At a cocktail party recently, a stockbroker asked me this loaded question: “Is real estate a good investment?” I gave a cutesy answer: "A good real estate investment is always a good investment." Not to be deterred, he pressed me on the point and for the better part of an hour we compared real estate investments with equities. Here are some of the highlights, arranged thematically:
Can You Live in That?
The ability to actually live in your investment is a value that many fail to consider.
Even if the returns on equity investments are higher than real estate, you simply can’t live in your Apple, Google, Home Depot or Walmart stock.
There will always be a cost to shelter, whether owned or rented. The problem is that most people are not great savers. Renters are often lured into spending on things that take away from investment money.
The prospect of home ownership causes the owner to multitask: to save and to invest.
Cold, Hard Cash vs. the Coziness of Home
The stockbroker and I realized that many of our clients are at the higher ends of the market and income levels. Their homes function not only as an investment, but also as:
A reward for their success. They are a direct result and tangible reminder of their accomplishments and privilege.
A place of comfort, convenience and confidence. Owners routinely place a personal stamp on their home, customizing it to their particular needs and taste. Homes provide the backdrop for experiences and memories to last a lifetime and a means to define their life story to family and friends.
Can equities do that?
Not the Whole Enchilada
The stockbroker had a good point: real estate investments should be one component of a comprehensive investment portfolio. Other components might include stocks, bonds, annuities, insurance, antique cars, jewelry and fine art.
That being said, some perks of real estate are that:
A quality investment, even if not a big money-maker, is an outstanding hedge against inflation. Over extended periods of time, value is maintained or increased, and rarely falls, especially over the long term.
There are numerous tax advantages for investment properties, including depreciation. Think: Jared Kushner.
Is any one type of real estate investment better than another, he asked? Good question, I said. Speak with a financial advisor to help assess individual real estate investment needs and options.
The Devil is in the Details
Whether it’s real estate or equities, we agreed on one point: successful investing requires forethought, strategy and planning:
What’s the timing for cashing out the investment?
What other investment options for the funds exist, and what are the risks and returns associated with them?
What’s the investor's appetite for risk?
What’s the desired level of return?
One difference regarding real estate: Is the investment intended to be the purchaser's home, a ‘flip’, or rental property?
On the One Hand…and On the Other Hand
To be fair, there are a lot of pros, cons and other factors about real estate as an investment.
Real estate investments tend to be less liquid than equities, but they’re also less volatile.
Real estate ownership often involves hands-on management for repairs, maintenance, finding tenants, refinancing and dealing with neighbors, but stocks don’t.
Each individual real estate purchase delivers different returns, and not all stocks have delivered the same exceptional returns. An investment apartment bought in 2001 for $250,000 in one part of town may produce a higher return than a similar apartment bought at roughly the same time in another part of town. Is a neighborhood gentrifying? Is the commute short? Are the views killer? There’s more to getting a high return than inflation and rising markets. Then again, diversified equities portfolios have done well, but some blue chip stocks have lost significant value: GE anyone?
Is real estate a good investment? The short answer is yes, absolutely. Indeed, now is an especially good time to begin. Interest rates and inventory levels are both heading north, and sellers are growing anxious. Find a property you love, a deal that makes sense, make an offer, practice your take-no-prisoners negotiating skills and prepare to become a real estate owner, because if not now, when? What comes from sitting on the fence? Missed opportunities and splinters.