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Is Real Estate Investing More Profitable Than Stocks?
Joe: Hey, it’s Joe Crump. Is real estate investing more profitable than the stock market? Good question. And I think that you have to look at the type of stock investing that you do and what’s going to be safe, what’s going to be profitable, what’s going to be long term versus short term. Is it going to be bonds, is it going to be index funds? Is it going to be puts and calls? You know, are you looking at futures? There’s a lot of different types of investings in the market that can be very risky. And if you know what you’re doing it can also be very profitable. But typically the people that are making the most money in the stock market are people that are at the top of the food chain. And the losses trickle down to little guys like us.
Joe: And the other person that I’ve seen make money are people that are doing day trading, but it’s highly stressful, it’s very unpredictable and the potential of loss is pretty great. So you have to be very careful with your money because the goal here is not to lose your money. I mean the goal is to make money, but it’s a, also a bigger goal is not to lose your money. So put it in a place that’s going to be stable and give you good long term investment over time.
Joe: One of the types of stock investing that I like is index funds. It seems to be pretty stable because you don’t have to be a stock genius to be able to pick. And as long as the stock market is moving up you’re going to make a profit. When the market crashes and all of the stocks go down because you’re buying an index which means that you’re buying a share or a piece of every – index funds are a piece of every stock on the market. And there’s lots of different kinds of index funds, whether it’s bond funds or S&P funds and those types of things. I am no stock market expert. So there’s plenty of good training on that elsewhere so I won’t get into that.
Joe: But the thing that I like about real estate over the stock market is its stability, the fact that it’s there, it’s a real, concrete item that you’re purchasing. It’s under your control which I guess there’s good and bad of that, but one, it’s bad because it’s under your control. You’re responsible for it. It’s also good because it’s under your control and you’re responsible for it and if it makes money it’s because you set things up properly.
Joe: But it’s not that hard to get good people to manage your properties and to take care of them for you. I’ve got people in many different parts of the country that have managed properties for me over the years and have a done a great job. And even when someone quits and leaves the business typically they’ll sell their business to someone else. You just want to make sure that you get somebody who does a good job from the get go, who does their accounting properly, who doesn’t cheat you. That’s happened to me in the past as well. But I learned how to find the right type of property manager to avoid that.
Joe: You also have to think about the difference between long term investing and short term investing. With the stock market, typically short term investing you want it in a safer place because you don’t want it to be as volatile as the market is volatile. If it’s longer term investing you can be in a more volatile market and wait for the market to come up over time. And that’s one of the things that stocks do.
Joe: With real estate, if you buy real estate the likelihood that the market is going to drop on you dramatically is pretty low. And if it does drop, if you set it up properly and you bought in places that can get you market rent, you’ll be able to sustain those properties through the decline. So if you buy into an area, let’s say you buy into a volatile area like California and, you know, right now we’re probably on a bubble and when that bubble pops the values are going to drop.
Joe: And when the value drops you’re going to lose equity in your properties. But, if you bought it in a way that covers your monthly payment on that property, that property’s going to continue to gain value over time even if you owe more on it than it’s value currently is. And the likelihood is that in all of these volatile markets, and what I’ve seen in the past, because I’ve lived through the last two dramatic collapses through 1991 and then in 2008. I was in the business during those times.
Joe: And we saw the markets come back after three, four, five years, the markets were back where they were and in most cases above where they started at that time. So long term, short term, makes a big difference. If you’re keeping a property long term and you’re a volatile market, it may go up really quickly. And if it does maybe it makes sense to sell out and take your profit. If it collapses, it’s not the end of the world as long as you’ve got enough money to make your cash flow.
Joe: One of the things I saw in 2008 in Florida people were buying $400,000 condos that would rent for $1,200 a month. I thought this was a mistake from the get go. First of all they were inflated. The values were going up 40%, 50% a year in Florida back in 2006 and 2007 and 2008 before the crash. And I thought this is just a recipe for disaster. Low income on a property, they weren’t expecting to keep those properties. They were planning on flipping them. But the work wasn’t done so they can’t flip them until the work was done. Because they were building these great complexes. So what happened was the markets dropped down to $200,000 but they had $400,000 mortgages on these properties and most of the people had put, you know, 20% down so maybe it was $320,000 mortgages on these properties, put $80,000 on them.
Joe: So they had a lot of money into these properties, but they only had $1,200 a month of potential income on a $320,000 property which was costing them about $3,000 a month because the interest rates were higher then. So when the crash came, and the values dropped, they lost their properties. And I know people that had quite a few properties just like this that they put money into and they lost all those properties.
Joe: Now, what we were doing at the same time in order to protect the investors that I was selling to, because I was buying and selling subdivisions at the time, and we would sell it to an investor and make sure that the income would be enough to cover the monthly payment. So instead of buying $400,000 properties we were buying $150,000 properties that had, you know, $1,000, $1,100 a month monthly payment but had income of $1,200, $1,300, $1,400 a month. That way if the values had dropped, and they did in some of those areas, they dropped for a few years. If they drop they’re still able to make the payments on their properties with the income that they’ve got.
Joe: So that cost to income ratio makes a big difference if you’re looking at long term investments where you’re heavily leveraged. So be very careful when you leverage your properties that you don’t get into a position where you have to make payments on properties and you’re not going to be able to come up with those payments because the bank will take that property back from you and you’ll lose all the equity that you had. And if that equity drops out from under you you’ll lose that.
Joe: If you look at the time back in the last 80’s when I was working in California, I was building new construction. I was doing the same thing. I was buying property very heavily leveraged and we were doing new construction and building these giant, you know, 5,000, 6,000, 7,000 square foot houses in the Hollywood Hills that would go from anywhere from $500,000 to $2M. And we had all these foundations on the hillside going up and then the crash came in the middle of our construction cycle. And the banks came to me and said the values have dropped by, you know, 40%. You have to come up with more cash to keep these properties. Otherwise we’re going to take them back from you. And that was in the terms of my construction loan with them.
Joe: And they ended up taking back those properties from me because I couldn’t come up with that extra cash. There’s no way I was going to be able to come up with an extra, you know, $5M or $10M in cash to make them happy. So I ended up losing all those properties, trashing my credit, losing all the equity that I’d built into them in the first place and going back to square one with that. And that was a very unpleasant experience. I would not recommend that you go through that. Be very careful about leverage.
Joe: The next thing to think about when you’re thinking about stocks versus real estate is active investment versus passive investment. Active investment is where you’re involved in it all the time. If you’re doing flip properties you’re involved in getting them fixed up. You’re involved in finding the deals. You’re involved in finding the buyers. You’re involved in all that work. Whereas if you’re just doing rental properties or you’re doing lease options, and you’ve got other people that are doing that work for you, it can be much more passive. But you still have to pay attention to make sure that the deal makes sense, make sure that you’re buying properly, you’re going to have to sign the paperwork. There is an element of active investing in just about any real estate owned deal that you do that’s not, you know, a real estate trust investment – investment trust.
Joe: So it makes a lot of sense to have that because you have more control, you have your eyes on it. Whereas with the stock market you don’t have to think about them at all. You only have to trust those CEO’s to do all that work for you and you know, trust them that they’re going to make you money and make the value of the stocks go up. You have no control over their business decisions, you have no control over the direction that their company is going, whether or not they’re taking on too much debt, whether or not they’re spending too much money on CEO pay. You have no control over that stuff at all other than maybe some voting rights with the stocks.
Joe: So it doesn’t lend itself to being able to guide your investments through the paths that you want them to go. Whereas real estate allows you to guide everything that you’re doing and as long as you do it competently you’re likely to make money. Plus you’re going to have a hard asset that you can go to, you can see, other people can see, it’s tangible versus the stock exchange which is basically just a giant Ponzi scheme, you know, tell us what you really feel, Joe…
Joe: But essentially most of the money that is put into the stock market doesn’t even actually go to the businesses themselves. It goes to other investors. So it’s not truly – and a lot of people are going to disagree with me on this. Because I think that there’s value in having a stock market. I’m not saying there’s not. I’m just saying that if you’re going to be a small time investor investing in the stock market carefully look at you know, the type of investment that you want to make and make sure that you try to take investments that are not going to eat you alive. And by doing that that means that you’re going to take lower risk investments which means that you’re typically going to make lower returns on your investment.
Joe: But it’ll be pretty passive. You can just deposit that money into an account in a particular index fund or bond or mutual fund or whatever it is you decide to invest in and it’ll do its thing and then you just come back once a month or once a year and see how it’s doing. Real estate’s a little bit different. I check in on my real estate you know, regularly. There’s a lot of properties that I haven’t been to for many years. And I don’t feel I need to go to those properties, but I have property managers who do it.
Joe: My property managers make reports to me once a month, to my bookkeeper. My bookkeeper then sends me reports which I download and I look at so I can see how much money we’re spending on each of the properties, I can see how much money the return is on the investment, how much value they are, what they’re worth, you know, how much equity I’ve got in the properties. So I have a better idea of where my portfolio is all the time. But it’s not like just looking at an online stock account and knowing exactly how much money you’ve got. You don’t know. Because there’s variables within real estate and what you think it’s worth and what Zillow tells you it’s worth or what your comps tell you it’s worth is not necessarily how much equity you’ve got in that property.
Joe: You still have selling costs and other costs of holding it that are going to happen when you do that. I think that real estate investing beats the stock market hands down. But it’s a business, it’s not just a passive investment and it will take some of your time. But it doesn’t have to take a lot of it.
Joe: All right. I hope that helps.