Why Investing in Real Estate is Far Superior to Owning Stocks – Part 1



Why should you invest in real estate, especially since there are many other types of assets to choose from? There is one overpowering reason to do so, but before I tell you what it is, I want to explain the other benefits of owning real estate.


Four Well-Known Reasons


When comparing commercial real estate to owning most other types of investments, there are four distinct advantages:

  1. The positive cash flow from real estate is a major advantage over owning most other types of investment. Stocks and bonds can also provide positive cash flow from their dividends. Bonds much more so than stocks, as an average dividend yield on the New York Stock Exchange is about 2 percent. But well managed CRE should generate significantly better cash flow, conservatively 6 to 8 percent and higher is not uncommon.

  2. 1031 exchanges on the sale of investment properties allow investors to defer capital gains taxes for decades. But if you sell another type of investment, you pay the capital gains that year.

  3. Depreciation on real estate shelters income, reducing the investor’s income tax burden. No such tax benefit exists for owning other asset classes.

  4. Using debt to buy property has two benefits: It significantly reduces the equity needed to purchase the property and leveraging a property with debt can significantly improve its return on investment. This is a huge advantage of owning CRE over other types of investments.

These four reasons for owning real estate are commonly known benefits. However, there are also three not so obvious reasons why investing in real estate is far superior to owning other types of investment assets. In my comments below, I will specifically focus on comparing real estate to owning stocks, because for many investors that is the logical alternative investment to owning real estate. But I believe this comparison is true of most other types of investments, not just owning equities.


Three Not So Obvious Reasons


1. The Concept of Efficient vs Inefficient Markets


The first less obvious reason to invest in real estate rather than owning stock has to do with the concept of efficient vs. inefficient markets. In an efficient market, everyone has the same financial information.

And you buy at whatever the price is. The stock market is a good example of an efficient market. Investors know the value of each stock. They have no legal way to buy a stock below the established market price.


The real estate market, on the other hand, is a perfect example of an inefficient market. The price of a piece of property is determined by what the seller and buyer agree upon. It has very little to do with the market at large. You make me an offer, and if I agree to it, we have a deal. It’s as simple as that.


It is far more advantageous to invest in an inefficient market because you may have information that the seller doesn’t, and this can make your investment worth much more than what the seller thinks it is worth. This happens all the time. The buyer sees a for-sale listing through a different set of eyes than the seller. He sees the property, not as it is, but for what it has the potential to become. Now the seller has decided it’s time to sell, for whatever reason. He doesn’t see the property’s potential. Instead he sees the issues that plague his property. Who has the more accurate assessment of the property? No one knows with certainty, even when the sales price is agreed to between seller and buyer. But over time, the property’s true potential will become readily apparent.


So the first not so obvious advantage of owning real estate over owning common stock is that it’s possible to buy real estate at a bargain price. You can never buy stock at a bargain, only at what is considered the market price.


2. RE Owners Can Influence the Outcome of Their Investments


The second not so obvious reason to invest in real estate rather than owning other types of investments is that real estate owners have considerable influence on the outcome of their investments. They can:

  • make capital improvements to tired properties,

  • change management for those properties that are poorly managed, an

  • re-tenant properties with better quality and higher paying tenants.

As an owner of stock, you’re a passive investor with no influence whatsoever on the value of your investment. You are truly a passive investor. You are at the whim of the emotions that control the stock market. Your particular stock might be doing well right now. But if the market takes a downward cycle, your stocks are going down in price with the rest of the market.


But the successful CRE investor is actively engaged with considerable influence on the value of his investment through a variety of ways. In commercial real estate, you actually have quite a bit of control over your investment and its potential for growth.


3. The 3rd Not So Obvious Reason


But it’s the third not so obvious reason why investing in real estate is far superior to owning any other type investment, which I’ll explain in my next blog post.


Those are my thoughts. I welcome yours. What are your thoughts? Is owning real estate superior to any other type of investment?


About the author:

Doug Marshall, CCIM is a veteran commercial real estate professional of 36 years, 30 of which are related to financing apartments and commercial real estate. For the past 10 years he has also invested in rental properties. In 2003, he founded Marshall Commercial Funding, Inc, a commercial mortgage brokerage firm located in Portland, Oregon. Doug Marshall is also the award-winning author of Mastering the Art of Commercial Real Estate Investing. Check out his book on Amazon!

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