In investing there are 3 general asset classes: 1) Stocks or equities 2) Real estate or 3) Businesses

Is real estate better than stocks?

This is the million dollar question and of course the answer is: it depends on you.

Stocks are nice because you don’t need to be hands on with them. You buy them, they are clean and you can look at your account anytime from anywhere.

As I type this, I am a professional real estate investor who invests in 1) real estate and 2) my own businesses and a I currently own zero stocks for the following reasons:

Stocks are intangible and can go to zero – Stocks being an intangible asset cannot be touched by you. You cannot drive over to your stocks and touch them and feel them. Stocks are an idea, a feeling, and are affected by the general feeling of the market place. In addition, stocks can go to zero in value (like enron). Real estate, even if it burns down has insurance and never really goes to zero in value.

Stocks are NOT controlled by me – Stocks are managed and controlled by the management of the company that you are purchasing. Are they good at what they do? Who knows. You do not control the management and anything can happen. Many companies eventually become mismanaged and you are not in control. With real estate you can fire the management and get new management if need be.

Stocks are subject by insider trading – The people who make the most money in stocks are insider traders. In real estate you make all of you money by being an inside trader, I buy many of my deals private and on the inside which makes me most of my money. In stocks insider trading is illegal and you can go to jail (think of Martha Stewart)

Stocks are subject to the digital herd – Every day there are millions of computers trading stocks at ultra high speeds and these computers can trigger crashes overnight when they all want to buy or sell at once. There is no digital herd in real estate.

Stocks cannot use leverage like real estate – With real estate you can borrow money to buy it and the bank will lend you at least 5:1 leverage. With stocks, the bank won’t even lend you money to buy it’s own stock… Think about that, which are you more confident in? the thing that the bank will invest in? or the thing that he bank will NOT invest in? Think like a bank, invest like a bank.

Stocks typically give single digit returns – Stocks traditionally return about 7% a year and most investors do much worse than this. Most novice real estate investors can beat this return quite easily with a small rental property.

Stocks typically do not cash flow – Stocks can pay dividends, but most don’t. Real estate typically must cash flow or you wouldn’t buy it. Cash flow is king.

Stocks are typically poorly picked – Most investors are so poor at picking stocks that they would be better off by picking stocks from a monkey who throws darts at a dart board (this is a true story). Real estate is somewhat easier to pick deals because you have more control and can see what you are getting typically.

So is real estate better than stocks? The answer is it depends. There are great things about stocks that I am not mentioning here because I am biased towards real estate, but at the end of the day, you can become rich through stocks or real estate depending on your passion, education and persistence.

Respect The Grind,
Stefan Aarnio