Let’s begin with the sage words of the one and only Oracle herself, Oprah Winfrey. “I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.” This lady puts her money where her mouth is! She lives in Montecito, CA (which isn’t ugly) in a 23,000 square foot neo-Georgian shack worth more than $100M. But it is move-in ready!
Not too long ago, a house was a place to call home. You invested in your kids’ education, not a $12,000 stove. Dad’s “man cave” was the living room. His AV system was a 3-channel TV in a wood cabinet with doilies and wedding gifts placed on top.
Somewhere along the way, consumers started viewing their white picket fence as an investment, not a nest. Cut to today, where 35% of U.S. households are no longer owner-occupied, according to the U.S. Census Bureau. On the other hand, the Bureau of Labor Statistics says 55% of American workers participate in an employer retirement plan.
So, which is better for you? An abode or a stack of paper? The age-old comparison continues to evolve.
The cons of trading stocks are well known. They are more volatile and easily influenced by life’s circumstances, economic and market conditions. Selling them can trigger substantial taxes. Since owning stocks is like running a marathon, gains are best realized over the long haul, which is inherently a trapdoor because they are so easily transacted in panic. Emotion can end this race prematurely. It’s very easy for the underlying facts or earnings substantiating a stock to sink into quicksand. Investing in stocks with debt, known as margin trading, is extremely risky and strictly for experienced traders. Like in Vegas, most of the game’s players are not the aficionados they may believe themselves to be.
And the upside? Stocks are liquid and can address your short-term financial needs. The great news about stocks is it’s easy to diversify and build a market-resilient portfolio. Transaction fees are much lower thanks to all the discount brokers running constant TV ads and, of course, it’s easy to create tax-sheltered retirement and education accounts.
In this corner, weighing in at an average of 2300 square feet is the typical American home. Would you believe back in the 50’s they were only 950 feet? The best news about buying and renting out a home is that it produces passive income. You can hedge against inflation and shelter some funds from the IRS. Homes can be leveraged without paying much cash outright, in the form of collateral and/or 20% down mortgages. And as the uber-rich talk show host above points out, homes are tangible assets that won’t go anywhere unless the climate keeps changing — hurricanes, tornados, floods and fire zones all broke records last year, but sure we don’t have a problem. In honor of Bernie Madoff’s far overdue departure in 2020, you’re a lot less likely to get swindled with a home than a stock investment. Homes can be inspected; you can run a background check on tenants and do your own repairs. On the other hand, you could always frame a stock certificate.
Speaking of the cons of real estate? Traditionally, it was conventional wisdom that real estate is not liquid, and its appreciation isn’t guaranteed. Have you read the news lately? Multiple, 125% cash offers are all the rage. Of course, it’s easier to get in trouble and over-extend yourself with real estate. Last we checked, stocks can’t be bought on credit or Amazon. What hasn’t changed about dirt are the high closing fees, the time and trouble of managing a property, and if the house is unoccupied, you’re the one paying rent to yourself. Then there is that dreaded evil, the tenants. Ready to be a landlord, collect rent and make major unbudgeted repairs in the middle of the night? Stocks don’t burst like plumbing or crumble like roofs, all of which need to be replaced instantly.
There is no doubt, this debate will rage on. There is no right or wrong answer. You can do either option well or both poorly. Just be honest with yourself about how much risk you can handle, do your research and partner with an experienced professional who is dedicated to your financial success.