An Ode to Real Estate

If you’ve read this column for any length of time, you know I am an unabashed proponent of the stock market. I think it’s the best wealth-building tool out there. I don’t have hard evidence, but I would guess it’s minted more millionaires than any other investment available to average folks.

But there is one other asset class that rivals it. And that’s real estate.

As much as I love stocks, I cannot deny that real estate packs one punch that stocks simply can’t deliver. So let’s talk about why real estate is an attractive place to invest money.

First, let’s recognize that real estate as an investment is a broad category. It includes rentals for residential homes, office buildings, self-storage, warehouses, industrial, and farmland. No matter the type of rental property, however, they all contain a unique and helpful characteristic.

And that’s that real estate doesn’t trade on an exchange all day, every day.

There are no publicly available prices that update second-by-second. That’s helpful because it smooths the value over time. You don’t see dramatic swings over short periods because those values don’t exist.

The value of your property is most closely aligned to the last sale of a similar property. Those kinds of sales aren’t happening multiple times a day – or multiple times a month or even multiple times a year.

Pretend you had someone who stood on your front doorstep each weekday and every few seconds blurted out values for how much he would offer to either buy your property or sell you one of his that is very similar. Aside from thinking he was crazy, what would you do with that information?

For most real estate investors, the answer is nothing.

Who cares if he offered you a bargain basement price for your property? Would it distress you? Probably not. Would it cause you to panic and sell at any price because you were worried he might shout out an even lower price two seconds later? Probably not.

In fact, for most real estate investors, they would look for opportunities to buy from the crazy fellow on their doorstep if he ever offered to sell his property at an absurdly low price – or if he happened to quote an absurdly high price for their property. Aside from that, he would be ignored.

That’s exactly how prudent investors should act.

Unfortunately, that doesn’t happen as often when it comes to the stock market.

Unlike real estate, stocks are not tangible – you don’t even get a stock certificate any more! – and they can be traded with extreme ease. These two factors create an unholy union that conspires to bring out the worst in investors. Because values are known every second, because people don’t understand stocks like they do real estate, and because stocks can be traded at a moment’s notice at zero cost, investors start to see stocks as pieces of paper rather than precious investments in amazing companies.

And when that happens, some investors do nutty things. Things like sell just because their stock price has declined. Or itch to buy more just because it went up. They buy and sell options, which are financial landmines, to make a quick buck or two, while putting themselves at risk of a huge financial blow up.

In short, stock market investors tend to be far worse behaved than real estate investors.

For that reason, I am a fan of real estate.

Equally important, real estate can offer returns in the same ballpark of stocks if you know what you’re doing. So it’s not like you must sacrifice returns to capture the benefits of real estate. That’s why I respect farmers and residential rental property owners. They simply chose a different investment class to build wealth.

And it works over time.

With all of that said, there is one huge drawback to real estate. It’s why I truly appreciate stocks for most people.

I’ll cover that next time. So stay tuned.