Author Topic: Real Estate v. Stocks  (Read 8024 times)

fuweike

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Real Estate v. Stocks
« on: August 21, 2014, 10:21:33 AM »
Hi all,

I'm 28 years old with the good fortune of a decent paying job in law and prospects for growth as time goes on.  However, I do not like my work, and want to reach financial independence as soon as possible so I can check out and do legal work that I will find gratifying, apart from the pay.  To this end, I also have some significant savings that I want to maximize investment-wise.

I am wondering if people have thoughts on rental houses vs. stocks.  I have traded stocks for a few years with some great success, more due to luck than anything else, I think.  I want to get into some safe investments before the bottom falls out of this long bull run we've had and my luck runs out.  I live in Texas and have the chance to invest in Plano, Texas, where I think I can find rent houses for 1% to 1.1% rental.  However, in Texas the property taxes are quite high, and rental income is also taxed as ordinary income.  By comparison, stocks have no property taxes, and profits are taxed at a lower capital gains rate.

My question is, should I focus on real estate, or just put things into a mixture of safe dividend stocks?  I know it all comes down to the numbers, but want to hear the intuition and conventional wisdom of those more experienced, wise, financially savvy, and mustachian than I.  Thanks in advance for all your thoughts and opinions!

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1388
  • Age: 40
  • Location: Texas
Re: Real Estate v. Stocks
« Reply #1 on: August 21, 2014, 11:39:38 AM »
In this forum you'll mostly get advice along the lines of:

1) You can make more in real estate

2) If you go with stocks, only invest in index funds

Personally my advice is to do what you are most passionate about, work hardest at and have the most discipline towards. That usually pays off the most in the long run. That could be doing law, running a business, buying individual stocks, landlording, flipping houses, marrying a rich girl, etc.

Most likely the quickest way in your situation is to live as simply as possible, work really hard and make as much money as possible in your job, and save like crazy. Allocate your savings in a way that provides above-inflation returns with as little risk as possible. You should be in a financial-independence type situation before too long in that scenario.

welliamwallace

  • 5 O'Clock Shadow
  • *
  • Posts: 87
  • Age: 32
  • Location: Eastern PA
  • Trying to squeeze out those whiskers
Re: Real Estate v. Stocks
« Reply #2 on: August 21, 2014, 11:46:50 AM »
  I have traded stocks for a few years with some great success, more due to luck than anything else, I think. 

Just curious, what is your annual return rate? Does it beat the ~16% average annual return from 2011 to 2013 that the whole market has had?

Alex321

  • Stubble
  • **
  • Posts: 156
Re: Real Estate v. Stocks
« Reply #3 on: August 21, 2014, 11:54:35 AM »
It doesn't have to be one or the other. And I understand (but am not personally familiar) that you can own real estate in a retirement account, so you would avoid taxes on income. The simplest way to do this, of course, would be REIT shares, but that doesn't give you the fun of being an active landlord.

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 40
  • Location: Midwest
Re: Real Estate v. Stocks
« Reply #4 on: August 21, 2014, 12:38:49 PM »
Quote
By comparison, stocks have no property taxes, and profits are taxed at a lower capital gains rate.

True, no property taxes on stocks.  But you can't defer income via depreciation either.  Please explain the part about profits from stocks taxed at a lower capital gains rate (than real estate).  Real estate (and actively trading stocks for that matter) can have big tax consequences/advantages.  Your statement makes me think you should thoroughly research the tax implications of all options before proceeding.

Quote
My question is, should I focus on real estate, or just put things into a mixture of safe dividend stocks?

As Alex said, there's no reason to make this all or none.  Even if you have the capital and the credit to jump into real estate in a big way, it just makes sense to wade in at first.  With your "significant savings" you will be able to ramp up your holdings quickly if that path proves worthwhile.

My advice?
a) Get out of your individual stocks as soon as you can without incurring short-term capital gains and get into one or more index funds that represent a diverse set of asset classes.

b) educate yourself on the tax consequences of realizing gains from stock trading and the tax consequences/benefits of owning residential real estate for rental. Specifically, download a Schedule E and start filling it out using a hypothetical real estate investment.  See how it would effect your taxes.  Don't proceed until you are comfortable with your estimate for each line item on your hypothetical Schedule E.

c) if you are still interested in real estate, explore your options for exit strategies, including the tax consequences of those exit strategies.  At a minimum, understand what a 1031 Exchange is and what depreciation recapture is. Also be aware of the different tax consequence depending on which tax bracket you are in when you sell/exchange.

d) if you are still interested in real estate, become at least somewhat familiar with landlord tenant laws, customs, and common mistakes and problems.

e) if you are still interested in real estate, buy one place and see how it goes.  Give it plenty of time (at least 1 or 2 tax filings) to see how things are shaking out before you buy another. 

f) Whether you do your own taxes or not, pay close attention to how your real estate investment is affecting your income, taxes, net worth.

g) providing you have a personal emergency fund, an operating fund for the rental property, put everything in index funds until you want to start a more liquid pool for a down payment on another property.

fuweike

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Real Estate v. Stocks
« Reply #5 on: August 21, 2014, 12:54:10 PM »
  I have traded stocks for a few years with some great success, more due to luck than anything else, I think. 

Just curious, what is your annual return rate? Does it beat the ~16% average annual return from 2011 to 2013 that the whole market has had?

Yes, far and away more than that.  I like to think I have good stock sense, but I know I've been terribly lucky as well.  I bought Tesla at 28 and again at 38, then sold at 180.  I bought Apple at 242 and sold around 650/700.  I bought Solar City at 19 and sold at 49.  More good examples like that.  However, I also bought American Airlines at 5.10 and sold it at 3.18 (and then the DOJ approved its merger and it went to 11 in a year--gaaah!)

I like stocks, but I don't want to lose a ton of money in the next few months.  A correction has got to come eventually.

fuweike

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Real Estate v. Stocks
« Reply #6 on: August 21, 2014, 12:56:16 PM »
In this forum you'll mostly get advice along the lines of:

1) You can make more in real estate

2) If you go with stocks, only invest in index funds

Personally my advice is to do what you are most passionate about, work hardest at and have the most discipline towards. That usually pays off the most in the long run. That could be doing law, running a business, buying individual stocks, landlording, flipping houses, marrying a rich girl, etc.

Most likely the quickest way in your situation is to live as simply as possible, work really hard and make as much money as possible in your job, and save like crazy. Allocate your savings in a way that provides above-inflation returns with as little risk as possible. You should be in a financial-independence type situation before too long in that scenario.

Thanks!  That is exactly my plan--buckle down and make as much money as possible and spend as little as possible in the next 4-5 years.  It won't be fun, but I think it will be worth it to get the snowball accumulating as early as possible, and get the 'stache rolling as soon and as largely as I can.  Thank you as well for the tip on real estate vs. stock returns.  I think I will go with real estate then, even accounting for the taxes involved.

fuweike

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Real Estate v. Stocks
« Reply #7 on: August 21, 2014, 01:21:02 PM »
Quote
By comparison, stocks have no property taxes, and profits are taxed at a lower capital gains rate.

True, no property taxes on stocks.  But you can't defer income via depreciation either.  Please explain the part about profits from stocks taxed at a lower capital gains rate (than real estate).  Real estate (and actively trading stocks for that matter) can have big tax consequences/advantages.  Your statement makes me think you should thoroughly research the tax implications of all options before proceeding.


Thanks John!  I think if you hold stocks for more than a year, they are taxed as capital gains.  If you hold for less than a year, they are taxed as ordinary income.  I am not a tax lawyer, I could be wrong!

You make a good point about depreciation.  I did not factor that into my equation, because I don't know a lot about it.  But I have heard it exists and can help with the numbers.  Thanks!

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1388
  • Age: 40
  • Location: Texas
Re: Real Estate v. Stocks
« Reply #8 on: August 21, 2014, 01:53:28 PM »
Thank you as well for the tip on real estate vs. stock returns.  I think I will go with real estate then, even accounting for the taxes involved.

Well, I didn't say that real estate offered better returns than stocks, just that the consensus of this forum says so. What I said is that no matter what avenue you pursue, the one where you are going to work harder and be more disciplined is most likely where you'll make the most money. You could easily make a bunch of money selling pink handbags on Etsy and lose your shirt in real estate if you are careless or don't know what you're doing.

fuweike

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Real Estate v. Stocks
« Reply #9 on: August 21, 2014, 03:19:27 PM »
Thank you as well for the tip on real estate vs. stock returns.  I think I will go with real estate then, even accounting for the taxes involved.

Well, I didn't say that real estate offered better returns than stocks, just that the consensus of this forum says so. What I said is that no matter what avenue you pursue, the one where you are going to work harder and be more disciplined is most likely where you'll make the most money. You could easily make a bunch of money selling pink handbags on Etsy and lose your shirt in real estate if you are careless or don't know what you're doing.

True.  I think what really fires me up is . . . making money.  Stocks is fun, but it's mostly passive.  I think I will give real estate rentals a try.

Johnny Aloha

  • Bristles
  • ***
  • Posts: 315
Re: Real Estate v. Stocks
« Reply #10 on: August 21, 2014, 03:51:40 PM »
Why not real estate and stocks?  Stocks in tax advantaged vehicles (IRAs, 401k) and RE in taxable accounts - works well for many.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28262
  • Age: -999
  • Location: Seattle, WA
Re: Real Estate v. Stocks
« Reply #11 on: September 02, 2014, 01:57:03 PM »
Why not real estate and stocks?  Stocks in tax advantaged vehicles (IRAs, 401k) and RE in taxable accounts - works well for many.

Yes, yes, to Johnny Aloha you listen!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

soccerluvof4

  • Walrus Stache
  • *******
  • Posts: 6128
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: Real Estate v. Stocks
« Reply #12 on: September 02, 2014, 02:34:02 PM »
+2 for Johnny ALoha but I haven't found the right property yet myself. Trying to be patient and diciplined. Till then index funds and Reits....

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1188
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Real Estate v. Stocks
« Reply #13 on: September 02, 2014, 03:42:21 PM »
Why not real estate and stocks?  Stocks in tax advantaged vehicles (IRAs, 401k) and RE in taxable accounts - works well for many.

absolutely.  +1

plus some bonds, plus leveraging your home for tax free capital gains, REITs, international stocks, your friend's awesome RE business, ...

all of the above. Keep it balanced. Manage taxes. Save your ass off.

cko

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Real Estate v. Stocks
« Reply #14 on: September 03, 2014, 10:28:00 AM »
I live on the East Coast and I have five units in Texas: Dallas-Fort Worth and Austin areas. Planning to scoop up more. And I'm currently 28. I've done a bit of self-education in terms of real estate but I mostly follow a real estate broker specializing in SFR investments. It was a risk making the first purchase, but so far everything is going well.

Real estate rental income can be tax-sheltered via depreciation. My annual tax returns are higher than my peers because of additional depreciation applied towards my job income.

One unit I purchased two years ago with 20% down went from 130k to 175-200k (most recent appraisal).

Which is to say, I would seriously consider well-located real estate as a serious option.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28262
  • Age: -999
  • Location: Seattle, WA
Re: Real Estate v. Stocks
« Reply #15 on: September 03, 2014, 10:50:35 AM »
I live on the East Coast and I have five units in Texas: Dallas-Fort Worth and Austin areas. Planning to scoop up more. And I'm currently 28. I've done a bit of self-education in terms of real estate but I mostly follow a real estate broker specializing in SFR investments. It was a risk making the first purchase, but so far everything is going well.

Real estate rental income can be tax-sheltered via depreciation. My annual tax returns are higher than my peers because of additional depreciation applied towards my job income.

One unit I purchased two years ago with 20% down went from 130k to 175-200k (most recent appraisal).

Which is to say, I would seriously consider well-located real estate as a serious option.

What company/broker are you using?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1188
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Real Estate v. Stocks
« Reply #16 on: September 03, 2014, 04:58:47 PM »
Texas real estate in prime areas last 5 years have killed. Just shows the upside of leverage and an appreciating market... :-)  take 20k and turn it into 80k in 2 years, tax free... yum yum.

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 40
  • Location: Midwest
Re: Real Estate v. Stocks
« Reply #17 on: September 04, 2014, 08:21:20 AM »
Texas real estate in prime areas last 5 years have killed. Just shows the upside of leverage and an appreciating market... :-)  take 20k and turn it into 80k in 2 years, tax free... yum yum.

Of course it's tax free.  They don't tax you on it until you realize it :)  If you are still sitting on it, doesn't sound like you've made it yet.  What does the cash return look like on the 20% down?

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1188
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Real Estate v. Stocks
« Reply #18 on: September 04, 2014, 08:57:53 AM »
If you live in the house as your permanent residence 2 years the capital gains when you sell are tax free up to $250000, $500k for a couple.

WillPen

  • 5 O'Clock Shadow
  • *
  • Posts: 57
Re: Real Estate v. Stocks
« Reply #19 on: September 04, 2014, 09:25:49 AM »
Do both and pay attention to your circumstances and surroundings.

My father in law and brother in law both dabble in real estate. Both prefer Real Estate as their vehicle to financial independence and generally don't trust the stock market much.

In 2009 both advised my wife (at the time we weren't married) to invest a nice chunk of change in some apartment buildings instead of the market which was at a historic low. Even they knew that much at the time.

As you can imagine her money would have doubled if she just would have put it in an S&P 500 index fund, which to many is a very vanilla and conservative plan. On the other hand, the apartment's upside is still hard to see. It doesn't (and hasn't) paid out any more than a rental house would so far in our city. It's hard to see how its a "smarter" move right now.