Should I Invest in Stocks or Real Estate?
Tax attorney Toby Mathis, Esq. explains how to determine whether investing in stocks or real estate is the right investment strategy for you.
So, you’re ready to throw your hat in the investing ring… but which ring, and which first?
Valid question my friend.
A forever incoming call I get from new investors is, “Should I start with stocks or real estate, and which one’s better?”
My answer? Yes.
Either one’s going to be great. As a tax attorney by trade, I tend to focus on numbers, because… well, I’m sure you’ve seen Wolf Of Wall Street. Unfortunately, not all stockbrokers tell the truth.
Numbers, on the other hand, never lie.
Looking at the Stats
If we plotted our investments on a chart, and this chart reflected the growth trajectory of each investment, something would be missing. For starters, looking at your real estate: the house you’re living in will never really reach the peak of our figurative chart.
I know, I know. The common response to this is “But our house is our best investment.” Well, that may be true for now, but not once you become a more experienced investor.
See, that house will never have real compounding or exponential growth, and the only way you’ll make actual money from it is if you sell it. Statistically, the growth you can expect to earn from it is about 4%.
Stocks, on the other hand, DO have exponential growth. For figuring out the growth on stocks we’ll use the tried and true formula of 72.
Sounds fancy, but all this means is that, whatever the percentage you make off the investment is, divide that number into 72 and that’s how many years it will take to double.
So you’re able to start doubling much faster with stocks because they have a statistical growth rate of around 7%. This means your stock portfolio is doubling.
Here’s what they don’t tell you: Of that amount, about 40% of it is the dividends that are being paid out from the company.
So a big chunk of the growth in the stock market is paying out profits.
If you’re investing in stocks that don’t pay dividends you’re leaving close to half of the benefits by the wayside.
And you’re not going to do as well.
So, you have to invest in dividend producing companies to see true growth.
Now, if you have any questions on that, click this link and we can go into greater detail together.
But keep in mind, we want something else besides the growth of the company itself.
If you’re just looking at growth, and just talking about the value going up (for instance, “I bought something at $10 and now it’s worth 15”), you won’t make as much with this strategy.
We want exponential growth.
If I’m being completely transparent with you, I’m going to say, start with the stocks.
Stocks are more liquid and the advantages of this are significant, especially for first-time investors.
I can buy a share of X and I could sell it tomorrow and get access to that cash within two days. If I buy real estate, I could buy it today but I’m probably not going to be able to close tomorrow.
Even if I buy with cash, it’s still going to be a week or two. And usually your closing is going to take 30-60 days.
How about selling it? You’re looking at the same length of time. I’m much more delayed and slower in real estate than I am when I’m doing stocks.
This means that, if you have an unexpected life event — car breaks down, lose a job, medical emergency, you name it — stocks are much more liquid. You can turn them into cash much easier.
Start with Stocks
BUT, what if the market crashes? Well, if you’re buying good dividend stocks, they do not fluctuate like the rest of the market. They tend to be pretty steady.
Don’t get me wrong, real estate is a fantastic investment. We want both stocks and real estate, but when you’re starting out, go for liquidity. Real estate tends to be illiquid, and tougher to get your money back.
And then if you’ve ever bought or sold a property, you know that there are typically other parties involved, like the infamous real estate agents, who take commissions.
On the flip side, there are zero commissions on most stock trading platforms like Charles Schwab, TD Ameritrade, and Robinhood.
Don’t get me wrong, real estate is a great long-haul investment, but I’m always going to recommend starting with stocks.
If anyone asks me which is better, stocks or real estate?
My answer is always, yes.