Jerry Fetta- Real Estate VS. The Stock Market
This question was posed to me over the weekend. I often have conversations with people and sometimes even financial advisors, about my stance on real estate vs the stock market. In case you didn’t know, I don’t recommend the stock market. I do recommend real estate. I was a financial advisor for stock market investing for years, but I am now 100% against it. I want to break down with you why and show you the numbers.
The stock market: Let’s use the S&P 500 as our example here because it is the most commonly know. I will forewarn you, I am about to get pretty nerdy here, but I will keep it simple!
Stocks will return in 3 possible ways:
- Appreciation: The value went up, but we didn’t sell. I call this “paper profits”. They aren’t accessible, and don’t actually benefit you.
- Capital gains: This means that the value went up and we did sell and we made money. There can be short term capital gains, which are taxed as ordinary income. There can also be long term capital gains which will typically be taxed at a rate of 15% for most people.
- Dividends: This means that the company was profitable, had excess funds, and voluntarily paid these to the shareholders. These aren’t guaranteed and an investor has no legal right to them. They are nice, but a company could refuse to pay them and the shareholder can’t do a thing about it.
So let’s talk numbers. Let’s say you invest $100,000 into the S&P 500 over 20 years. In fact, let’s use the last 20 years. We will go from 1998-2018.
The annualized return of the S&P 500 over the last 20 years is 4.778% without dividends. With dividends, it was 6.697% annualized. Don’t believe me? Click here to use the S&P 500 returns calculator.
If you invested $100,000 over the last 20 years, you’d now have $380,257.70. Sounds great right? Well, we forgot fees. The average account will charge a fee of roughly 1.25%. When you include the annual fee, you’ll only have $296,182.75. This is $84,074.95 of your money going towards fees. This represents 22.11% of your account balance going to fees.
This shows a dividend of roughly 2.75% annually over the 20 years. This means that we have two options when it’s time to use the money for income. You can either sell the $296,182.75 of shares and use it for income (and probably pay 15% taxes on the sale) or we can try to keep the shares and live on the dividends. 2.75% of a $296,182.75 balance is a dividend income of $678.75/mo.
Wow! You can make a car payment! Too bad that’s not including your fees though. That 2.75% dividend is also hit with the 1.25% annual fee. This leaves only a 1.5% dividend, which means your income will really only be $370.23/mo.
With the stock market, you can either run out of money in 2 years, or try to live on $370.23/mo for the next 40 years. Your pick!
Real Estate: Let’s take the same $100,000 and see what would happen if it was invested in real estate for 20 years.
$100,000 will purchase roughly $500,000 worth of real estate to be conservative.
Real estate has 6 contributing factors to the rate of return.
- Cash flow: this is the monthly profit that is left over to the investor after all expenses are paid and the debt has been serviced. This can conservatively be averaged at about a 12% annual return.
- Appreciation: this is the value of the building going up.
- Debt pay-down: this is the value of the debt converting to equity due to the fact your tenants are paying the mortgage down every month.
- Tax deductions: this is the value of the tax savings created by you deducting the interest & other expenses off on your taxes.
- Depreciation: this is the value of writing the depreciation of the asset off on your taxes. You can actually accelerate your depreciation in order to increase tax benefits in a given time-frame.
- Inflation proofing: this is the value of you paying devalued dollars to a fixed mortgage for 30 years. The bank asked for 2018’s dollar value on the mortgage payment. By 2048 you’re paying them cents on the dollar compared to the inflation adjusted value. We know this return is about 4% annually.
So let’s invest your $100,000 into a $500,000 property.
You now have $500,000 in assets, not $100,000.
The $100,000 will produce about $1000/mo. in cash flow. Doesn’t sound like a lot does it? Well here’s the thing, that money is coming in TODAY.
Let’s look at this in 20 years. If you keep reinvesting every time you get $100,000 available between retained cash flow and equity, you would have roughly $4,425,945 in real estate assets, roughly $885,189 in equity, and roughly $4,006 in monthly cash flow.
Your rate of return is roughly 11.52% annualized and you’re earning a cash flow (equivalent to dividends on a stock) of $4005/mo that cannot run out. You don’t have to sell the real estate for income and you can 1031 exchange it and not pay any taxes.
This is the difference between stocks and real estate. Now you can see why I don’t recommend the stock market and I do recommend real estate.
If you’d like to learn exactly how to understand and master this information, create a plan that helps you get here, and be provided with coaching, community, and resources to help you get there, then enroll in Wealth Creation Coaching. I’ve specifically designed this program to give you the exact roadmap you need to make this happen. Click hereto get started.
Own Your Potential,
Jerry Fetta helps his clients make money, keep it, and multiply it.
He believes everyone should own their potential. He believes you were not created to spend 40+ hours per week serving the 40-year-to-life sentence trading your precious time for money just to live in mediocrity.
However, the truth is that time and money must be exchanged. It just doesn’t need to be you making the exchange.
Jerry helps his clients create wealth that exchanges time and money on their behalf.
His clients see a 30% increase in income, a guaranteed increase in savings rate, and 8-12% fixed annual returns on their assets in the 1st 90 days of working with him.
To get started, go to www.WealthDynamX.com/potential