Invest in Real Estate or Stocks

Here is another financial question from a close friend.
He has some amount of earnings apart from the ones that he saved for his necessities. He would like to invest the earnings in some real estate or alternatively in stocks. He has some knowledge on stocks but, heard some people reporting bad experiences when the stock market crashed before. So, we have gathered different opinions over the net, answering the question: What is a better option – real estate or stocks?

“It's really tough to make a decision between the real estate or stock. The bare minimum you should do is to study the last decade's value of land or real estate versus the stocks. The stock market condition is heavily inflated, nowadays, but the same could be said for the estate properties too. Do your homework and take an advice of a financial consultant, then make your decision.”

“It all depends on your interests and there can’t be one straightforward answer because a lot of it comes down to your personality, preferences, and style. However, many people feel Real estate is often a more comfortable investment for the lower and middle classes and is always evergreen.”

“Ups & downs occur in both the stock market and the real estate market. Before investing in anything, you need some knowledge and to study the market to be prepared in case of emergencies or market collapse. If you already have knowledge in stocks, this is a good factor to consider investing on the stock market, compared to the real estate investing.”

“In every sort of investment, you have to make sure that you possess the knowledge about the area you would be investing in to. Consulting a financial consultant is also a good idea. In the case of a real estate investments, it is a fact that nowadays every Metropolitan city is growing by fits and starts and those cities are adorning themselves with multi-storied buildings. A huge amount of land which were barren for a long time has been used for industrial purposes. So, do your study about the neighborhood you would be investing in, and only then invest carefully.”

“Stock trading is certainly the better option and is much lucrative than real estate investment. Get in touch with a professional to get the minimum training or join a group of investors to learn more, share ideas and knowledge.”

“Investing in real estate is a great way to obtain cash flow, real estate investments will be a better option. Some advantages of real estate investments are:
1. Cash Flow
2. Capital Gains
3. Leverage
4. Inflation Resistance
5. Tax Incentives.”

“Investing in real estate gives higher returns than typical investments like stocks. These are the most considerable advantages of making an investment in income-producing real estate. The income stream it produces tends to be extremely stable and predictable. The income stream is partially passive. The underlying property will typically appreciate over time. There are tax benefits to investing in real estate that is not available with most other investments. Rental properties when purchased correctly generate significant cash flow. As good as the returns in real estate are when investing with cash, they can also be compounded significantly by using leverage.”

“Stocks are good if you can keep yourself updated, all the time, and would love to keep a close eye on the stock market. Otherwise invest in real estate.”

What is the state of the US real estate market (May ’21)

Today’s topic is about the US hyperinflation, and how is it going to impact the real estate market. And let’s start by quickly mentioning that the real estate market is crazy right now and the real estate prices are up 20%. Also, we’ve got stocks mostly up with some small exception, we've got commodity prices up. We're seeing prices of everything going up and it's because of the FEDs money printer.

The whole situation is  leading people with assets and wealth to have more of it, which allows them to shop for more real estate. More institutional buyers get into the rental real estate market. More people buying houses directly from ‘open door ‘or ‘zillow’ instant offers. Large landlord entities taking those properties away from other home buyers.

And this all creates more demand for real estate and drives up prices even more. Everybody with a pre-approval letter is immediately going to shop for a home. And the market is on pins and needles waiting to see what happens with longer term inflation. We have most investors right now knowing that we have massive inflation happening and we expect this inflation to continue due to supply shortages.

Over the near term the Federal Reserve takes the stance not to worry, as this is only transitory, and these issues are going to go away. We're told that these issues will not stay for the long term, inflation will come down, we'll balance out around two percent. And the rates will be risen slowly.

A lot of people in the investing markets, however, don't believe this. They're concerned that the Federal Reserve is going to lose control, that we're going to have hyper-inflation and maybe the mortgage rates are going to go through the roof and real estate prices will be going down.

We already know that there is a clear link between mortgage rates and home prices, or rental property prices, or cap rates on commercial real estate. Quick easy rule is the rule of 10x! For every 1% that mortgage interest rates increase - home prices rental property prices go down 10%.

If you get a half percent increase in rates, prices tend to go down five percent. A quick example of this happening in history – look at May of 2018. What you're going to find is the Federal Reserve started raising interest rates, resulting in real estate prices falling instantaneously within a matter of a few weeks. We saw real estate prices tank 10% - 12%. They recovered by the end of the year but only because the FEDs started reversing course.

Fast-forward to May 2021, the FEDs are saying ‘we're considering maybe injecting less cash into the markets.’ And the first target they'll likely look at is reducing their purchases of mortgage-backed securities. And here's what's happening right now. The Federal reserve is buying 40 billion a month of mortgage-backed securities.

When they stop buying these bonds mortgage rates are going to go up. And if you want to get into the real estate – you probably want to get into real estate before the taper. You can then lock in a 30-year fixed rate mortgage but be prepared for some potential volatility.

There are a two possible scenarios to occur in the following months. Scenario one is the inflationary direction. By September or October ‘21, the taper may have already started getting priced in. Mortgage rates might be higher, but the market's going to anxiously be looking if the rates are going to continue going up. And it will heavily depend on the inflation – is it going to stay, go up or down. This will determine if there is to be a crash or even further inflation.

In short-term – if you're trying to buy now, you probably want to get in before the FED starts talking about tapering mortgage-backed securities. Once that happens, probably the mortgage rates are going to jump up a good chunk, probably half percent would not be unreasonable, very quickly within a day.

You just want to lock in then, if you're thinking about buying after September, October, wait for September, October watch what happens – we will probably know then if the inflation is temporary. At that time, we would be getting the Q3 reports – so we will get an overview how are companies seeing inflation, what are company margins looking like, is inflation here to stay, is inflation starting to inflict downwards.

If we start seeing an inflection to the downside we might be at a place where we say the FED was right - we didn't get big long-term inflation. If that scenario happens - real estate prices could stay stable and potentially continue to trend in the current direction. Probably, not at those 20% rates, but more like 4-5% natural growth if the supply stabilizes.

The second scenario is if in September, October we start seeing inflation ramp up and not down. The short-term transitory nature of inflation we're expecting doesn't happen to be short-term – but long-term instead.  It happens to be systemic and lasts for 3-4-5 years.

The FED has to then raise rates much sooner than expected. That will force mortgage rates up even faster so the taper's going to push rates up. The FED freaking out pushes rates up and real estate prices could literally collapse.

if the fed had to raise rates say 2% in the matter of a month, be prepared for that potential change in market value. If you are locked in on a 30-year fixed rate mortgage - doesn't matter. Your payment doesn't change, nobody can margin call you, you're not going to lose your house

And if you have short-term variable rate - financing rates might change, and you should be prepared to have to start paying more on your mortgages. This is a risk factor if you have a 30-year fixed-rate mortgage you don't have that issue you can ride this out if you're looking to buy after September, October ’21.

The market is weird, right now, and a good advice would be only to buy properties if you can get them a hundred thousand dollars under market value. As an example, a property in California that is closed on $500 000, and could be sold at about $700 000, once the renovation of about $40 000 – $50 000 is done is a good investment.