The Wall Street or Main Street (real estate) debate is well covered territory by both the print and TV media outlets and perhaps was a topic of discussion at a recent cocktail party, wedding reception or real estate investment social event you attended.
Given the recent run up in the stock market (3Q07), the increase in interest rates, the limitations being put on non-owner occupied financing and the flattening or depreciating property value issue plaguing some of the country’s real estate markets, what is the better investment (from a return on investment standpoint) for both the short and long term, based upon today’s market?
If you are one to believe what you hear and or read (and it isn’t your fault if you do---a lot of money is spent to program your perception and belief systems) then you believe Wall Street is the better investment vehicle.
Discussions like these and comparisons of ROI (return on investment) between Wall Street and Main Street rarely account for and ignore the following:
1). The concept of leveraged capital: Up to recently, you could control a hard asset (real estate) with no money down---this can't be replicated on Wall Street...Even now, you can control a 100K real estate investment for between 5-10K---even if you were to use stock options, you still can't leverage yourself with OPM the way you can with real estate.
2) The benefits of tax deductibility: Real estate is the only investment that allows for a tax deduction when purchasing, owning/controlling and selling real estate---not so with Wall Street.
3) Differing ways to profit: Wall Street offers only two ways to profit from the stock market---capital appreciation and dividend payouts. On the other hand, investment real estate offers at least 8 ways to profit:
- Rent roll (rental income)
- Mortgage Payoff (thanks to your tenants)
- Property Improvement
- Purchase Profits (buying at a discount)
- Government Benefits (tax credits, tax deductions, rent vouchers, etc.)
- Strategic Property Management
- Property Appreciation
- Inflation
4) The concept of leveraged equity (profits): This is where the divide between Wall Street and Main Street widens. Let’s compare a $10,000 investment made by two investors (one invests in Wall Street and the other invests in Main Street) to better illustrate the profound profit differences: ·
Investor Y invests $10,000 into Wall Street for an annual return of 6%. ·
Investor X invests $10,000 (5,000 towards a down payment and 5,000 towards closing costs) to purchase a real estate investment worth $100,000 which appreciates 6% annually.
Here is how the two investment approaches differ:
a. In the 3rd year, Investor Y has a capital appreciation value of approx. $1,900---Investor X has an equity appreciation value that is more then 1000% higher (approx. $19,102).
b. In the 5th year, Investor Y has a capital appreciation value of $3,382---Investor X has an equity appreciation value has multiplied tenfold ($33,382).
c. At the end of 10 years, Investor Y has approx. $7,900 in profits---Investor X has more then $79,805.
d. At the end of 20 years, Investor Y has more then doubled his original investment (with profits exceeding $22,000)---so has Investor X, who has earned approximately 2200% on his original $10,000 investment (accumulating more then $220,714in equity).
Additional arguments could be made about the speculative nature of Wall Street or the volatility of the stock market & the differences between a hard asset and a paper one, but remember this:
- Everybody needs somewhere to live---you can't live in a mutual fund...Real estate will always be in demand regardless of the market circumstances...(This is the “demand” side of the law of supply and demand)
- God stop making land on the 7th day (unless you live near a volcano)---you can't build a house on top of your IRA...Real Estate will benefit from diminished availability (supply) as our population continues to expand due to natural reproduction and immigrant influx…(This is the “supply” side of the law of supply and demand)
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H. Scott Miller is a nationwide commercial and residential investment lending professional specializing in the creation, management and growth of real estate wealth from a mortgage prospective. He is also the author of "The Not So Funny Games That Lenders Play With Your Money That Can Cost You A Fortune Every Time You Get A Mortgage" which is freely distributed at The Mortgage Inner Circle.
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