July 31, 2020

Real Estate vs the Stock Market, How Real Estate Can Win Big

The Stock Market has long been the conventional investment vehicle for the masses.  Fortunes have been made and lost.  Many have strong opinions that the stock market is the best way to invest.  There are positives, especially when done right.  There are things that are not disclosed to investors however, that can greatly impact their portfolio over time.  67% of American owned stocks in 2007, that is down to 56% in 2020.  Now I am not a financial advisor, this is a quick educational article to help people understand reality and some other options when comparing Real Estate as an alternative to the Stock Market.

Stocks average 7%, does your portfolio?  When averaging the yearly stock market returns, they come out to around 7%.  So a 1 million portfolio should grow to 3.869 million over 20 years of 7% returns.  What they don’t tell you is how do fees and losses impact your portfolio value.  There are management fees, transaction fees, etc.  And what if year 1 is similar to the 38% loss in 2008?  Then your portfolio only grows to 2.242 million during the same period and that is before fees.  When investors look at their statement 20 years ago and compare it vs now, they will be surprised to see that it usually has not grown even close to 7%.

Stocks are liquid.  Recently the market went down 29% in a very short period of time.  Investors have the choice to liquidate their holdings.  Many people who feared further loss did liquidate.  What happened?  It shot right back up.  Will that always be the case?  No, nobody knows.  Many investors do like having the choice.

Everybody is doing it.  We are taught to go to school, go to college, get a job, invest in the stock market, have a family, etc etc.  Many can relate and they like being able to discuss it with their friends, families, colleagues and peers.

Real estate on the other hand has some amazing positives.  I am the first to admit, it is not for everyone.  Watching HGTV shows and buying expensive houses in your neighborhood and trying to do all the upgrades yourself just to make a small profit and not factor in agent commissions and soft costs can be a real bum deal.  Doing it right however and you can double your money.

Buy Real Estate at a Discount.  Industry standard is 70% LTV rule.  The purchase and rehab does not exceed 70% of the After Repair Value.  We buy our homes at 40-60% LTV.

Add Value to Real Estate – renovations can skyrocket values of homes.  I bought a home for 15K recently, after 35K of rehab it is now worth 120K, over double what we have in it.

Reposition Real Estate for a Higher and Better Use – A property could be worth one amount to an investor who would hold it as a rental, to a homeowner some are worth around 50% more.  Another example is a house could rent for $1000, but as an AirBNB it could bring in 2-3K per month which makes it much more valuable.

Multiple Exit Strategies. Flip to homeowner, hold as a rental or AirBNB, lease option, land contract, there are many exit strategies with real estate that insulate investors from volatility.

Real Estate is Stable, especially in tertiary markets – many remember 2008 when half the neighborhood in Vegas, Phoenix and primary markets were short sales.  That was not the case in tertiary markets that do not see the spikes in values or the lows.  Indianapolis for example dropped 7% while many markets dropped in half.

Use Leverage – Instead of doing 2 deals at a time, leveraging financing and you can do 10 at a time.  By sticking to the fundamentals you can easily

Over 100% annual returns – my firm for the 3rd year in a row is more than doubling our money annually.  Our average deal is around 60K for purchase and rehab and we profit almost 40K in 6 months.  So we can do that type of deal twice a year.  60K turns into 100K then we can almost do 2 deals the 2nd time.  Now the key is for us to average 4 months so we can turn it 3X a year.  That is realistic, we are making great progress to achieve over 50% cash on cash return in 4 months so we can do it 3X and earn over 150%.  Not all markets or models are like this.  Our team combined has done thousands of deals.  We made most of the mistakes you can make, and now we have it dialed in.