LIVING OFF DIVIDENDS & PASSIVE INCOME

According to this article in Money Magazine, stocks are a better investment, based on a study taking in account the years 1978 to 2004.

While there are some valid points favoring stocks over real estate, I think it was a one sided arguement.

Why choose a period where the stock market did very favorably? According to Gary Burtless, the real return on stocks since 1885 using a 15 year trailing return is only 6.3%.

I would assume real estate to keep pace with inflation or around 3-5% per year over the same time period. So on the surface, stocks do seem superior to real estate.

However there are certain benefits to investing in real estate that have to be considered.

1. Leverage
You can get in with only 10% down, sometimes even less. In stocks, the best you can do is 50% down. The higher the leverage, the more you make if you’re right. (The converse is also true!)

2. Tax Savings
You can defer paying taxes on the profits indefinitely using 1031 exchanges. Not only that, you can use phantom depreciation losses to deduct upto $25,000 from your regular income. With stocks,
you can deduct actual losses but only upto $3,000 of regular income.

3. Ease of Understanding
While investing in real estate is more difficult per se than stocks, this is an advantage. It helps keep the novice investors out, and keeps prices inline with valuations (well except in the recent past where everyone become an investor!).

With so much money chasing stocks in 2000 and so many execs lying about company performance, tech stock prices saw incredible appreciation. Many of them tanked 90-100%.

A 90% drop in real estate prices is difficult to imagine. Not only that, you always know if a property is fairly valued or not.

If the rent doesn’t cover your holding costs even after you put down 25%, you’ve probably overpaid for it. Thats a very simple rule of thumb! Unlike in the stock market, you can’t hide behind fancy accounting in rental property!

Conclusion:
Listening to the popular press will usually never help you in the long run. However, I think it boils down to investing in what you know. There are people who’ve made incredible amounts of money in the stock market. But I think these people make money in all asset classes without playing favorites.

For example, Warren Buffett has invested in foreign currencies, commodities and even a manufactured home-builder (and along with it real estate) apart from his stocks.

I also know a few people who make money day trading for a living. Even these people invest their excess profits in real estate! If you can trade stocks, you can definitely understand real estate calculations.

For most people who know nothing about investing and don’t want to know, investing in stocks is the easiest way to invest. It may not be the best but its the easiest and most likely the only way they’ll ever invest at all.

But I don’t think the two classes are mutually exclusive. I’ve made incredible amounts of money in real estate, which wouldn’t have been possible with the stock market. But now, I’m moving some of my profits in stocks and commodities because I think the easy money in real estate is gone.

I think you should invest in anything that makes sense. Don’t get married to any stock, properties or any particular asset class. There’s a season for all investments!

Here’s a good post on looking for investment ideas and the basics of investing in real estate

• Common Sense Advice For Investing In The Stock Market Given the poor performance of the stock market in 2008, its time to go back to the investment basics and make sure you don't forget the important stuff. 1. Only invest in companies that pay a decent dividend (at least 3%) and that have a long history of increasing their......
• Understanding Real Estate Market Cycles and How To Invest Based On Your Own Research A lot of people have been asking me how I do my research for places to invest in. Here's my attempt to explain the process. It started when I sold my home and was wondering where to invest the proceeds. I moved into a condo that had previously been a......
• Will 2009 Be A Good Year For Stocks? Prof. Jeremy Siegel, author of the excellent book The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, seems to think 2009 will be a good year for the stock market: All of this means that, although the first quarter of 2009 will......

• market correction madness! With all of the major indices – the Dow, the S&P 500, NASDAQ – off 10 percent from their 2007 highs, we are by definition in the midst of a market correction. Individual companies continue to announce frightening news stories: Countrywide: Tapping their line of credit for more than $11......
• Stocks are a Great Investment /caption] Most people recognize that stocks are an excellent investment, but purchasing stocks can be a confusing process. This is especially true if you have little experience in investing, or no experience at all. You can turn the stock buying process into a good investment even as a beginner, and......
• Keeping Your Money Safe in Economic Turmoil While many are reacting to the news of bank failures and bailouts badly, there are a few people that are taking the time to assess the situation and figure out what they can do to stay on top, and keep their money safe. Panic is an ugly thing, especially when......

[All content is copyright of Living Off Dividends & Passive Income]

Random Posts

• June 7, 2008 -- Time To Go Long The Dollar – 2
• July 18, 2006 -- Tax Time Again
• October 11, 2005 -- Real Estate Lament or when to start investing in Real estate!
• February 26, 2007 -- COSTCO CHANGES RETURN POLICY ON CONSUMER ELECTRONICS
• July 4, 2007 -- Dollar Hits A New Low
• September 6, 2007 -- Recession On The Horizon?
• June 4, 2007 -- Learning From The Frogs