Real estate and stocks are two investment classes that offer investors opportunities to grow their money. While both are common investment vehicles, they’re very different in terms of structure and taxation, carry different risk factors, and provide investors with different returns on their investments.
In this blog, we will consider these factors to answer the question of where to put your money: real estate or stocks? Alex Kholodenko, founder of Wealthy Mind Investments and an investor who’s been helping busy professionals create passive income streams through syndication, will tell us why real estate provides a more attractive option for many investors. In our recent conversation, we looked at the pros and cons of investing in real estate vs. stocks and why, after working for decades in the software industry in Silicon Valley, he chose to focus on commercial real estate The full podcast is available here.
Volatility and Risks
“The stock market is very volatile. We’ve seen many companies, Fortune 500 companies and now they’re nowhere to be found. At one point, on any given day, you see the market spike as well as downturns where you could lose 20%, 30%, or sometimes even more in a single investment. It is possible to lose your entire investment,” says Alex.
Stock values are subject to market fluctuations that can make them move up and down much faster than real estate prices. These extreme changes can be caused by events happening in the economy as well as monetary policy, regulations, tax revisions, or changes in the interest rates. Even political and company-specific issues affect stock values.
In real estate, price fluctuations happen over months or years. So, even if prices go down, most investors who see that starting to happen can sell their investment before they lose money. Real estate investments have also been traditionally used as inflation hedges since home values and rents typically increase with inflation and protect against loss in the purchasing power of the dollar.
Access and Liquidity
“It’s easy to enter the stock market. With little money, you can buy a few stocks,” says Alex. He adds that stock investment is very liquid, “Let’s say you urgently need your money. You can just sell your stocks outright and liquidate your assets tomorrow.”
Investing in real estate requires more initial capital than investing in stocks. “There’s a high entry point. You cannot invest with a thousand dollars, to begin with,” cites Alex. However, he points to ‘leverage’ as one of the biggest pros in real estate investing. Significant amounts of financing or borrowed money can be used when investing in real estate without adding much risk – enabling investors to buy more valuable investment assets. On the other hand, investing in stocks with debt, known as margin trading, is extremely risky.
Then again, a real estate investment is not as easy to liquidate. Taking your money out of a real estate investment through resale takes more time and is not as easy as buying and selling stocks.
Returns and Cash Flow
Profits from stocks investments come when you sell. However, investors can be paid while still owning stock through dividends which they can reinvest to buy more shares. Over time, with reinvestments, they should own more shares and earn more cash dividends. However, it would take a significant investment in a high-yielding dividend stock to generate reliable income.
In real estate syndication, income sources are varied. Passive investors earn preferred returns, profit from the sale of the property, and income generated by rent if the property is rented out to tenants. Some cash-generating properties such as apartment buildings, rental houses, storage sheds, or a strip mall can provide steady, reliable cash flow on a month-to-month basis.
“In real estate, you have the physical asset while a paper asset in stocks. So, that’s an advantage especially in weathering a crash. Property values still come back while in the stock market, if it’s gone, it just vanishes,” says Alex, highlighting the benefit of tangible property that can generate income and a hedge against inflation rather than buying ownership in a company.
“One of the best and biggest benefits of real estate is the tax benefits. Together with some asset depreciation, bonus depreciation, and cost segregation, real estate investors receive very tax-efficient, almost tax-free cash flow that stock investors don’t,” tells Alex.
Real estate syndication comes with five major tax benefits that make a positive financial impact: depreciation, depreciation recapture, bonus depreciation, cost segregation, and capital gains. On top of that, if you own and sell commercial property, you may avoid capital gains tax pretty much indefinitely through a 1031 exchange by reinvesting proceeds in a similar type of property.
In stock investments, capital gains tax is paid when you sell your shares. You may qualify for lower tax rates if you’ve held the stock for more than a year but you also have to pay taxes for stock dividends earned from your portfolio during the year.
Why Real Estate Syndication?
“Being in Silicon Valley, I’ve been investing in the stock market for a very long time and I’ve been semi-successful. But, when I started to look at what ultra-wealthy people do, I began to notice major differences, especially for people in the very high, over 10-million-dollar net worth. Primarily, their net worth is tied to either some assets that are income-producing assets or equity in the business. They are not very tied down to the stock market as much,” shares Alex, who has found more success in real estate syndication.
Alex is quick to add though that he would not recommend investors to take everything out of the stock market and invest it all in real estate since there are premium stocks (i.e. Apple, Amazon) that are performing exceedingly well. For an overall portfolio, Alex advises investors to diversify and allocate more toward cash-flowing tax-efficient investments like commercial real estate.
“A lot of people don’t know that you can rest your retirement funds into real estate including syndication. I try to explain to people that they could co-invest as little as $50,000 into a large apartment syndication along with other people that are experienced so that they can be a totally passive investor,” says Alex, adding that it’s important to educate people about this investment option in syndication.
If you are looking for high returns in the stock market, but are frightened by the volatility of stocks and mutual funds, then consider investing in real estate. Real estate has traditionally been an alternative investment that offers lower risk, yields better returns, provides greater diversification, and allows investors to build wealth over time.
Ready to start investing? Reach out to us if you need help to make a decision or if you’d like to learn more about passive investing in multifamily real estate. Our team will be glad to assist you. You may also email us at firstname.lastname@example.org or call to see if LifeBridge Capital’s investments are a fit for you.