification. If we own one property and we need a new repair that costs $5,000, we are on the hook for that amount.  If we own five properties and have that same repair, we can leverage the cash flow from the other four properties to help pay for that cost in the moment. In general, the stock market moves up at the same time and down at the same time with most of the stocks together- this is because stocks are all about how the market is actually doing as a whole.  If you look at almost any representation of a stock, even on just a given day, the stock is all over the place in price, this is due to constant buying and selling. This makes stocks very unreliable as a true source of income, as you’d have to always try to time when you want to sell your stocks to make the right profit.


Real estate is more predictable

This statement is actually pretty closely tied to the point on risk.  I can point to a three family house and plan out when I will receive my rent checks and when I will pay my mortgage, and time those to basically always provide a positive increase in my cash on hand.  I know, through leases, when my tenants are at a risk of moving out. I know how my cash flow is affected if one of my tenants has an issue with being able to pay their rent on time. I also have ways to make up for lost rent if that were to happen, through security deposits.  The hope with real estate is that you’ll never actually go through rough times, but the good news is that there is always a way to make it through those tough times if proper planning has been done. With stocks, if they happen to drop in price one day, there’s really nothing you can do to get that money back, other than wait it out and hope that it does come back.


Real estate provides better cash flow

The name of the game for us is to get enough positive cash flow to retire from our corporate jobs and live a life of casually investing in other properties full time.  This is certainly possible through real estate because the cash flow is determined through money coming out, (mortgages, taxes, repairs), and money coming in through rent.  Stocks simply don’t provide actual cash flow, their value is all what’s hypothetical on the screen or on a piece of paper. The only time that you see cash flow, in or out, is when you buy and sell.  While your stocks should continue to rise in price, the only way that you can invest the growth of those stocks is to sell them and reinvest into other high-growth stocks. This means that not only have you lost the growth from the stocks you just sold, but you’ve now taken another risk on of hoping that the new stock will prove to be the right choice by performing even better.


Real estate provides a hedge against inflation

Simply put, I can hedge against inflation every time a lease comes up for renewal.  If I am renting a unit for $1,000 and my costs for the year rise 3%, you can bet your butt that I’m going to increase the rent to at least $1,030 for the next lease cycle.  Small changes like this don’t generally affect tenants, as they expect rent increases each cycle. This is a relatively easy concept to explain to tenants as well, they know that you’re ultimately running a business that allows them to have a place to live, and they know that if they don’t pay the increased rent that there is always someone else who will.  There’s not as much directly tied to inflation with stocks, the performance is more directly correlated to perceived value of a company. I’ve sat on earnings calls at previous companies that I’ve worked for and when we expected that news would be good and even presented news in the appropriate light, the stock could still take a dip. The value of stock doesn’t always make sense on metrics that you might expect it would.


Real estate affords more control

Real estate investors are empowered to make decisions for their properties to help control the value of them.  I have empowered myself through education and reading, (see some of my recommended books here), I am in charge of almost every aspect of my property, from the paint colors on the inside, to the frequency that the lawn is mowed, to the tenants that I permit to take residence in the property.  These rights of control are protected by my leases with each of the occupants of each home. I get to decide how much I want to charge for rent each month, I get to decide if and when I want to sell the property or assets tied to the property.  I can drive by the property to make sure it is still physically standing if I want, or I can trust that the property will continue standing, as it did for many years before I took ownership, and allow the tenants to let me know if there are issues that arise with it.  With stocks there’s none of that - you have practically zero control over the company that you’ve purchased a share of. The only way to start having control is to actually own enough stock in the company or to become an employee of that company, and that just defeats the purpose of buying stocks in the first place!


Real estate outperforms stocks

This article from ThinkAdvisor states that from 2000 to 2016, the real estate market outperformed the stock market at a rate of 2 to 1! That statistic in itself is fairly exciting to think about.  While that snapshot of just the past 16 years is accurate, there have certainly been years where the stock market has outperformed real estate, it just doesn’t seem to happen very often. There are statements just like this one all over the web that back up this fact, as well as the others, that I would invite you to check out as well.



I feel that it wouldn’t be right to end the list here and let you think that investing in real estate is all sunshine and rainbows.  There are definitely cons to investing in real estate and they rely heavily on what your goals and ambitions are, as well as how actively you want to manage your investments.  Even though I successfully manage property in Massachusetts while living in California, it doesn’t mean that doing so is completely hands off. I’ve established strategies of automating my investing to prevent a lot of pitfalls that come with investing in real estate.  I’ll post next week about all the reasons that I can think of as to why someone shouldn’t invest in real estate!

I’m curious to hear your thoughts about stocks vs real estate.  I am definitely, by no means, an expect on stocks, so I could get some of this wrong.  I’m also happy to hear if there’s anything else that I’m missing or if you agree or disagree.  Feel free to leave a comment below or shoot me a message through the contact page.

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-Mr Money Smith

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