Dow or Dirt?
Stocks vs. Real Estate
"Only buy stocks that go up...if they don't go up don't buy them." - Warren Buffet
Nearly all financial planners advocate a diversified portfolio that consists of stocks, bonds, cash and other assets such as real estate. Many Americans already have such an investment portfolio with only their home as the other assets portion of their portfolio. So why invest in more real estate?
- Appreciation - Land is a limited commodity. There is a diminishing supply of quality real estate combined with a rising demand for real estate in prime locations. Although the earth is covered with millions of acres of raw and undeveloped land the keywords for quality real estate have always been location, location, location
- Leverage - People can borrow other people's money to invest in real estate. For every dollar of your own money that you invest in real estate you can borrow someone else's dollars at interest rates that are near historic lows. Yes, the same technique can be applied to stocks, but not under as favorable of terms as can be found in a loan to purchase real property.
- Tax Advantages - Tax write-offs and tax deferrals. The interest on loans may be tax deductible up to certain limits for owners of real estate who have leveraged their money by borrowing against the equity in their primary residence. Taxes on the profits on certain types of investment property can be deferred when the property is sold and replaced with similar property. This tax deferral gives investors more purchasing power since all of their equity is available for purchasing more real estate instead of paying a hefty tax bill. For specific details on the tax advantages of real estate consult your tax advisor.
- Real - Real estate is real. Owning a recreational property is an investment in lifestyle. You can vacation there, live there, and enjoy time away by yourself and with others. For most, but not all, this is the primary reason to invest in more real estate, see appreciation above.
This is not to suggest that one should not invest in the stock market or that the stock market is not a good investment. The advantages of stocks are their liquidity and their ability to produce large returns. The disadvantage of stocks is their potential for a rapid decrease in value. Most people agree that real estate is a good investment in uncertain times.
Due to baby-boomer demographics, population movement trends, and low interest rates, owning real estate can be an important part of a diversified investment portfolio. Real estate is tangible, reliable, and you can determine for yourself whether it's a sound investment.