Monday, April 23, 2007

Real Estate Vs Stocks - Again

Many posts have been written in response to this CNNMoney article Stocks Vs Real Estate. Stocks come out the winner in this article - obviously written by a non-real estate investor (I don't consider a homeowner a real estate investor in the same sense one is a stock market investor). I also don't regard people who buy real estate on hopes it will appreciate rapidly as investors - these are more properly called speculators.

Here's the list and my comments:

  1. Performance - yes stocks win, but the price is risk. The author ignores this very important fact. Individual stocks are a high risk gamble because of No.5 on this list. Mutual funds can reduce this risk, but year to year it remains high. What if you invested between 1965 and 1982?
  2. Leverage - hands down winner for real estate here
  3. Cost - certainly real estate has higher transaction costs
  4. Taxes- the author only mentions the advantages of home ownership. She ignores the extraordinary tax advantages of having your own business. You can also use a self-directed IRA to grow your real estate investments tax free. A double win for real estate here.
  5. Transparency - a big win for real estate. I don't have a clue what is going on in the company I work for, much less the Enron's and WorldComm's of the world. You can hire inspectors to check out your property pretty easily.
  6. Effort - if you are a real stock investor, you need to do a lot of homework to investigate the companies you are investing in. She ignores this small caveat
  7. Volatility - real estate is much less volatile. Not everyone lives in California.
  8. Diversification - yes you can diversify in real estate without being Donald Trump. Single family homes, duplexes, different geographical areas, different demographics (why not invest in property geared to baby boomers or first time buyers?)

I only count 2-3 clear cut winners for stocks. In addition, I think there are a couple of other advantages for real estate I wrote about here.

  1. The inefficiencies in the real estate market allow you to buy below market value. You cannot do this in the stock market very well.
  2. You have control over your real estates value. I can't do much to change the direction of the companies I invest in.
  3. You can pull money out of real estate tax free by refinancing.

I still invest in stocks, but in my mind real estate is the better investment.

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