When considering investing in Real Estate vs. Stocks there are 5 reasons why real estate beats stocks.
1. Predictability.
Unlike stocks, you can predict more or less how your real estate property will perform in the future. When investing in stocks, no matter what level of professional stock forecasting skills you have, you don’t know how the stock will perform over the short or long term. Only 20% of companies that were listed on the S&P 100 years ago are still listed on the exchange today.
2. Tangible.
When owning real estate, you can visit and touch your investment asset. Unlike stocks where you can own millions of dollars worth of shares but you don’t actually own anything that’s tangible.
3. Individuality.
You get to visit and see your property and make it nicer than the property next door. You can own a million shares of Apple. Do they look any different than the next guy’s shares? Can you improve the value of your shares? Of course not!
4. Control.
You get to control the Class of your property. You get to decide if you want it to be a Class B or Class A property. When you own stocks, you have no say in what some folks in a board meeting decide, and other than a vote you have no say in how the company should run itself.
5. Tax Benefits
From a 1031 Exchange to avoiding capital gains tax, there are many benefits of real estate vs. stocks taxwise. A 1031 exchange lets you avoid paying taxes on the sale of a property as long as you identify another property within 45 days of selling your first property and allows you 180 days to close on your new property.
There is also the depreciation schedule that is unique to real estate. The government will allow you to depreciate the build value portion of your property over 27.5 years if you live on the property or 39 years when it’s non-owner occupied (think commercial property).
This is a loss you can deduct from your income when it’s not really a loss. In fact, your poverty may have actually appreciated over this time period! Additionally, capital gains taxes are much lower on real estate than stocks. Currently, when selling real estate, the government allows you to take a $250k deduction for single filings and a $500K deduction for married filings. (note: you cannot do a 1031 exchange and take a deduction on the same sale).
There are also things like cost segregation and passive rental losses. Cost segregation allows you to calculate your depreciation schedule on an accelerated schedule instead of having to do it over 27.5 or 39 years. You would have to hire a professional to do a cost seg study and you can take advantage of this accelerated depreciation. Passive rental losses can offset taxes on income.
When using passive rental losses have a cap of deducting a $25K loss up until an income of $150K. But there is a loophole! When you become an active real estate professional, meaning you spend more than 750 hours a year you qualify and you can take advantage of passive rental income without the 150K cap.
This will allow you to take passive rental losses (depreciation, utilities to run your business, office expenses) against any profit you will make when selling a property even when your income is more than 150K a year. All of your passive losses will fill up an imaginary bucket of losses which can offset gains on any sale in the future.
So why do people invest in stock over real estate? In my opinion, simply because it’s a lower cost of entry and you have no need to monitor the performance of the business your invested in. However, nobody cares as much about your money as you do.
Although the executives at a company have it in their best interest that the company perform well, larger companies are limited in their growth potential. Once they go public they are usually past the fast growth period that they had when they were an unknown start-up looking for venture capital.
