With billions of dollars every year spent on marketing ETFs, brokerage firms, trading platforms and stock-and-bond-based retirement accounts, it’s no wonder that most people believe that the equity, bond and derivative markets are the end-all solution to long-term investing. However, it is worth noting that the vast majority of American wealth is still tied up in real estate.
The real estate industry spends nowhere near the same number of marketing dollars as Wall Street, but there are strong reasons for investing in properties. In fact, for the average person, real estate investing often provides more safety, better prospective returns and a far easier time really understanding how the investment works than most other investment vehicles.
Unlike with stock investing, with real estate, it is much easier for the average person to both fully control and fully understand the underlying asset. Although real estate certainly has a learning curve, investors who take a hands-on approach to managing their investment properties quickly get an excellent feel for exactly how much things cost and what kind of real returns they are likely to see. With stock investing, on the other hand, even understanding something as fundamental as a company’s debt structure may prove almost impossible for the layperson who doesn’t have expert-level accounting knowledge. And individual stock investors are virtually powerless to stop bad decisions by the executive team. With real estate, the investor is the executive team.
But the far greater selling point for real estate versus stock investing is the significant reduction in risk. While buying for a good price and selling towards the top of a market is also important in real estate, it doesn’t take on the same dire urgency as it does in stock investing where buying into the top of a market can mean 20 years of breakeven real returns.
With real estate, the cash flows from rental always provide a significant hedge against declining market values. And certain types of real estate, particularly residential, condominium or apartment rental properties, have hard floors on how low prices can drop. That’s because people always need a roof over their heads. This fundamental demand for housing ensures that even the worst housing crashes will never wipe investors out completely. And historically speaking, the real estate industry has always bounced back to hit new highs. Compare this with industries like retail and newspapers where many equity investors have been wiped out.