I just read an article by the guys over at The Motley Fool on investing in stocks versus investing in Real Estate. The article is called What Happens When The Boom Goes Bust?
They give a great example on how a person who bought a house in 1980 for $76,400 would have a current value of $295,100 – resulting in $218,700 in equity (apparently the mortgage was interest only). The positives end there. They correctly point out that the annualized return on the price of the home was 5.6% over the period. Now let’s move on to the stock market…
The Fools (this is what they call themselves) point out that the stock market (S&P 500) average over the same period ends up at about 10.3% You’re probably saying to yourself, “Wow, thanks for pointing this out, maybe it’s time to sell my house and dump it all in the market!”
This article fails to point out two MAJOR real estate investing rules:
- Use Leverage (Other People’s Money) to move your investment further than your own cash could ever get you
- Have other people pay off your expenses by renting the property
Using the example by the Motley Fools, a person who invested $10,000 in 1980 would have approximately $115,981 over a 25 year period – an amazing return. Now look at the 25 year value of a $76,400 property purchased in 1980 – that’s right $295,100! After the renter pays off the mortgage and interest, the real estate investment would be worth $295,100 or a sweet $179,119 more than the stock market investment. Even with zero cash flow, you still have twice the money.
The next best part about the Motley Fool article is their fictional character Sal. Sal has flipped properties and made a million dollars. The Fools then say
And even if Sal did make a million in 2003, is he set for life? Certainly not. In order to make that nest egg last, Sal can only withdraw about $40,000 a year. Our guess is that Sal wants to live better than that.
I’d agree that Sal is probably going to want to live better than $40K per year. I’m also guessing that if Sal is smart enough to flip real estate and make $1,000,000 dollars that he’s also smart enough to diversify his accounts. Does a stock investor just pull out all their money when they hit the $1,000,000 mark? Earlier in their article the Fools say that the S&P 500 averages 10.3% per year. Doesn’t that mean that Sal could just throw it all in the market and live off the $103,000 in yearly growth?
Oh, I forgot, for the purpose of this article, people are not allowed to do crazy things like invest in real estate AND the stock market. I understand where the Fools are going with their article…they sell investment advice and want to continue to sell investment advice.
Until today I had actually enjoyed the Motley Fool website and their stock investing advice. Their book The Motley Fool: You Have More Than You Think was one of the first personal finance books I read. It helped me see a different side of controlling your costs and investing for the long term. After reading this article, I’m off their mailing-list.
