Stock Market vs Real Estate: Where Should Your Wealth be Allocated?

Okay, John has a question. He asks, when it comes to wealth, if two individuals have similar net worth but one is in stocks and the other is in real estate, who’s better off? Is there one that has an advantage over the other? It’s a philosophical money question for you. You know, that’s sort of a weird question to answer, right? You have two individuals with the same net worth, one has real estate, and one has stocks. I want to be unbiased here, Brian, because I don’t think that one is necessarily disadvantaged over the other. There are advantages and disadvantages to both sides.

I mean, obviously, if you have real estate that’s rental real estate, producing income, highly appreciated, and you don’t have a ton of debt on it and can service it, that could be a very valuable thing. Now, it’s likely not incredibly liquid. One of the benefits of equity stock market investors is that they have a lot of liquidity available to them. If they need to get access to capital tomorrow, they can do that. There’s a good chance that their portfolio is not leveraged, so they don’t have to deal with any sort of debt service.

I don’t know which one is better off, and I think in reality, thinking through the situation, I think most folks, when it comes to building up their personal financial statement, building their net worth, it’s not exclusively either/or. I think most people actually have access to both of those, even if they don’t realize it.

Yeah, I think there are pros and cons to both. But the question being asked is, what is the best course for most people? Pros for stocks include liquidity for the stock portfolio because you can get rid of it tomorrow. Now, that’s not talking about market risk or anything like that. Real estate, on the other hand, is potentially going to have a higher yield, so that’s a pro. But it has the con of liquidity, as we just talked about. They have completely different risk structures, doing different things.

But the reality I’ve seen is, on get-wealthy behaviors, something more like the Financial Order of Operations. That’s why I talk about it a lot, and I know you guys might think, “All he talks about is the food.” Of course, because this is the better mousetrap. It lets you focus on get-wealthy behaviors, specifically steps five, six, and seven, where you’re making sure you have the resources. That’s the get-wealthy behaviors that you can then maximize.

What happens is, and I see it all the time with our clients, it’s the gateway into reaching the boiling point of your wealth-building process. You’ve got to have enough resources, and for most people, it’s going to be in their employer 401(k), in their monthly investments that they started with. But there will come a point of success where there’s enough cash flow from your job and investments that you realize there’s probably a better way to do things from a tax perspective. That’s when people end up in real estate. That was my own journey. I ended up in real estate because of the potential tax benefits and other things.

Real estate is one of those things; you better have deep pockets because you’re typically using leveraged debt. It looks great on paper, and you get exponential growth because you’re using a leveraged asset. As it appreciates, and you’ve run a mortgage on it, it looks much better. If you make 5% on a million-dollar property, that’s $50,000. But if you only put down $50,000, that’s a 100% rate of return. The asset only made 5%, but because you only put down $50,000, you made a 100% rate of return. That’s the siren song of the beautiful mermaid that makes you feel like this is a win-win situation.

But there’s the other side, the risk profile. If nobody’s renting or using the property generating cash flow, you still have to make the mortgage payment on the debt. If they damage the property, you have to make repairs, sustain the property with utilities, insurance, and so forth. That’s the part nobody talks about. So, you’ve got to make sure you have the foundation underneath you before you go deep into the real estate process.

I think they’re connected. In my view, the gateway to wealth is probably more the path of investing in your retirement plans and other things. That’s what we see with our clients. About 65-67% of our clients came from the saving and investment process. Then you build on top of that by adding diversifiers like real estate because there are some tremendous benefits. If you do it that way, it’s sustainable, a risk-adjusted way, and you won’t get into trouble by buying real estate for its shininess and benefits without having the deep pockets to navigate the associated volatility. For more information, check out our free resources.