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What are the pros and cons of investing in real estate compared to stocks?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 450.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What are the pros and cons of investing in real estate compared to stocks?
  • Why do millionaires want to be billionaires when they can buy everything they need?
  • How can professional gamblers exist if casinos ban people who earn too much?

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Source for all answers – Adam Fayed’s Quora page.

What are the pros and cons of investing in real estate compared to stocks?

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One of the main negatives few people speak about is that are usually linking your wealth to the average person’s fortunes when buying property.

Most people, by definition, buy properties in the average range, be that below average, average or above average. Only a few buy very cheap or costly houses.

That means that your investment will partly depend on the fortunes of the average person in society, which is risky.

When the average income increases dramatically, like in China in the 90s and 2000s, your investment is likely to do better than when there is stagnation, such as in Japan recently.

Of course, there is more to it than that, and some markets, such as London, are highly dependent on foreign buyers. The luxury end of real estate is a whole market to itself, as is the very budget end.

The point is that it is very different from buying an index fund or ETF. If you invest in the S&P500, you are investing in 500 of the top firms in the world. The Dow is 30 of the leading firms in the world.

You are investing in the cream of the crop. If you buy it, you are saying, “i don’t know which firms will be in the top 30 or 500 in thirty years’ time. I also don’t know if it will go up or down in the next few months or years, but long-term, I think the cream of the crop will get bigger as the top firms get more efficient”.

The cream of the crop can get more profitable even if smaller and average businesses struggle, as we have seen during Covid-19.

The stock market, in comparison, can rise when the economy is struggling. It is difficult for the average property price to go higher, at least adjusted for inflation, if bad economic times last for years.

That is especially the case in this global world we live in. Coca-Cola, or Amazon, can grow if sales struggle in Europe or just one or two regions but do well elsewhere.

Therefore, with property, it is best not to focus on capital appreciation, which is often linked to how the average person is doing. It is better to focus on rental income and leverage.

So, the positives of property are:

  1. You can leverage it. You can start with stocks, via margin and Lombard loans, but with real estate, you can sometimes go further
  2. It is uncorrelated to stocks. It can go up when stocks are down and vice versa.
  3. If buying is cheaper than renting and you plan to stay in the same area for decades, it makes sense to buy
  4. It can create cash flow. Again, so can stocks, though, as dividends can be reinvested.
  5. It is usually less volatile, but that shouldn’t be a big issue for most people.

The negatives are:

  1. As mentioned, you are often linking your fortunes to the average person more than buying the biggest names in the world through ETFs and indexes.
  2. It is harder to diversify unless you buy a real estate investment trust (REIT). You can purchase thousands of stocks cheaply through ETFs, which are usually globally focused across all industries.
  3. In some countries, with the US being an exception, property is more highly taxed. The UK, for example, has hefty taxes for buying property and an extra hit on capital gains versus most investments, but allows you to invest free of capital gains taxes in a pension.
  4. It isn’t liquid, and so selling takes time. You can’t quickly sell just one room, for instance, if you need money, whereas you can sell even 0.0001% of your stock and ETF portfolio.

Why do millionaires want to be billionares when they can buy everything they need?

This is one of the great misconceptions. If you are a millionaire, you can’t always buy everything you need. You certainly can’t buy everything you might want.

Simple example. You have $1.5m in brokerage accounts + a bit of cash, and a house you have some equity in. Total net worth about $2m.

Then you lose your job and suddenly need to live on the investments. On a $1.5m portfolio, you can only safely remove $60,000 a year in retirement.

Now, sure, it is safe to remove more short-term to cover this job loss until you get another job, but it is better to be conservative.

$60,000 a year is more than liveable in much of the world but isn’t in some of the more expensive places.

That is just one example. If I had given the example of a person who is worth $5m on paper, but it is almost all in one primary residency and a pension which can’t be liquidated for decades, then that person might struggle badly.

We have all heard of the asset-rich, cash-poor, pensioners who are “house poor” – living in huge houses and struggling to pay the bills.

That will only increase with these energy bill increases.

So, being a multi-millionaire doesn’t tell us:

  • How much liquidity do you have? In other words, how easy is it to sell the asset? Properties and businesses aren’t easy to sell in an emergency.
  • The amount you need to actually live. How good are your spending habits versus what is coming in, especially if you lose your primary income?
  • How much risk you are taking? Having $10m in something which is quite low-risk isn’t the same as having it all in one start-up, small-cap, stock.

As other people have also said below, it is true that it is human nature to want to make more, and therefore some want to become billionaires.

I doubt the majority are focused on becoming billionaires though. The difference between having a thousand millionaire and one million is bigger than having zero and one or two million.

The average millionaire teacher, or dentist worth a few million after accumulating for decades, isn’t thinking about becoming a billionaire.

That isn’t to mention that creating a seven-figure business is much easier than something much bigger.

Mark Cuban admitted that if he were to start again, he is confident he could become a multi-millionaire, but not a billionaire, as that requires some luck.

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The people who are likely to have ambition to become a billionaire have usually acquired the first few million when they are young enough to dream bigger, which is very different to the average “every day” millionaire.

How can professional gamblers exist if casinos ban people who earn too much?

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I have met some professional gamblers, including some who wanted to invest money after acquiring from this “job”

For those I met, which is albeit a small sample, they aren’t going to casinos. They are betting on things like sport, elections and other events.

They would use similar tactics to stock pickers. Instead of picking the “blue chip” stocks, which are seldom mis-priced – after all who wouldn’t notice if Apple and Amazon looked especially undervalued – they try with smaller and medium cap stocks.

If you focus on small and mid-cap Indonesian or Vietnamese stocks, you are more likely to find undervalued opportunities versus large cap US stocks.

There are fewer institutional players (hedge funds, banks etc) in those smaller markets, which increases opportunities.

Smaller average investors are more emotional, so you see massive volatility in smaller markets.

Ditto gambling. Rather than betting on Liverpool vs Man United, they would bet on the Egyptian or Syrian second division match:

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Many of these people come from professional and statistical background, with plenty previously having jobs working in analytics for companies.

They would look at loads of data points until they found an undervalued opportunity in the gambling markets for those sporting events.

The house always wins, but that doesn’t mean a very small percentage of people can’t win in something like sports betting.

Obviously there is an ethical problem for some people, as professional gamblers are taking advantage of people who are just playing for fun or don’t understand statistics, which causes the pricing mismatch in the first place.

I am sure there are also professional gamblers who go to casinos, but it must be harder in some ways compared to gambling on lessor known sporting events, when you can have time to crunch the odds.

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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