One of the most common questions that I receive has to do with real estate. The question usually goes like this: “I have some money that I am thinking of investing and I want to know if it’s better to invest in an apartment or a well diversified portfolio of stocks and bonds?”
Investment or to Sleep in?
When attempting to answer the question, one needs to distinguish between buying a property to live in versus an investment property. If you are talking about buying an apartment that you plan on living in, then there are more factors influencing your decision, than just economic issues. For most people, a home has traditionally not been seen as a portfolio device or financial instrument, but rather as place to live and raise a family. No price tag can be placed on having your own apartment, and raising your family there, ultimately, even if the value goes down, the primary importance is that you still have a roof over your head.
Investment Property
The real issue arises as to when you have some extra money that you are looking to invest. I was raised in a family where it was inconceivable to invest in the stock market, because my grandfather lived through the stock market crash of 1929, and because something similar could happen again at some point in the future, you had to invest in real estate, because at the end of the day, you are still left with a tangible asset. How many times have you heard people talk about the beauty in property investing because” apartment values always go up”
When one starts to investigate the economic benefits of one asset class over the other, the picture is not nearly as clear-cut as people think, in fact as an investment, statistically, it seems that a diversified portfolio of stocks and bonds may be a better investment. Historically, a well-diversified portfolio of stocks and bonds returns over 8% annually compared to an approximate 6% return for real estate.
Is it worth the headache?
There are no guarantees when buying real estate for rental purpose. Let’s take an example. Say you own a debt-free apartment worth $250,000. You are lucky enough to find a renter who pays $800 per month. You net $9,600 a year, which is a return of 3.84% annually. This is before any unexpected expenses that may arise. It’s not a lot of fun being a landlord and getting a call at midnight that a pipe burst, and that the tenet needs it fixed immediately. And what if your apartment has a vacancy for a month or two? Your 3.84% return very quickly gets lower and lower.
Currently you can get a FDIC insured bank deposit, which pays 3.5% annually, headache and hassle free. Of course, and of equal importance, if you feel the property value will increase substantially, then you might decide to continue your ownership.
Liquidity
Perhaps the biggest drawback to property as an investment, is its’ illiquid nature. If for whatever reason one needs to sell an apartment suddenly, it’s not at all certain that the seller will get a price even close to what the property may be worth, and that is assuming you can even sell it. Conversely, a stock and bond portfolio has daily liquidity, and you get the market price when you need to sell.
Stability
One of the advantages of property investing is the stability of returns. “Historically, the largest real home price decrease is on the order of 5% in any given year,” says Jonathan McCarthy, senior economist at the Federal Reserve Bank of New York. “Whereas you talk about a real stock-price decline, you could probably see 20% or even more.”
Is there an answer?
Jewish scholars debated this same issue 2000 years ago. The Talmud says that you should keep 1/3 of assets in property a 1/3 in business and a 1/3 in cash. Meaning not only is there room for both property and a stock and bond portfolio, rather it’s the recommended way to invest.
