Hey guys, it’s Sharon from digital nomad quest and today we’re gonna do an episode on stocks versus real estate, which is the better investment now if you guys are new to this channel, welcome. I’m all about teaching how to build passive income, become financially free and design your best life. So because I’m interested in that, make sure to subscribe and hit the bell button to be notified of my latest videos. So I get this question a lot people ask me which one is the better investment type I do talk about both on my channel. But as you can see, I probably talked about real estate the most however, a large portion of my net worth is actually in stocks. So I want to go over it. Today, I’m going to go over the pros and cons of each. So we’re going to start with stocks first. And we’ll start with the pros. So first off, stocks have a low barrier to entry. In my opinion, it’s very easy to start investing with stocks. So for example, there are mobile apps like weeble in public where you can sign up right away. So if you guys want to sign up with my link, they’re actually some really good signup bonuses. And that’s why I kind of have multiple brokerages now because I like getting his signup bonuses. So if you guys do decide to sign up with weeble, or Publix through the links in my description, you will get free stocks upon signing up and putting $100 into your account. Now we’re doing this with just transferring some money into those apps, you can start investing stocks right away. Even with Publix, you can buy stocks with as little as $1, because they have fractional shares. So you can even buy $1 of Amazon, or Google or whatever, because they allow you to buy fractional shares. So you don’t need to buy a whole share to own a piece of that stock. So if you want to get into it right away, you can literally do it from the comfort of your phone, and you can just get those apps and you can start investing. So that’s why I believe it’s a low barrier to entry you can invest with as little as $1. And with the signup bonuses you just put in $100 into the account, you can start getting those free stocks right away. Number two is very liquid meaning you can easily convert your stocks into cash, there are always people buying and selling stocks. So if you put an order to sell on a stock, it will most likely execute pretty quickly. Depending on like the market cap. If there are a lot of people buying and selling that specific stock, it’ll be likely that people will buy your shares that you are selling, it’s definitely a pro that it’s so liquid. For example, with real estate, it’s going to be harder for you to sell a property versus selling stocks if you need the money right away. For example, if you put your money into a property, you’re going to need to probably find an agent to sell your property or you can try to do off market but both ways it’s going to take some time for you to sell that property. Number three, there are low transaction costs. A lot of these brokerages now actually offer no fees for trading stocks. So for example with Publix, and we will that I mentioned earlier, you actually don’t have any costs when you are buying or selling stocks at the same time real estate, there’s going to be higher transaction fees for sure. So there’s going to be closing costs when you purchase a property, there might be appraisal fees, origination fees, points and things like that. So usually closing costs with a property when you’re buying, you might incur two to 5% of your purchase price, when you are buying a property, there’s gonna be even more cost when you’re selling a property because you will need to pay your agent as well. Usually another advantage with stocks is you can easily trade with your tax advantaged accounts. For example, with your Roth IRA, your 401k, you can actually use that to invest into the stock market. So for example, with your Roth IRA, your contributions are coming from after tax dollars. So the whole account is tax free, including your earnings when you turn 59.5 years old. So you can make a ton of money through stocks in your Roth IRA. And when you’re over 59 and a half and you withdraw, you can enjoy tax free withdrawal, then you also need to make sure that your Roth IRA has been open for at least five years to get tax free withdrawal as well after 59 and a half years old. So that’s definitely an advantage if you actually invest with your Roth IRA contributions, and you’re putting it into the stock market. So I definitely make sure for my Roth IRA contributions, I always try to max that and then I also try to put that into ETFs, like QQ Q and other long term stocks that I invest in. And the last pro with stocks is there’s not much physical work required. So you might do some initial research. But ultimately, a lot of people recommend just putting a bunch of your money into index funds, or ETFs that are diversified and track the market that’s usually safer than investing in just like the hottest stock putting all your money into that that’s usually kind of scary. It’s better to invest in safer plays like index funds and ETFs. So let me explain. So ETFs are exchange traded funds into basically a basket of stocks. So rather than investing in one stock, you can invest in a portfolio of stocks through an ETF and this already helps you diversify your holdings essentially making it less risky than investing in just one stock. A popular ETF that I invest in is QQ Q which passively tracks the NASDAQ 100 index by investing in this ETF invest in 100 of the top companies in the NASDAQ Stock Exchange index funds also tracked a particular index the biggest difference with ETFs and index funds is that ETFs are easier to trade they’re kind of traded like a stock whereas index funds can be bought and sold only for the price set at the end of the train day. Alright, we went over a bunch of the pros of Sox let’s go over the cons now. So first con is you don’t own something tangible with stocks you don’t own something tangible. So some people feel weary of investing in stocks for
is real estate where that’s actually a physical asset that you can see, number two can be more volatile. So you may see huge ups and downs depending on what the stock is. So because of this, there’s a lot of day traders who like to buy and sell based off of the fluctuations of the pricing. Because it’s so volatile, they’re trying to make quick profits, I usually recommend investing in stuff that’s more long term that you want to hold for a long time. And even if there’s so many fluctuations, it’ll eventually go up because you believe in it based off the fundamentals. Number three, you don’t get much control with real estate, you can actually force appreciation, which I’ll talk about later, with stocks, you kind of just have to watch. So if you invest in a company, and they decide to do something that you think is completely stupid, and it might take the price of the shares, and you don’t have any control of that. And lastly, it’s easy to invest emotionally. And because of that, it also reacts on how people feel a lot of times. So if people start feeling really scared, there’s a chance that the stock might tank because they’re like, Oh, my God, what if everything tanked, so a bunch of people will start selling off. That’s why people say buy the dips, they’re trying to go against the fear and try to buy when it’s low, you don’t want to invest emotionally, because there’s a chance you’re going to buy at the high and you’re going to sell at the low because of it. So for example, when crypto was going up, and up and up, a lot of people started buying into it at the highs and then people started selling off, right. So you want to make sure you’re investing because you actually believe in the company or believe in whatever that you think that it has long term growth potential. Now let’s go into real estate. Let’s go into the pros and cons. So Pro Number one is it’s tangible, everyone needs a place to live. So for me, I feel safer in seeing that a lot of my properties, there’s demand for it, because there’s a lot of people renting places, and they need a place to live. So there’s going to be demand no matter what a lot of it though, is that you want to make sure you’re buying something in an appreciating market. So you want to make sure that there is population growth, there are a lot of renters out there and they’re building new things. They’re they’re having more job growth, all those things will usually drive the prices of homes higher, because there’s more demand for it. Number two, there’s cashflow income. So when renters are renting your properties, you’re going to be able to pay off your mortgage and your other expenses and cashflow if you’re doing it correctly. And with that you can see regular income coming in every month. And obviously that’s one of my favorite benefits, you get to see passive income coming in every month to your bank account, because you have these little properties working for you. Number three, let’s talk about force appreciation. So like I mentioned earlier, there’s less control with stocks. But with real estate, you can actually force the value of the property upwards. By fixing it up and doing repairs doing renovations. For example, you could buy an ugly property in a really nice neighborhood and buy it at a low price and then fix it up where you can actually make a lot of money doing that. So that’s what a lot of flippers do, right, they buy these properties that might be complete fixers, and then fix it up, and then they actually make a profit by selling it at a higher price. For example, you might buy a property at $100,000. And the property would be worth $300,000 after repair. So if you do calculations and make sure you’re accounting for holding costs, selling costs, renovation work. So if all of that, for example becomes $50,000, for you to fix it up, hold it and sell it, then you can make a $150,000 profit, which would be insane. But it’s actually doable because a lot of flippers in the Bay Area actually make six figures every single flip, it’s risky, but it can actually work I for one I’m currently not a flipper, because I prefer holding on to my investments, I would say that I almost don’t even feel like flipping is a form of investing. I would say buying and holding is more investing in real estate because you’re kind of holding it and letting it appreciate over time while you’re getting that cash flow as well. So as far as depreciation, you could fix up a property and just let it sit and it will appreciate a lot in value my $240,000 single family home I purchased that $240,000 I mean, we spent $13,000 in repairs that force the appreciation a little bit. And then natural appreciation just did its work actually. And now it’s worth over $600,000 Which is insane. Number four, let’s talk about tax benefits as well their tax benefits like depreciation. So even though your property’s appreciating in value, the government has determined the useful life of a residential rental property is 27.5 years. So to help you out, the government’s gonna let you deduct one over 27.5 of the building’s value every single year. And then another tax benefit is the 1031 exchange. This lets you defer your capital gains taxes on your rental property when you buy another like kind property. So when you sell your home, you’re normally going to pay capital gains taxes on the profits that you made from selling. But if you buy, for example, a bigger property, it’s going to let you roll that over and defer your capital gains taxes. There’s also the benefit of step up in basis when you pass away. It’s another tax benefit. So instead of selling your properties, you could basically pass that down to your heirs and if the heirs decide to sell those properties, they won’t need to pay those capital gains taxes because it basically sets them back
to zero when they inherit the properties, but after they inherit the properties, if the property’s appreciate after they’ve inherited it, then they would have to just pay the capital gains taxes on that period of time. So currently, that’s essentially how it works. But things may change in the future. But as you can see, there are a bunch of different tax benefits. I haven’t named all of them here. But there’s a lot of these things like that, that investors understand that can help them when they are trying to grow their wealth. And then lastly, another huge benefit with real estate is leverage with stocks, you can’t just borrow 80% of the stock’s value, and then just get the stock right. But with real estate, you can leverage money, meaning you can borrow maybe 80 to 90% of the value of a home, a lot of people if they buy like a $500,000 home, maybe they will pay only 20% for the down payment instead of paying all cash for that property. So basically, you can put in a down payment of $100,000, and then borrow the rest, which is $400,000. Like I mentioned, conventional financing is usually 20% down payment. But there are some types of loans like FHA loan where you only have to put in 3.5%. So that’s definitely a huge advantage that you can buy a cash flowing asset without putting in 100% of your cash by yourself. And if that property appreciated, for example, you buy a $100,000 property appreciates $220,000. If you put an all cash at 100,000, that’s a 20% increase. But if you leverage money, and you put in $20,000, to buy that $100,000 property, and it goes to $120,000, you’re basically doubling your investment, right, because you’ve made $20,000 in profit, and you put in 20,000. So those are a lot of different pros for real estate. Let’s go over the cons though. Now with real estate, there’s going to be a lot more work required. So for me, I have to have property managers, I might fix up the property for repairs and things like that, I might renovate it to increase the value of the asset, it just has a lot more work involved. And some people just don’t want to do that work, right. They’re like, I’m not a real estate investor, I’d rather invest in stocks, I don’t want to think about that. A lot of people kind of think of it as a whole nother business, which it really kind of is, but I kind of enjoy that part of it. I like that it has that entrepreneurial aspect. And I can hire property managers to manage my properties, I can get income. And it’s really nice. Because of that. Number two, there’s a lot more startup capital that’s required. And on top of that, there’s going to be higher transaction costs. Like I mentioned earlier, your closing costs might be two to 5% already of the purchase price. So that’s kind of a lot of money, whereas stocks a lot of brokerages offer 0% transaction fees, which is really nice with real estate, if you buy a $5,000 property, you might put in $100,000 for a down payment, which is about 20%. Plus you add those closing costs of two to 5%. So it does require a lot more money to invest into real estate. But there are other ways to finance maybe you partner with friends and family where you’re the one finding the deal and doing the work and they put in the money. That’s where you can actually find ways to put in less capital, but it could be riskier doing that. So you want to make sure you’re not over leveraging as well. And on top of that, you could actually do cash out refinances, where you take money out after you have done the bur method where you’re buying a property, you’re rehabbing it, renting it out, then refinancing and then repeating where you’re actually taking money out after you fix it up. And then you can put that back into more investments. And then you can scale your portfolio quicker by doing that. So there are ways around kind of putting in a ton of your own money, but you just got to understand the risks, you want to make sure you are not leveraging too much money. Number three, it can be harder to start investing in real estate. I feel like a lot of people are excited when I talk about real estate because they’re like, Oh, how do I do that? How do I do that it’s not as easy as going on a mobile app like we will in public and just buying some stocks, right, it’s definitely got a lot more work to it, you have to understand that there’s work there’s more money required in it, there are things to study, you usually have to get an agent, you have to get a pre approval letter, there’s just like so many more steps. Whereas with stocks, you can just open your phone and start investing. So it’s definitely a different game when it comes to real estate versus stocks. And lastly, it’s not liquid, it’s not as easy to sell off of property and have money again to like put into something else for example of all your money is tied up into real estate and you need to pay someone off like right away, it’s going to be harder it takes some time to if you are going to work with an agent, get an agent and get the listing up, get offers accept the offer. There’s the escrow period, there’s just like a lot more steps when it comes to selling your property. So it’s definitely not as liquid as with stocks where you can literally just sell it and have money pretty quickly right after so I hope you guys enjoy this comparison with stocks and real estate. There’s a lot of different pros and cons as you guys can see if I were to choose which is my favorite, I would probably have to say real estate you guys probably guessed it because I talk about real estate all the time on my channel, but I like stocks as well. So I have a huge portion of my net worth into stocks and ETFs and things like that because I like to diversify. I like to have multiple types of investments. But I also like some of those pros
I mentioned that it’s more liquid and it’s just easier to do you can just dump money into an ETF or an index fund and oh CRO, over time most likely so if you don’t want to do any thinking you are not into any of this type of stuff you don’t want to like own a business because I honestly feel like real estate’s kind of like owning your own business. If you don’t want to deal with any of that stocks are super easy. Like for example, a lot of people recommend putting their money into VTS a x Vanguard Total Stock market index fund and I think that’s an easy way to go you could grow your wealth pretty quickly by just doing that because it’s essentially tracking the entire US equity market it is a safer choice and you’re diversified just doing that so a lot of people do recommend that books like a Simple Path to Wealth and your money or your life they do recommend just putting your money into BTSA X and very simple that way so I definitely don’t judge whichever one you prefer. It makes a lot of sense to me investing in both or one or the other. There’s a lot of pros and cons to both so I don’t judge now if you guys liked this episode, let me know in the comments below which one do you prefer? Do you prefer stocks or do you prefer real estate do you invest in both? Tell me which one I’d love to hear your reasoning behind it as well subscribe, hit the bell button to be notified on my latest videos and I’ll see you guys in the next one.Transcribed by https://otter.ai