Which is a better investment: Real estate vs. Stocks

[ethat001]

The articles in this forum have been fantastic - and I thank you all for contributing. I am planning on buying a 300k 2br condo in Atlanta by May/June. I will be a fellow, but I'm lucky to have my wife who will start as in IM hospitalist & support me for several years..

Perhaps a simple investment question, but -- is it better in the long run to plan to keep the condo & rent it after I move out in 3-5 years or sell it and use that money to invest in the stock market? If it's better to just invest in stocks, I'd consider doing a 7 year ARM instead of a 30year fixed.

My naive quick calculations tell me that stocks usually yield 7-10%/year (~subtracting 1/3 for taxes = 4-6%/year). This means over ~10yrs --> (1.05)^5 = 63% return on investment after taxes = 63k for 100k invested. In real estate, on the other hand, I would gain equity from mortgage (paid by renters) and appreciation, minus several thousand from HOA fees & real estate taxes. These numbers I guessed at 10 years to be $75-100k appreciation (after taxes) + 80k equity - 80k HOA/taxes = 75-100k.

Having never bought a house and never having any money to invest -- are these reasonable numbers? It seems like real estate pays off much better (if you rent your property). Or am I forgetting extra taxes somewhere, etc? And assuming I can find renters..

Here are a few articles I found - but I'm not sure they're referring to ppl renting real estate vs. just living in it.
http://www.forbes.com/realestate/2005/05/27/cx_sc_0527home.html
http://www.usatoday.com/money/perfi/columnist/krantz/2006-03-06-stocks-real-estate_x.htm

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[Sol Rosenberg]

Really, it's just a case of "pick your poison." You can make or lose enormous amounts of money in both the stock market and the real estate market. The thing that I kind of like about the real estate market is that if you enjoy doing work with your hands, you can fix-up your home, etc. to increase its value and save you some $$$ in repair cost. Therefore, although you are largely at the mercy of the housing market when you invest in real estate, you DO still have some control over your property value. Not so with stocks. You are totally at the whim of the market.

That being said, IMHO, any good portfolio has lots of both. I would say that 95% of my savings is tied up in stock and real estate in some form (i.e. I'm counting stock-based mutual funds as stock) and I've done very well in both. If you are in it for the long-term you should be just fine.

So, although I realize that I haven't answered your direct question, I don't really think there is an answer. You can do well with either -- go with what you feel most comfortable doing, but I'd try to do some of both.

 

[etf]

well, i guess the way i'd look at it is you can have it so that you always have a mortgage on the place - and if that money is invested in the stock market, you get both the appreciation of your equity portfolio, as well as the appreciation of the real estate. of course, this means you'll always have a loan payment, but most of the time the interest is tax deductible, as well as being at a low rate. if you were lucky enough to get a mortgage atr 4.75%, and with inflation running at around 3%, it's basically free money.

 

[The White Coat Investor]

well, i guess the way i'd look at it is you can have it so that you always have a mortgage on the place - and if that money is invested in the stock market, you get both the appreciation of your equity portfolio, as well as the appreciation of the real estate. of course, this means you'll always have a loan payment, but most of the time the interest is tax deductible, .

Of course, this way you can also have depreciation of your equity portfolio as well as the depreciation of the real estate AND have a loan payment, much of which MAY NOT be deductible (only the amount of interest above and beyond the standard deduction is deductible). Leverage works both ways.

To the OP: You ask which to invest in in the future? Let me consult my tea leaves. No one knows. I'd hedge your bets and invest in both. If you enjoy being a landlord, invest more in real estate. If you do not, invest more in the stock market.

Good luck investing.

 

[roo]

Another consideration you may wish to look into is the tax consequences of capital gain in both real estate vs. stocks.

It depends where you live in the world, but typically:
Neither holding stock nor holding a house triggers a capital gain tax until it is disposed.

If you keep the [non-dividend paying] stocks forever as a nest-egg against possible personal hard times, you could in theory keep them until you die and never pay a tax in the interim. This is possible.

If your home is a primary residence in which you are living, typically you can sell that home and it doesn't trigger a capital gains tax. So you could acquire a good bones property in a neighbourhood with an up-and-coming catalyst, renovate/improve it while you live there, and then sell and buy your next one and move on. If it is no longer your residence when you sell it (ie it is a rental), then a capital gains may be triggered (and it may be weighted on how many years you were living there vs. how many years it was a rental). If you had a holding company, then when you switch from living there to renting, then you might sell it from yourself (which would be a tax-free capital gain) to the holding company (which would have a benefit, depending on your situation, of a lower business income tax for the rental and the capital gain on its eventual sale).

Renting from afar has difficulty. It is easier to keep and hold stocks than keep and hold rental property. If your time is worth something, then chasing down rentees, repairs, going to city counsel meetings to register objections to nearby developments which would devalue your property, going to court to appeal property tax increases: these all consume time (unless you enjoy them). The only one I like personally from a real estate point of view is home renovation in a well-built Victorian house, since the quality of the materials underfoot is so sturdy. Even though it would be better financially to go work a weekend in the ER then pay a contractor, I'd still rather hang that pocket door myself since I know it is done well since I have to live there and look at it, and there is a sense of pride looking at the things one made with ones own hands.

The other consideration is liquidity. There are peaks and valleys in both housing and equity. However if you want/need cash, you can sell a stock for what is worth in most large exchanges within the hour (as the buy/sell spread in high-volume stocks is often a few pennies), and discount brokerage fees are small. However, for a house the sell time is often the spring for full value (again depending where you live), the time to sell may be months, and the sell brokerage fee is stiff in consideration that you have to pay the 3-5% commission on the whole house value, not 3-5% of how much equity you have in the house.

In my opinion, I agree the best strategy though is to have both: own a home that you live in. When equities are giving a 3% higher return than your mortgage, then put the excess income into diversified stocks. When that changes, go back to paying down mortgage.

Best wishes,
roo

 

[The White Coat Investor]

In my opinion, I agree the best strategy though is to have both: own a home that you live in. When equities are giving a 3% higher return than your mortgage, then put the excess income into diversified stocks. When that changes, go back to paying down mortgage.

Roo, will you please PM me the next time equities will return 3% more than my mortgage so I can go buy some stocks? Also, please send a quick PM when that changes. Thanks.

 

[roo]

Roo, will you please PM me the next time equities will return 3% more than my mortgage so I can go buy some stocks? Also, please send a quick PM when that changes. Thanks.

I know you mean that as a sardonic remark, and a crystal ball is impossible. Still, as someone with enough brains for medicine, I think that you should be able to forecast finances better than average. If you feel that you cannot, then it is better to pay for some proper financial advice from someone who can.

 

[etf]

Roo, will you please PM me the next time equities will return 3% more than my mortgage so I can go buy some stocks? Also, please send a quick PM when that changes. Thanks.

i'll avoid the pm and say it in the public - equities will return at least 3% more than your mortgage right now. and even if you invested in qqq (now qqqq) on march 11, 2000. assuming your holding period is long enough, that is.

 

[ethat001]

Thanks to all, this was very helpful. I see the value in diversification -- I'm going to buy the condo on a 30yr fixed & live there, and try to keep it as a rental for a couple of years. I'll invest the rest in stocks.

Sadly I'm thinking I should prepare for cards fellowship and worry less about house depreciation and tax writeoffs right now. I guess that's why doctors are usually horrible investors. Anyway, that post from roo was great -- I'm going to save it for when I decide to sell.

Thanks for the advice!

 

[The White Coat Investor]

I know you mean that as a sardonic remark, and a crystal ball is impossible. Still, as someone with enough brains for medicine, I think that you should be able to forecast finances better than average. If you feel that you cannot, then it is better to pay for some proper financial advice from someone who can.

Of course the comment is in jest, but I believe markets are very difficult to forecast. While ETF is PROBABLY right, that equities will return something between 1.5-3% better than my mortgage over the long term (20+ years), I submit that many intelligent people believe markets are extremely difficult to predict with any certainty at all in any periods of time shorter than that. I think many physicians make the mistake of assuming that because they're pretty smart they can outperform the market by picking stocks or timing the market while still being great physicians. This is a very difficult thing to do for investment professionals (and I'm talking about the David Swensens of the world, not your local Merrill-Lynch Salesman) who have much more time and resources to devote to the task. IMO there are three kinds of investment experts:

1) Those who don't know what the market will do and know they don't know
2) Those who don't know what the market will do but believe they know
3) Those who don't know what the market will do and get paid to pretend they know.

I prefer listening to those in group 1, like Warren Buffett, who said, "I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two."

If Warren can't do it, I sure as hell can't, and that doesn't make me feel stupid at all.

Good luck investing.

 

[etf]

Of course the comment is in jest, but I believe markets are very difficult to forecast. While ETF is PROBABLY right, that equities will return something between 1.5-3% better than my mortgage over the long term (20+ years), I submit that many intelligent people believe markets are extremely difficult to predict with any certainty at all in any periods of time shorter than that. I think many physicians make the mistake of assuming that because they're pretty smart they can outperform the market by picking stocks or timing the market while still being great physicians. This is a very difficult thing to do for investment professionals (and I'm talking about the David Swensens of the world, not your local Merrill-Lynch Salesman) who have much more time and resources to devote to the task. IMO there are three kinds of investment experts:

1) Those who don't know what the market will do and know they don't know
2) Those who don't know what the market will do but believe they know
3) Those who don't know what the market will do and get paid to pretend they know.

I prefer listening to those in group 1, like Warren Buffett, who said, "I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two."

If Warren can't do it, I sure as hell can't, and that doesn't make me feel stupid at all.

Good luck investing.

the "warren buffett" approch is what i ascribe most of my success as an investor to - once you treat equity investments as part ownership of a business instead of just some freely tradeable commodity, you start to worry less (and are less dependent on) how the market as a whole acts. as much as i despise cramer, he's right when he says "there's always a bull market somewhere."