Stocks vs. Real Estate: Six Trade-Offs Investors Should Consider

Hello,

I am not one to say the market has "recovered" or everything is fine. As we know, the market can move up or down significantly in the short term. Frankly, these short term swings are irrelevant to our long term plan.

But I think it's important to point what has transpired over the 1st ~120 days of 2025.

The Total US Market (I will use the ticker ITOT) came into the year on January 1st at 128.

It bottomed out at 105 on April 8th - a NEGATIVE 18% decline on the year.

The next day on April 9th, it rose to 118, a 10% increase in ONE DAY.

Since the bottom on April 8th, it has risen almost 18% as of May 8th, 2025.

It currently sits at 123.50, making it down ~4% on the year.

And as I have pointed out in the last few letters, let's not forget that the International markets are now quietly up 12% in a little over 4 months.

Now tell me, could anyone have accurately predicted any of this? Had you gotten out of the market during the panic, you potentially missed out on a 10% increase in ONE DAY from the President simply tweeting.

Now I wish I could tune all of this noise out, but given the nature of what I do, I follow what happens in the markets. What I would encourage you to do is turn off the TV, tune out the noise, and check your accounts every now and then. You will sleep far better at night.

In other news, Warren Buffet announced his retirement last week.

During his conference, he made some interesting comments on investing in real estate that have lined up with some of my recent feelings on real estate.

You can find the video by searching for "Warren Buffet on Real Estate" and it's a 6 min clip on CNBC's youtube channel.

Here are my main things to think about after researching and investing in real estate personally.

1.) Competition

There are investors across the world with bigger resources than you, who have full time employees looking for deals. If you find a property on the market, that has been sitting for some time, you need to ask yourself why hasn't the brightest investment minds with all the resources in the world bought this property yet?

In my experience, the best real estate that I have have ever bought has been found OFF market. The other thing I have found helpful is partnering with someone who has experience. It's also easier to not take debt out that way. I have only ever bought real estate with a partner, that partner having 50 years of real estate experience.

2.) Debt/Leverage

Real estate has had a very attractive return for the last decade because you had been able to borrow between 2.5% - 5%.

When you are using debt or leverage, you are taking on more risk, and therefore should be achieving a higher rate of return for it. It's not something I would recommend or have ever done but you typically buy real estate by borrowing money. But when you compare this to investing in the stock market, it's not quite apples to apples because most people don't borrow money to invest in the stock market.

For example if you put $20,000 down on a $100,000 house and it goes up 10%, it's worth $110,000. Where if you put that $20,000 into the stock market and it goes up 10% it's worth $22,000.

Now you have to calculate closing costs into the equation so if you sold the $110,000 house you would net about $101,200, then payoff your loan of $80,000 and you are left with $21,200.

But typically the longer you hold these properties and the more they appreciate you will come out ahead due to leverage.

Now what I find interesting, why is it acceptable to borrow money to invest in real estate but have you ever thought to borrow money and then go invest that into the stock market? How is that any riskier or worse than borrowing money and investing it in a property that could have electrical problems, an AC unit go out, a renter that moves out and leaves the place destroyed. Or an economic event happen that leaves the house vacant for months on end.

3.) Interest Rates & Growth Rates of Real Estate

I think a lot of people are finding out that real estate doesn't always go up, at least in a straight line. I follow financial forums where one person asked the question "I bought my house in Austin for $600,000, I now need to move due to work and the house is valued at $550,000 now. If I rent it out, the rent wouldn't cover the mortgage, taxes, and insurance, what should I do?"

The last decade of low interest rate real estate has mislead people into thinking they can buy real estate and in a year or two sell it for higher than what they bought, or "I'll just rent it out". The long term AVERAGE historical growth rate according to FRED Economic Data is around 4-5%. In most cases, you need to hold a home for 5 years just to breakeven on your investment after you factor in closing costs.

4.) Liquidity

There is something to be said about how quick you can access your money. With real estate, it could be a long process. In the stock market, it takes a few days. Life circumstances can change quickly, having money in liquid investments can bring a lot of peace of mind.

5.) Tax Advantages

Where real estate can definitely pay off is the tax advantages it has over investing in the stock market. You can take depreciation on the property to offset the money you make is one way. You don't have this in the stock market.

6.) Simplicity

The older I get (and the more kids I have) the less time I want to be spending on things . That is one of the main reasons I have exited on the real estate positions I have held.

To me, there is something fascinating about not putting your money into the "stock market" but buying OWNERSHIP in BUSINESSES. And these businesses are some of the most innovative companies in the world that you get to have a small ownership in.

And people talk about how they like real estate because it is tangible, I invite you as you go throughout your day, look at all of the companies you use that you likely have ownership in that you can feel and touch.

Off the top of my head here are some I've used recently:

Apple - I am typing right now on their laptop and use their Iphone to talk on Facetime with my brother 700 miles away.

Google - I used to research this letter

Proctor & Gamble - diapers, lots and lots of diapers in this house which we buy from Walmart

Amazon - their truck seems to be at our house on a daily basis

Home Depot - went this week

McDonalds - sadly my kids like this place

Visa - use their credit card

Johnson & Johnson - bandaids that my kids use as stickers

Facebook

AT&T - cell service

Disney - kids love their movies

Exxon - gas

These companies never call me saying their toilet isn't working either.

But I'm curious to hear from you. What has been your experience investing in real estate? I am interested to hear any pros or cons I left out or any stories you have to share; good or bad.