Disclaimer : The author is a licensed real estate agent in the state of New York. Anything mentioned in this post is not financial advice and is for informational purposes only. All investments carry risk and there is no guarantee of profit nor protection against loss. WealthGap does not provide any legal, tax, or accounting advice.
In America, real estate is generally a poor asset class compared to common stock, but I agree if someone is not an investment professional it is a much safer bet to invest in real estate. At WealthGap, we do the stock picking for you so you can invest in hedge fund quality portfolios without being an expert in the financial market. In this article I will explain why real estate is such a poor asset class compared to common stock.
Property Tax, Insurance, and HOA Fees
When you own a piece of real estate, you need to pay property tax on the asset. On average, an American paid 1.13% on his/her property value in 2016 (source: Investopedia). This means you are paying "rent" as cash outflows to the government every year to live in your home. Further, if you have a mortgage on the property, the lien holder will most likely force you to buy home owner insurance. To make matters worse, if the property has HOA fee obligations the owner is forced to pay out more cash flows every month. All these fees add up, but if you own stocks you could be receiving dividend cash inflows every year instead. Real estate= cash out flows. Stocks= cash in flows. While rental properties have rental income that covers the operational costs, good luck when the recession hits and when there is no rent paying tenant.
Assuming you are not buying land, any property structure will get old over time. Things break and you would have to shell out money to fix things. Yes, more cash outflows.
Absurd Transaction Costs
When a transaction takes place, the brokers, the lawyers, the title insurance company, your local government..etc will get paid in the transaction. Just the broker fee is around 5%. I won't describe each item's fee in detail, but the point is it is quite expensive to sell a piece of real estate. Any profit you generate will be reduced significantly due to the transaction costs.
If you invest in a rental property, it is likely your property will be vacant for a period of time before a new tenant moves in. This further erodes the profitability of this asset class.
Real estate is highly illiquid, especially during economic recessions. If you have a mortgage on a rental property and you cannot manage to find a tenant (or a mortgage on your primary residence and you lose your job), how are you going to cover the mortgage payment? It could take months before you can find a buyer that can close on the property. If you urgently need money, you might even have to sell at a huge discount to get cash as soon as possible.
Why Common Stock Is Better
Common stock has none of the issues that I described above. When you own stocks, you don't have to pay property (ownership) tax to the government. You also don't have to buy insurance to insure your stocks because when you invest money with WealthGap, you are insured up to 500,000 already (SIPC). The stocks that you own will not depreciate. There is 0 transaction cost when we trades stocks for you since we negotiated an amazing deal for our clients. There is no vacancy issue. There is also no liquidity issue assuming that none of you invest more than a billion dollars with us, but don't let this deter you because we can always set up a separate hedge fund to manage your money :).
In summary, common stock is a much better asset class than real estate for innumerable reasons. If you are not an investment professional, just trust WealthGap and we will help grow your money in the years to come. Warren Buffet got on the world's richest list by owning stocks, not real estate.