Should I invest in Stocks or Real Estate? Do I buy equities or properties? These are the age old questions we always hear. Where in the [email protected]#$ do I put my money in this chaotic global economy?
Often, real estate can give better stability than stocks and better returns with leverage due to the 5 IDEAL reasons: Income, Depreciation, Equity, Appreciation, and Leverage. It’s not just about getting rich quick— we’ll leave that for the 3AM infomercials.
With real estate, you use careful leverage to generate
immediate cash flow to support your dream of financial independence. There’s a way to get the rewards of a life of hard work without waiting till the end. Let’s test the theory and put real estate estate and stocks head-to-head in a
simple comparison. We’ll take $100,000 in cash and put them into both
investments. We’ll give stocks an 8% Return on Investment (ROI) and real estate an 8% cash on cash return (CCR). We’ll ignore leverage for now, which means that we won’t take out a mortgage to buy our real estate and we won’t use any
margin for stocks. So what’s margin anyway? Well, to put it simply, margin is a loan from your stock broker to buy more stock. it’s a way you can use leverage with stock. NOTE: This is a hypothetical situation! We understand a lot of people don’t have $100K to buy a property in cash. This will be a nice “apples to apples” comparison of stock vs. real estate…but don’t worry, we’ll get into leverage later on. Let’s buy some stocks! Take your $100,000 initial investment and hold your stock for 30 years, as shown in this projection table. Over 30 years, you will accumulate $906,266 of stock price gain, giving you a total stock value of $1,006,266. Now it’s time to sell the stock. Take your long term capital gains tax of 15% and deduct your earnings by $135,940. Subtract your initial investment of $100,000 and come up with a total cash gain of $770,326. This will give you a 770% cumulative ROI after 30 years, from your sold stock. Okay, let’s buy some real estate! We’ll use our Rental Property Analyzer and give you a sneak peek at our new property projection tool! We entered in $1,100 rent and basic expenses such as insurance, taxes, and property management. As always, we enter in a 5% vacancy factor for potential vacancies and 2% as a “collections factor.” This is a buffer in case cash needs to be spent on rent collections or evictions. Throw in $50 for a repair budget every month as well.
Now we have our risks covered. Take your $100,000 initial investment and purchase the property. You’ll have a property appreciation of $81,136, which is 2% per year. Add your 30 year cash flow gain of $380,632 and you’ll get a total property net worth of… $561,768. Subtract the real estate agent commission from the sale, 6%, at $10,879, subtract your initial investment of $100,000, and you have a cash gain of $450,889. Your cumulative Return on Investment is 451%. So in this example, stocks earned you a total 770% ROI and real estate earned you a 451% ROI. This is without leverage. Even though stocks had a higher ROI, with real estate, it’s important to remember that you earned $380,632 of cash flow that was just going to your pocket over 30 years. Keeping in mind the fact that your cash flow doesn’t automatically get reinvested in real estate, We’ll now use leverage and show how real estate can outperform stocks, even with the cash flow going to your pocket! Let’s run those same scenarios again with a slight change. With Stocks, we’ll use margin to borrow another $25,000 on top of the original $25K. This will allow us to buy $50,000 of the same stock that earned an 8% ROI. For real estate, we’ll use that same $25,000 to pick up a property worth $100,000 (from the previous example). We’ll also buy right and find this
property below market at $90,000. Use a $22,500 down payment to get $90,000 from the bank. Let’s buy the stock and hold for 30 years on margin. Take your $25,000 initial investment and hold your stock for 30 years, as shown in this projection table. Borrow $25,000 more on margin
at an interest rate of 6.575% a year. Over 30 years, you will have a $563,133 gain on your stock, giving you a total stock value of $478,133. Now it’s time to sell the stock. Take your long term capital gains tax of 15% and deduct your earnings by $67,970. Subtract the total margin interest you paid of $49,313 and then subtract your initial investment of $25,000. Your total cash gain is $335,850. This will give you a 1343% cumulative ROI after 30 years, from your sold stock. Not too shabby! Now let’s buy the real estate with a mortgage. Take your $25,000 initial investment and purchase the property worth $100,000. As before, you have a rent of $1,100 and necessary expenses, including a mortgage at $362.35. Cutting to the chase, over 30 years you will have an appreciation of $81,136 as before, a 30 year cash flow gain of $254,532 and a total investment net worth of $435,669. subtract the real estate agent commission
from the sale, 6%, at $10,879, and subtract your initial investment of $25,000 and you have a cash gain of $399,790. Your cumulative Return on Investment is 1,599%! Real estate had the edge on this one, Well you may ask, “Where’s the depreciation recapture? What about the taxes on the sale?” Well, you can use the 1031 Exchange
principle to roll this sale back into a new investment property. Check out our
blog post and video about the 1031 Exchange to learn more about this tax benefit. As with non-leveraged, you earned $254,532 of cash flow after 30 years. That could’ve bought you at least 8 or 9 more properties over that time period. So, real estate is ahead without even investing that cash flow that you earned. Imagine running this scenario eight or nine more times over 30 years with extra properties that you
purchased, or if you also put some of your own money saved up from your job into properties. Appreciation and other tax benefits come upon you in droves once you leverage a $100,000 property using only $25,000. Hopefully this helped you make a decision on whether or not you should invest in stocks or real estate.
If you would like to see any of the expense details or dig deeper into how we came up with the sheets and calculations, leave us a comment below and be sure to try
our Rental Property Analyzer. Also, check us out at facebook.com/AssetRover and like our page to keep up with latest news. This is Bill with AssetRover, wishing you infinite returns on your next investment property! Copyright © 2016 – AssetRover, LLC