I am often asked WHY I only invest in real estate, and not other investment opportunities like cryptocurrency, stocks, start-ups, gold, etc. In this video I provide a detailed investment vehicle comparison along 8 criteria; Downside Risk, Appreciation, Leverage, Liquidity, Control, Cash Flow, Tax Benefits and Inflation Hedge; and ultimately you can make your own conclusion on which investment is the best:
Investment Vehicle Comparison
1 - Downside Risk
Real Estate: When you look at the entire history of real estate, it's rare that values go down. There have been a few periods of time where real estate has declined in value, such as after the tech bubble burst in 2001 and then in 2008 through about mid-2011. However, even then there were lots of areas of America that didn’t see any real drop in real estate values. Their values didn’t increase, but they didn’t drop either.
This is a hot topic right now because people are concerned about the potential for residential real estate values to drop. I have a video called Housing is Booming. Will it Bust? In it I cover this subject in detail. I don't think real estate values are going to go down. And when we assess the downside risks from the perspective of the banks, we can look at where they're willing to lend the most money. Banks are conservative, and real estate loans have the longest amortization schedule, lowest interest rates, and the lowest down payment. So, real estate is the gold standard for collateralization of a loan with a bank.
I'm going to grade real estate's downside risk an A because it is historically strong, and the signs of what the future holds, plus the confidence of banks’ lending money, signifies that the gold standard is real estate. And it's not just simply the gold standard because of its ability to retain its value but also because of the cash flow generated from the asset, which can help offset loan payments.
Cryptocurrency: I don't own any cryptocurrency. I don't even understand it, but I do know that I don't know it's downside risk. It has gone up in value over the last two years. In 2019, it was in the $4,000 to $5,000 range for Bitcoin and now it's around $56,000. So, it's gone up tremendously. But I just don't know it’s downside risk.
Publicly Traded Stocks: We know stocks go up and down and we can see that pattern over time. When it comes to downside risk, I think they’re graded at a C. Of course, the risks depend on which stocks, but public stocks definitely have some downside risk. And again, we can look back to the asset test of banks and what they lend money on.
Startups: This is an F- on downside risk. The way startup funding typically works, angel investors put money in early and take on a huge amount of risk. The stats on those investments are 1 in 10 are a homerun, 2 in 10 do okay, and 8 in 10 lose all the money. You’re almost guaranteed to lose money investing in a startup. In fact, the entrepreneur rarely loses money, but the investors almost always do.
Gold: Gold is awesome when it comes to downside risk. It gets an A.
2 - Appreciation (The Ability for an Increase in Value)
Real Estate: I’m going to give real estate a C, although I will end up changing that. But I give it that grade because as real estate appreciates, over the long haul it barely keeps pace with inflation. So, it’s at a C right now, but when we get to leverage, we will discover why it's actually higher in the real world.
Cryptocurrency: I have no idea. I don't really know what's going to happen with that. Does Bitcoin stay at $56,000? Does it go up to a hundred thousand? I don't know.
Publicly Traded Stocks: Stocks are incredibly strong over the long haul. When you track the Dow over a 10 or 20-year period, literally just tracking the market with a no-load index fund, you're looking at a 11% or 12% gain. It's strong. So publicly traded stocks get a B here. They do well with appreciation.
Startups: If you don't completely fall flat on your face, startups are an A. There's the potential to really hit a home run with a startup that you fund. You see that amongst some entrepreneurs, some of the wealthiest people in the world. They funded Google, PayPal and Facebook early on. So, there is a huge upside, but of course, it has massive downside risk as well.
Gold: Gold keeps pace with inflation, but it gets a D because it doesn't appreciate. Currency in general doesn’t appreciate because there’s no intrinsic value being added year after year. It fluctuates and has aberrations in its value, but it's not actually appreciating based on value.
3 - Leverage (The Ability to Borrow Money)
Real Estate: With this criteria, real estate is by far an A. It's an A because you can get the longest amortization schedules with the lowest interest rates and the lowest down payments compared to every other investment vehicle that has any ability to produce real results.
I recently put out a video called What Every Investor Needs to Know About Rental Loans. In it I talk about how there are lenders that will give you great rates and it has nothing to do with your personal income.
Cryptocurrency: When it comes to borrowing money, cryptocurrency is about a D. You could borrow money against it, but it will be a very short timeline at a high interest rate and low LTV.
Publicly Traded Stocks: With publicly traded stocks, you can get a loan on margins sometimes, but the loan programs are not nearly in the same universe as real estate. It gets a C.
Startups: You're not borrowing money to put together a home run of a deal, you are funding them. And when you own those shares, often there’s really no way to borrow against them because they're completely private and illiquid. They just look good on paper and you're just hoping for a big home run down the road.
Gold: Gold is landing in the C range.
Borrowing against any of these other investment vehicles is based on your personal income. They aren't throwing off any capital. There's nothing to help offset those monthly payments. With real estate there is, which I’ll cover when it comes to cash flow.
Now, I gave real estate a C for appreciation but I’m going to change that. I think it's a B or even an A and here's why. So, referring back to the video on rental loans, if you put 25% down, you can get a 75% LTV loan on a rental property and it doesn't matter what your credit is. And those are competitive rates in about the six range, which means you can borrow to a point where your investment, if it appreciates 4% a year, because you only put 25% down, it's really 16% appreciation on the cash you invested. You are magnifying your appreciation when you borrow.
I have videos about borrowing money against real estate. And I think it's foolish not to get a loan against rental property when you can get one that is a competitive interest rate with a 30-year amortization. I've been resolute on that for my entire career. Having a loan against rental property is just financially responsible.
4 - Liquidity (The Ability to Turn Something into Cash Quickly)
Real Estate: This has been the biggest strike against real estate investment and that is because it is sometimes hard to sell. In my experience, because all my assets are in good areas, are well managed and cash flowing, I find that I can sell any property in under 30 days.
So, if I have to sell any of the properties I own, they're not that bad from a liquidity perspective. Also, you could put a HELOC or a line of credit against some of your equity, so you always have liquidity. I'm going to give it a C. I have been able to make this C a B personally, but not everybody can do that.
Cryptocurrency: What is the liquidity of crypto? I would say that's an A. That's very quick.
Publicly Traded Stocks: Public stocks is an A.
Startups: This is an F. You can't get out of a startup. If you're an angel investor, you just better hope and pray it works out.
Gold: You can quickly move gold, so it gets an A.
5 - Control
Real Estate: You have tremendous control when you own the property, so real estate gets an A grade. I'm not referring to properties you are partial owner of or a private money funder; I'm meaning the ones that you own and control. You control the management, the upgrades, and what tenants you put in the property. And this is magical in the world of investment vehicles. When you lose control, it is so detrimental to the rest of what you could do with your investment vehicle. This is incredibly important. It's something I'm very passionate about and why I wrote the book Real Estate Investing Gone Bad. When you have complete control in real estate, you can force appreciation, not just market appreciation, but by adding value to the property, which is also a tax benefit.
Cryptocurrency: Do you have any control over the public perception of the value of cryptocurrency? No, you don’t have control over what happens to it. It gets an F.
Publicly Traded Stocks: You have no control over them. Even if you are the CEO, it's still difficult. There's a board of directors and you have an entire company. There are so many things you don't control. That's an F.
Startups: You really have no control. Maybe you get a board seat, so I can give it a D on the level of control, but you're not the one executing day in and day out.
Gold: Do you have any control over people's perception of the value of gold? No. You have no control over gold. F.
6 - Cashflow
Real Estate: You can have an A on cash flow with real estate in comparison to the rest.
Cryptocurrency: Do you get any cash? Do you have any dividends that come from currency? None. So, an F.
Publicly Traded Stocks: Could you get a little bit of a dividend from a public stock? Yes, but not like the old days. There's a little bit of dividend sometimes, but typically the higher the dividend, the lower the appreciation. So, there's that scale that you must balance. It's a D.
Startups: Do you get any sort of cash flow from a startup? Heck no. Startups need to keep all their capital so they can keep pumping it into the business. It gets an F.
Gold: Is there any way to get cash flow from gold? Maybe a sell option, so I should give it a D, but it's really an F.
Real estate is the only investment that enables you to get paid while you own the investment vehicle. Yes, maybe you get a home run with a startup, or you had a crystal ball and knew crypto would skyrocket, but here’s my fundamental argument. If these other investment vehicles are the golden goose, the only way you can get the golden egg from your golden goose is to sell it. Whereas, with real estate, you get to keep your golden goose and you get to collect those eggs. That's incredibly powerful.
7 - Tax Benefits
Real Estate: The tax benefits with real estate are magnificent. It gets an A. There are so many benefits to real estate investment:
- If you have a large capital gain when you sell a property, you can roll those capital gains and the depreciation recapture into your next deal using a 1031 Exchange. You literally kick the can down the road, deferring your capital gains taxes.
- In the 2017 tax bill, some adjustments were made that allow real estate investors to fully depreciate or get a hundred percent deduction on improvements to the property in that calendar year. These improvements could significantly impact the cash flow, value, and appreciation. An example of this would be if you have a triplex and you put in a washer and dryer in each one of the three units. You then raise the rents by $50 a month because now those units have laundry facilities. Suddenly, you have a tax benefit because everything you spent is now tax deductible, yet you get more cash flow and more appreciation. You reinvest in your asset, and you get a deduction for it.
- Depreciation is the ability to have a phantom loss on your tax returns, which reduces the taxable income. And that's fascinating because depreciation is based on the idea that a single-family home and its structure are degrading at a rate of 27 and a half years. So, you divide whatever your tax basis is for the structure by 27 and a half years and you get the yearly depreciation you can take. But you know what? Houses don't depreciate like that in real life. Certain things might deteriorate in that timeframe like the roof, but not everything. And so there you have a brilliant tax benefit.
Cryptocurrency: Do you get those tax benefits with cryptocurrency? When you buy cryptocurrency, do you get any tax benefit? No. It gets an F.
Publicly Traded Stocks: Do you get that with stocks? Almost never. When you sell a public stock, you have a capital gain that creates a taxable event. And then you're taking that after tax money and reinvesting it. Stocks get an F too.
Startups: What about a startup? Maybe if it's in some opportunity zone, but let's call that an F as well.
Gold: Gold is also going to be an F because there's no tax benefits for buying gold.
8 - Inflation Hedge (The Devaluation of a Currency)
Real Estate: Historically real estate has always been an inflation hedge. The reason why is because as materials go up in price and as labor costs rise, builders charge more for properties. So historically real estate has been a hedge against inflation, like gold. It gets an A.
Cryptocurrency: I don't think we know just yet. I was reading some articles about this. I think the consensus has not landed on either side of whether it's a hedge against inflation or not.
Publicly Traded Stocks: Another example of a good hedge against inflation are publicly traded stocks because businesses need to raise their prices. Is it an A? No, it's probably more like a B.
Startups: I’ll give startups a C.
Gold: Gold is a great hedge against inflation because it has a more intrinsic value that has stood the test of time.
Why I invest all the money I earn in real estate:
- It has a downside risk as good as any other investment vehicle that exists.
- A great level of appreciation.
- There are incredible leverage capabilities.
- It isn’t the strongest on liquidity, but there are ways to mitigate that.
- It's incredibly strong on control.
- It has cash flow, so I get to keep my golden goose while it keeps laying eggs.
- The tax benefits are amazing.
- It’s a gold standard as a hedge against inflation.