The Tryon Street Journal

Marlys Harris at Money Magazine recently published an article comparing investing in stocks to real estate.  It’s 90% correct, and her conclusion on which investment is the winner is non-conclusive.  But for the most part it’s a great piece that captures most of the similarities and differences between investing in stocks or real estate.  Read it now then see my notes about the gaping holes in her analysis: 

1. She frequently refers to your home when talking about investment real estate.  I know the argument can be made that your home is your biggest investment, but it can’t be looked at the same way as investing in stocks or other pure investments, simply because you also derive UTILITY from your home.  You live there, and you have to live somewhere.  But that aside there are a few other points to keep in mind… 
    
2. In “Round 4: Taxes” she is simply wrong by saying about real estate, “there’s no exclusion from taxes when you sell, and you pay 15% in capital-gains taxes on any profit“.  The IRS makes a well-known exception to paying taxes when selling investment real estate by using the sale proceeds to purchase another investment property.  Essentially, Uncle Sam says if you don’t put any money from the sale in your pocket, I won’t make you pay me either.  The 1031 exchange is probably the single-biggest reason investing in real estate even competes with other more-liquid investments.  You simply can’t do this with stocks. 
    
3. In “Round 2: Leverage”, she talks about the downside of trying to “flip” condos, and being stuck with a mortgage when you’re forced to have a fire-sale in a down market… but that doesn’t happen in commercial real estate.  Non-recourse loans are common, which do not require the investor to be personally liable beyond their equity investment.  Which means if everything hits the fan you just hand back the keys.  Granted you lose your investment, but you wouldn’t lose your home too. 
    
4. Another Round 2 item I disagree with is the comment “You could also play in the options market, but you risk losing your entire investment.“  Who ”plays” with their investments?  Trading options is serious business.  That’s like saying, “you shouldn’t play in the real estate market”.  I don’t recommend anyone “play” in any market with yours or anyone else’s money.   
    
5. One Round she is missing is Income.  Stocks can pay dividends, and income-producing property yields cash flow.  In this category real estate easily wins over dividends. 

I was struggling with the title for this post, so I just decided to go with something bland.  I just read one of Robert Kiyosaki’s column’s where he gives a basic example of how the working and (especially) middle class pay a huge portion of their income in taxes, while the rich shield their income from taxes using intelligent mechanisms such as real estate investing.  Even if you and I don’t have $100k TODAY to drop on buying a bundle of condos, we can start planning with what we do have and how we’re going to be able to employ these strategies sooner rather than later. 

What you’ll get from reading this short column is a basic understanding of how to move toward having money work for you (financially free mentality; lower taxes) instead of (only) working for money (middle class mentality; higher taxes).  I would, however, be cautious about taking on too much debt to fund your real estate acquisitions that you are personally liable for, but that’s another topic entirely.  OK, enough babbling… read Kiyosaki’s column now.