Thornhill Wealth Forum
My Irrational Bias Towards Real Estate
Invest in real estate or stocks? I have this discussion at least once a week with friends and family. My faith in real estate is sometimes irrationally strong. So, I decided to write the pros and cons of owning real estate vs stocks.
All investing is based on attitude. Most of us treat our home purchases very differently to how we approach investing in stocks. The reasons are obvious. Homes are an emotional purchase (however, investing in real estate should never be emotional) and stocks are not. Here are some reasons why real estate has been a better investment than stocks for most people.
1. Owning a home is a long-term investment
When someone buys a house, they’re usually thinking they will live in it for years. They commit to being on the property ladder and paying down a mortgage for decades.
With stocks, many people ask what will go up in price next week. Even those who pay lip service to the long-term can panic at the first sign of trouble.
2. We are selective
I have seen people put thousands of dollars into a company’s shares because of an article in MoneySense magazine, or even a tip from a friend with limited knowledge. In contrast, real estate investors are more circumspect and spend weeks or even months finding the right property that has cash flow potential. Real estate investors look for cash flow and equity and go through many hours of due diligence.
3. Rocket Science!
Try this word association game:
· Mutual Funds : TER, tracking error, CAGR, portfolio, asset allocation
· Stocks: P/E, amortisation, dividend yield, volatility
· Real Estate: 2 bedrooms, kitchen, garden, rent
It’s not hard to see which is the most accessible.
4. Leverage
A bank will lend you $30,000 to buy a house at an interest rate that’s just a smidgeon above inflation. Just try getting the same deal from your brokerage to buy a high-yield share portfolio – despite the fact that currently the dividends would cover the repayments.
· If you invest $50,000 into shares and the stock market doubles, I have $100,000 and have made $50,000.
· If you invest $50,000 into a $200,000 house and the price doubles, your house is worth $400,000 and you have made $200,000, after backing out the mortgage
Yes I know houses are more work, and need maintenance and whatnot. The point still stands. Taking on debt has multiplied the return from property several times over.
5. Real asset
As a real asset, property has the ability to rise in price with inflation. Anyone over 40 might have noticed how inflation to a large extent paid off their parents’ mortgage. Shares have the ability to respond to inflation, too, but it’s a bumpier ride. If the Baby Boomers had not owned their homes throughout the inflationary 1970s and 1980s, they would not have the lion’s share of the country’s wealth today.
Real Estate versus stocks: Final verdict
Anyone who has spent more than five minutes on the Thornhill Wealth Forum website knows that I am a committed real estate investor and my first love will always be real estate.
Also, there are plenty of caveats you need to make in a truly fair fight between houses and stocks as investments.
So don’t take this post as a rallying cry to dump your shares for a bigger house and a second garage. Diversification is financially prudent in all things. Buying your own home AND investing in shares for long-term financial freedom is the best route for most of us to take.
However it is worth thinking about how the wealthiest people have made their money.
All investing is based on attitude. Most of us treat our home purchases very differently to how we approach investing in stocks. The reasons are obvious. Homes are an emotional purchase (however, investing in real estate should never be emotional) and stocks are not. Here are some reasons why real estate has been a better investment than stocks for most people.
1. Owning a home is a long-term investment
When someone buys a house, they’re usually thinking they will live in it for years. They commit to being on the property ladder and paying down a mortgage for decades.
With stocks, many people ask what will go up in price next week. Even those who pay lip service to the long-term can panic at the first sign of trouble.
2. We are selective
I have seen people put thousands of dollars into a company’s shares because of an article in MoneySense magazine, or even a tip from a friend with limited knowledge. In contrast, real estate investors are more circumspect and spend weeks or even months finding the right property that has cash flow potential. Real estate investors look for cash flow and equity and go through many hours of due diligence.
3. Rocket Science!
Try this word association game:
· Mutual Funds : TER, tracking error, CAGR, portfolio, asset allocation
· Stocks: P/E, amortisation, dividend yield, volatility
· Real Estate: 2 bedrooms, kitchen, garden, rent
It’s not hard to see which is the most accessible.
4. Leverage
A bank will lend you $30,000 to buy a house at an interest rate that’s just a smidgeon above inflation. Just try getting the same deal from your brokerage to buy a high-yield share portfolio – despite the fact that currently the dividends would cover the repayments.
· If you invest $50,000 into shares and the stock market doubles, I have $100,000 and have made $50,000.
· If you invest $50,000 into a $200,000 house and the price doubles, your house is worth $400,000 and you have made $200,000, after backing out the mortgage
Yes I know houses are more work, and need maintenance and whatnot. The point still stands. Taking on debt has multiplied the return from property several times over.
5. Real asset
As a real asset, property has the ability to rise in price with inflation. Anyone over 40 might have noticed how inflation to a large extent paid off their parents’ mortgage. Shares have the ability to respond to inflation, too, but it’s a bumpier ride. If the Baby Boomers had not owned their homes throughout the inflationary 1970s and 1980s, they would not have the lion’s share of the country’s wealth today.
Real Estate versus stocks: Final verdict
Anyone who has spent more than five minutes on the Thornhill Wealth Forum website knows that I am a committed real estate investor and my first love will always be real estate.
Also, there are plenty of caveats you need to make in a truly fair fight between houses and stocks as investments.
So don’t take this post as a rallying cry to dump your shares for a bigger house and a second garage. Diversification is financially prudent in all things. Buying your own home AND investing in shares for long-term financial freedom is the best route for most of us to take.
However it is worth thinking about how the wealthiest people have made their money.
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