It’s an old debate. Which is better, investing in the stock market or putting your money
in real estate?
Years ago when I was a financial advisor at a Wall Street firm, I knew everything, or so I thought. Late nights
spent feverishly studying the stock market, staring at charts, reading stacks of annual reports and clinging to the words of Warren Buffet. Mutual funds, stocks, interest rates, bonds, variable annuities, options, even futures, I knew it all…in theory.
One cold February day an older, a much wiser silver haired client sat in my office with hands folded across his chest. I gave my mutual fund pitch, rattling off a dozen reasons to buy. His eyes glazed over. I mentioned our top analyst’s stock picks. He yawned. Quietly and patiently he waited. Recognizing his boredom, I wrapped it up. Later a colleague informed me that my wise old client was a well-known real estate investor. He’d accumulated significant holdings spanning decades. He was far wealthier than I presumed, and much smarter than I’ve given credit. Puzzled, I wondered how stodgy old blue-collar apartment buildings had yielded such wealth.
Over the years similar clients sat across my desk with the same story. Sometimes it was a sprawling multifamily complex, other times a portfolio of rental houses or a corner retail building, maybe a warehouse near the airport. But the story was similar, real estate accumulated slowly with good tenants, over time paid off and appreciated in value. It was repeated again and again.
My question persisted. How does real estate as an asset class, that has undeniable underperformed many market indexes, how was it producing so many millionaires? The numbers can’t lie. It was frustrating but eventually I discovered the easy answer. Psychology or simply put, human behavior.
Investments such as stocks, bonds, mutual funds are bought and sold with a phone call or click of a mouse.
Decisions can be made quickly without the counsel of professionals, often within seconds. Technology made buying and selling instantaneous which is required considering investment values fluctuate daily, hourly, down to the minutes and even seconds. This instantaneous decision-making ability combined with frequent price fluctuation triggers our impulsive nature. So when our stocks start dropping, we enter a sell order within seconds, transferring ownership. This isn’t the case with real property.
The purchase or disposition of real estate isn’t instantaneous. It requires procedures, people, and documents and time before the property changes ownership. While hasty developers may get caught up in the sensationalism of a new project with fancy renderings, generally real estate is a process not a quick transaction. In other words, real estate can’t be day traded.
The path to wealth is slow and steady, a model that income producing real estate encourages. It’s a simple concept lacking sophisticated financial modeling, no “Argus runs” or complicated IRR calculations are needed. The basic concept is back-of-the napkin-stuff here, real easy. The hard part is execution and patience, it’s a persistent effort that requires more time than energy. It’s behavior, habit and longevity of paying down the debt, increasing rent with the eventuality of increase in value that wins the game. Carefully select a property, negotiate a good purchase price and terms, find well qualified tenants then rinse and repeat.