Pros and Cons of Stocks vs Real Estate: Is one better than the other?

What's up you guys? It's Graham here. This is a question I get asked a lot: Is it better to invest your money in the stock market or put your money in real estate? This is a topic that people get so opinionated over. Some people, they love the ease and the passive income of investing in stocks. Other people like chasing the higher returns that real estate has to offer. But is one necessarily better than the other?

Well, I think a lot of it comes down to personal preference. But let's break down the numbers and see which one yields the greater return and which one would be right for you.

So let's first start with the stock market. Now, it would be impossible for me to do an accurate comparison using anything other than a broad index fund because individual stocks can vary so heavily on price. Therefore, for purposes of this video, I'm going to be using an S&P 500 index fund as an example because this tracks the top 500 publicly traded companies in the United States. We're going to be able to get a good example based off that.

Since its inception, the S&P 500 has gained slightly more than 9% per year, or when you adjust for inflation it gets just over 7% returns. This means that every $100 you invest, on average, will yield you $7 in return annually. So, doing all of this is very easy and very passive. Once you click that little buy button on the website, that's pretty much it; you're done. You don't need tens of thousands of dollars like you do with real estate. I mean, buying stocks could be as easy as a few hundred at a time.

There are no angry tenants to deal with. There are no broken toilets at 2 a.m. that you have to handle. There are no late rent checks to go chasing after. It's very easy! You can pretty much go to bed every single night with a nice smile on your face because you know you have very little obligation to worry about like you do in real estate.

Now, one of the other positives about stocks that I see is that they're a very liquid investment. So if you need cash, you can just sell the stocks, and there it is. It's not like real estate where you have to go through a long process and pay a hefty commission to sell your house.

So now let's talk about real estate. But first, let's discuss the downsides of real estate. The first and most obvious one is that it takes a lot of time. You have to first find the deal, then close on the deal, then remodel it if that's something you're into, then find tenants if, again, you're doing something that's long-term cash flow investing with rental properties. And then you have to manage it.

It's definitely not like stocks where you just click a little button and there you go; you bought the stocks. This is something that takes a lot of time at the very beginning to set up and manage. Now, with stocks, especially the index funds I invest in, there's very little time commitment. I don't have to do anything on these things.

The second is that you typically need a lot of money to invest in real estate; sometimes tens of thousands or hundreds of thousands of dollars, depending on the market and the price range you want to invest in. With a lot of stocks, you could pretty much just start with a few hundred instead of thousands or hundreds of thousands.

The third downside is that if you need money quickly, it's very difficult to cash out and take some time. You either have to sell the property, which has a high transaction cost of sometimes 5 to 6%, or if you're going to do a cash-out refinance, it takes 30 to 45 days for that to go through. That's unlike stocks where you just go online, you click the little sell button, and there you go; it's sold. Real estate takes a long time to sell.

So why do people invest in real estate? Well, these are people who want to be hands-on with their investment, who don't mind the time commitment, and who want to leverage their money to potentially get a much higher return than 7%, adjusted for inflation. But trying to achieve the higher returns definitely comes at a cost. It's either in the form of risk, the complexities of buying real estate, the high barrier to entry, or the time commitment needed.

But these are also some of the advantages because you have complete control over your investment. You can manage it the way you want to. You can add square footage if you want to. You can remodel it if you want to. You can do things to increase your cash flow if you want to. These are all things you have direct control over.

There are also some major tax advantages of investing in real estate. Now, yes, even though you can buy stocks in a tax-advantaged account like an IRA or a 401k, pulling your money out before you reach retirement age of 59 and a half is somewhat difficult unless you get a little creative with, like, rule 72(t) conversion ladders. Say that five times, by the way, really fast. Bet you can't do it.

Or investing in, like, Roth IRAs with a regular traditional 401k and taxable accounts to pull money out at different times depending on your contributions and tax. I mean, it's pretty complicated stuff. It's all doable, but it's a lot more complicated than just reaping the tax benefits right off the bat in real estate.

With real estate, you can pretty much immediately see cash flow in your pocket and pay very little taxes on it because you can depreciate the property over 27 and a half years. You can write off the mortgage interest you pay. You can write off all of your expenses. Chances are, on paper, you could actually be at a loss, but in reality, you're putting, like, $11,000 or more in your pocket every single month from your investment.

You can also do what's called a 1031 exchange, which is where you have an investment property, you sell it for a profit, and you use those proceeds to buy another investment property, and you pay no tax at all on the profit that you gained. You can continue doing this over and over and over again, called a 1031 exchange, and avoid paying any taxes on all the profit that you make from owning investment real estate.

This eliminates the need to build up a huge portfolio of stocks to withdraw from because this is just going to give you cash flow every single month. You can also leverage your money in real estate, which means that a bank or person lends you the money to fund your own investment. Now, hopefully, you get more cash flow than you're paying in interest, and you just profit the difference.

Okay, so we get all of that. So which is better in terms of raw numbers? Is it real estate, or is it stocks? So let's take a 10-year example of a $100,000 investment.

If you invest $100,000 in an S&P 500 index fund, on average, over 10 years' time that $100,000 is going to be worth $196,000, accounting for inflation. Now, if you don't count for inflation, that's more like $236,000. Now, keep in mind, this is average, and some 10-year periods are going to be higher than this, and some 10-year periods are going to be lower than this.

So now, if we invest $100,000 in real estate, we're going to use that $100,000 as a 20% down payment on a $500,000 building. Now, we're also going to finance that $400,000 mortgage at 4.2% interest, which is going to make it $1,199.50 per month in a mortgage expense.

Then, on average, we can find a $500,000 real estate property that will net us a 7% return per year. This is after all of your expenses—your property taxes, your repairs, your insurance. This is 7% net in your pocket. That means that this building is going to be bringing in $35,000 per year in profit, or about $2,916 per month.

So, from the $2,916 that you average every single month in cash, we've got to subtract the mortgage, which is $1,950, and that leaves us with $966 per month in profit. That works out to be about $11,500 per year. This works out to an 11.5% return by investing your money in real estate.

But this is where it starts getting really interesting because every single month that you pay your $1,950 per month in a mortgage payment, some of that goes towards the principle which pays down your loan. Some of that goes towards the interest which is a tax write-off. In your first year, you will have paid about $6,800 in principle which pays down your loan. That increases your rate of return by 6.8%.

So when you factor this in, because you've already made 11.5% from rent, you factor in another 6.8% in equity in the property by paying down the loan, you're now at an 18.3% return on your $100,000 invested.

So if we take the same concept as we did with the stock market, that $100,000 that you invested will be worth $215,000 in rent alone. Now, of course, we also have to count the equity that you're getting by paying down the loan. Over 10 years, that's going to be $83,000, which means that you can turn that $100,000 into $298,000 in 10 years.

That's both from cash flow and from paying down the loan. That also doesn't count for any potential rent increases because hopefully, you should be increasing your rent about 3% every single year. There's also the possibility of having the property appreciate in value, or there's the possibility of remodeling the property and gaining even more equity, or buying the property, remodeling it, and achieving even greater than a 7% return.

These are all possible when you're hands-on with your investment in real estate. So there's definitely a big gap between $298,000 over 10 years in real estate versus $196,000 over 10 years in the stock market.

But if it sounds too good to be true, there's got to be a catch, right? And there is a bit of a catch. Real estate is not a passive investment like stocks are, so it's somewhat unfair to compare a larger return that takes a lot of your time versus a smaller return that takes pretty much no effort whatsoever.

So while you can get much higher returns in real estate, the reality is you have to put in some work and your time to achieve those higher returns. So it definitely comes at a bit of a cost.

So overall, if you're just chasing the raw numbers and want the highest return ever possible, in my opinion, real estate is the way to go if you leverage your money. If you're buying real estate without any leverage, then it really doesn't make sense at all in my opinion, and you may as well just invest in the stock market because you can pretty much get the exact same returns just without all the work and the stress and the hassle of buying real estate.

If you're looking for something that's entirely passive that you can do on the side that still yields a pretty good return, stocks are the way to go, and there's very little obligation or responsibility that you have by investing in the stock market.

So a lot of it, in my opinion, just comes down to personal preference and what you want to do with your time. If you want to get the highest return possible, yes, in my opinion, real estate is the way to go. Spend the time, invest your money, get a higher return in real estate.

But if you're looking for something on the side that you really don't have to do much with, it's pretty easy; stocks are definitely the way to go. And a lot of it just really comes down to personal preference.

Now, my recommendation for all of you watching my YouTube channel is to invest in both. Don't limit yourself to just real estate, and don't limit yourself just to stocks. I think a healthy mix of both is probably the best overall. This is what I do as well.

Now, even though I'm heavily biased towards real estate, I still see all the advantages of investing in the stock market, so I like to do both. Even though I'm more in real estate, stocks to me are also a very big component of my portfolio.

So before I end this video, one of my biggest pieces of advice, seriously, and this will change your life, I swear! I swear this will really help you out—open up a tax-advantaged account. Go to Google, type in Roth IRA, or traditional IRA, or a 401k. Please, if you're over the age of 18, open up one of these accounts. Learn the benefits of it and please put money in one of these accounts. It's the best thing you can do.

I actually regret not putting money in a Roth IRA when I was 18 years old. Just like me not getting a credit card until I was like 21 years old, me waiting until I was like 21 to open up a Roth IRA was really stupid. I should have done it at 18. There's no reason why you can't do it now.

Seriously, the benefits of this just are huge. Please, if there's anything from this, you could ignore everything in this video, but if you pay attention to that one thing, that one little thing, just open up one of those tax-advantaged accounts or all of them. I don't care; open up all of them.

I have a Roth IRA and a SE 401k. Do that, seriously! If you do that one little thing, this entire video will be worth it. All of YouTube, all of your time spent on YouTube will be worth it if you just do that one little thing. Seriously, thank me!

Just Google it. If you have any questions about it, I'll make a video just in great detail about all these tax-advantaged accounts. But seriously, do it.

So anyway, thank you guys so much for watching my videos. It really means so much to me, and I hope I was able to simplify the differences of real estate versus the stock market and which one might be the best for you.

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