Fast Forward 30 Years: Stocks vs Real Estate

In the next two decades, barring major advances in life extending technology, the wealthiest generation (aka Baby Boomers) will pass down close to $30 Trillion worth of assets to their children and grandchildren. That money has to go somewhere.

To me, it’s not a question of what assets because it’s stocks or real estate ONLY. There’s no third place asset in this race. Bonds, Savings/CD’s, and Gold will all fall well short of these two, which is why if you have the money, do both – buy real estate and stocks.

Both stocks and real estate should be looked at through a long-term lens. That means 20, 30, 40 years down the line. On a holistic basis, the S&P 500 will likely outpace real estate as a whole, but on an individual “micro” basis, the choice of one over the other comes down to income vs appreciation.

As for the stock market…

The S&P 500 is likely to produce ~7% a year (on average) going forward. However, picking the right stocks will always be the best way to build wealth. That’s why the majority of the Forbes 400 are business owners first. Gates, Buffett, Zuckerberg, Bezos, and so on all became wealthy because they owned large amounts of stock in a business that substantially increased in value.

That said, picking the right stocks is hard. It’s right up there with being a successful entrepreneur because it requires consistency and patience. Very few are going to be as good as Buffett or Vaynerchuk, which is why buying an index fund is becoming even more popular, along with services like WealthFront. Obviously, my thoughts are that buying stocks create the best opportunity to build wealth, but after 15 years in the financial markets, managing money and publishing research, the biggest hurdle I notice is still prevalent today – fees.

I left the brokerage business in 2007 because I thought self-directed investors would be better served simply following my research than having me charge them a percentage of their assets. Luckily, many investors were willing to take me up on that offer, but the vast majority still wanted to have their money managed, and in the end most of my clients were either high net worth individuals or financial professionals.

Real estate is a little different…

The average increase in the value of homes across the United States has been ~4.25% over the last 30 years, and while the last 15 years saw the real estate market rise faster than the historic average, levels will stabilize and normalize – falling back to the 4-5% level. Of course, in some cities, like my home, Washington, DC the average rise has been nearly double the national average. That’s made the nation’s capitol a great place to own property long-term.

In real estate, it’s determining the future of a neighborhood and the value of its homes that matters. Most people can walk into a house and get a feel for whether they like it or if it needs updating. Then, it’s simply a little work to determine the math behind whether buying is worthwhile.

Mind you, I’m talking about investing in real estate, not buying a primary residence and living there. If you can, buy your primary residence in cash. When investing, you should almost always use the banks money, but you should also get the right deals.

Strategy

My stock market strategy has always been the company with the quickest payback (as based on earnings divided by market cap) is usually the better investment. This can work just as well with Real Estate by taking the rental income minus mortgage and dividing by the downpayment. As a rule, if the payback period can be 10 years or less, it’s probably a good buy.

For stocks, that means buying into a company that has a solid financial history, which should remain consistent going forward. For real estate that means cash flow yield, which turns into income that can be used elsewhere, like more deals or stocks.

State of the DC Real Estate Market

Right now in DC, there are good deals that can give 8-12% cash flow. The average property price is around $300,000. The properties are typically condos with lower HOA or C/C fees. Many of the homes in DC are row houses, which can also provide two income streams. The main levels of the house and the basement level for a standard 2/2 equates to about $4500-$5000 in total rental income. This should rise to north of $6,000 in the coming years, so depending on the deal, buying and leasing row houses is also a good investment long-term. Fix and flips still exist, yet the best returns are behind us for now.

Bottom Line

If you’re liquid and want to build wealth, you have two main options – buy stocks or buy real estate. If you want long-term appreciation and can handle the volatility, stocks may be for you. If you want monthly recurring cash flow without the ups and downs, buy real estate.

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