REAL ESTATE VS STOCK MARKET
We like the equity markets better than real estate. The main reason is that you can find better bargains in the stock market.
Three things to note about real estate:
1) LEVERAGE: People mostly use leverage (mortgage), thus, the returns can be attractive “if you do it right.” You can make higher returns if more leverage is introduced. However, leverage regardless of the situation can be dangerous. One day you have a lot and the next day poof gone. Most real estate companies are in a crap load of debt.
2) MANAGEMENT: Real estate causes headaches with regard to physical property, insurance, and tenant management. But it’s simple to understand.
3) RETURNS: Real estate is too competitive (Jews, Patels, Asians, PE firms…all love real estate). Thus, the returns are not that good over time (+5%/year generally).
We just like the power of the equity markets (Stock Market) a lot better. You can buy real estate companies in the markets as well, but the returns are generally not good – not always. The margin of safety is generally lower with real estate.
An exception, we do own one real estate company, where we found a bargain (special situation case).
Also, real estate investment is good if you can buy it at 50% of its intrinsic value. If you buy a house with an intrinsic value of $300,000 for $150,000, that gives you a 50% margin of safety (because you could be wrong). However, the market is too competitive, so you generally buy it above its value.
Buying undervalued assets is what I do! I must be able to value assets (if I can’t value them, I just move on to something I can value). Then I buy it with a minimum of 50% Margin of Safety.
Real estate is appealing to the eye because the property is there, and you ‘feel’ you have something even when banks own the majority of it. Stocks you don’t see it. It’s not appealing to the eye. You feel nothing is happening. However, in the long run, stock indexes perform around 10%+/year. Plus, we are doing a lot better than that.
Ask yourself, how hard did I work to double my return with stocks? Can I get that kind of return in Real Estate? I know lots of people who lived a humble life and when they retired, they had $50 million plus pure cash because they invested that way I invest! Further, they carry no debt! You will be one of them if you don’t touch your equity (stocks) investments.
Real estate, sure, you can be rich. However, with stocks, you can be one of the wealthiest in America. I mean the goal is to simply life. Plus, we like to think we are logical, but we humans are emotional and overcomplicate everything.
I’m trying to make you cash-rich. Too many times, I see people with nice cars and houses, but they usually are drowning in debt. I can’t sleep tight like that. Life is too short for that. To be cash-rich you must be patient, and it does not happen overnight. Most people want to feel rich but maybe don't always know what it really means to be rich.
Sometimes I get a gut feeling we are going to be very wealthy. Chinese people will love us (old and rich people are who they admire). Plus, I love the ethos of Chinese people, especially, Confucius.
November 29th, 2024 Rojan K. Shrestha
General Managing Partner