Jonathan Heagle is President of Mountain Vista Wealth Management, a fee-only registered investment advisor that helps pre-retirees and real estate investors achieve time and financial freedom.. On this episode of CFO at Home Jonathan and Vince compare real estate and stock investing in terms of returns, liquidity, volatility, diversification, and more.
Key Takeaways
Returns
- Long-term returns of the stock market are often quoted between 8-10%.
- Since 1953 residential real estate prices have nominally increased 4-5% per year, but this does not factor in variables such as
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- Leverage: Properties are often purchased with a mortgage, reducing the capital invested
- Cashflow: Investors typically target properties that produce positive cashflow
(collected rental income is greater than all expenses and reserves)
- Amortization: The tenant is paying down your mortgage for you, increasing your equity in the property
- Inflation: Rent, in addition to the value of the property, should increase over time, while your debt service remains the same, assuming a fixed mortgage
Liquidity
- The stock market, generally speaking, is very liquid.
- Single-family housing market is generally viewed as the most liquid segment of the real estate market; it still takes weeks, if not months, to convert a home to cash.
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- While liquidity is generally viewed as a positive characteristic of an investment, it can also promote bad behavior
Volatility
- The stock market experiences a correction of 10% or more, on average, every 1.87 years
- Since 1963, the median sales price of existing homes experienced a YoY decline of 10% or more on only two occasions
Diversification
- Stocks - can easily be achieved by purchasing an ETF or index fund that owns a broad array of stocks and does not require a large amount of money
- Achieving diversification through rental properties is more difficult
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- Money required for multiple down payments
- You would want your portfolio to be geographically diversified
- Publicly traded REITs or eREITs offered through crowdfunding platforms, that allow for investors to achieve diversified exposure to real estate,
Time and Effort
- Stock investing can be active, but most people buy a few individual stocks and index funds, sit back and watch their account value change over time
- Despite the common perception that you will be fixing toilets at 2 a.m., owning a rental property can be very passive, particularly if you have the right team behind you.
Resources
Ways to contact/follow:
Contact the Host - vince@thecfoathome.com
