There has been a long-standing debate regarding stocks and real estate about which investment is best. Which one has the higher return? Which one creates the best income and lifestyle? Is there a reason to do both? In this episode, Chris Miles digs into the numbers to settle the debate once and for all!
Watch the episode here
Listen to the podcast here
Are Stocks Or Real Estate the Best Investment
Welcome to the show that’s for you, those of you that worked so hard for your money. You want money to start working harder for you now. You want that freedom and cashflow now, not 30 or 40 years from now but now, so you can live that life that you love with those you love. Most importantly, it’s not about getting rich. It’s about living a rich life because as you are blessed financially, you have a greater capacity to bless the lives of others.
Thank you for allowing me to create a ripple effect through your life now through the education and things that we bring here. I appreciate you folks tuning in for offering feedback and commenting on our videos on YouTube. Thank you again for those that have been going to iTunes and rating our show. If you haven’t done it already, subscribe to our show on iTunes. It’s a great way to be able to listen to it on your way to work or while you’re traveling versus watching on YouTube, which you can do too, but I invite you guys to subscribe on iTunes as well. Be sure to do that now.
The topic I want to talk about is to continue from the last few episodes that we’ve had. The last few episodes I’ve done here, I’ve gone into the 401(k) and the myth of the match. I’ve talked about what the real returns of the stock market are. We’ve tried to dispel a lot of these myths and I want you to take this journey with me that helped me realize what’s going on here, like what’s happening in this space of money and finances and retirement and things like that.
Real Estate Versus Stocks
The truth is, once the wool was pulled off my eyes, I don’t wear wool that often, but when the blinders were taken off my own eyes and I got away from that financial advisor Kool-Aid that I’d taken, I started to understand that wasn’t about creating a retirement, but it always came back to this, passive income. It always comes back to passive income. That’s what I wanted to talk to you about now. I’m going to compare what’s the difference between real estate and the stocks? I talked about this and I gave my own examples of my own real estate portfolio.
I’m going to push that aside because someone could look at that, especially if they’re fans of the stock market. It could be another financial advisor and they would say, “No, Chris. Come on. The last few years have been ridiculous.” I can argue the same thing for the stock market. The last few years were ridiculous. As I mentioned in the previous episode, I said, “The stock market’s done well, but we’ve kicked the crap out of it and most importantly, the passive income has been way better on the money that I’ve invested.” I want to take historicals. I want to take a 30-year outlook. I want to look at this from retirement.
The crazy thing is, I only had to go ten years of calculating for you to be able to see some patterns here. I’m going to show you the numbers. Those of you that are watching this video, you’re going to be happy. Those of you are reading, might have to go back and watch it later or you’ll get the gist of it. Some of you already know that this is going to be the case, but I also want to put real estate on trial too. I put mutual funds at a trial last time. I’m going to still put real estate on that. Let’s start with that, just the general premise.
What’s the advantage of mutual funds or stocks versus real estate? Hands down, where stocks and mutual funds win is that they are way more liquid. If you want to cash the money out, you can cash out unless you’re locking up your 401(k), then you’re stuck. That’s something that we discussed before: getting those handcuffs to where you can’t get it out unless you get fired or you quit your job. We don’t recommend that. Having to borrow from it and doing those things or worse, you have to try to find ways to find a financial emergency before they’ll let you get to that money without penalties.
You could do that, but that’s hard to do. It’d be way easier to deal with real estate than deal with the 401(k). When you’re talking about plain all mutual funds, the stocks, they’re not bad when it comes to liquidity and here’s the thing. If you’re looking at market returns, the growth of the asset itself, stocks and mutual funds do win over time, even over real estate. This is the thing that I taught. Remember, I used to show the Ibbotson charts over time.
The Ibbotson charts of the charts that you might see a financial advisor pull out or pull up on their computer. They say, “Since 1927, here’s the stock market. It’s way up here. Here’s the value of the dollar. You were way down here. Here are savings accounts, CDs, T-bills, bonds. It goes up and real estate’s down at the bottom.” It will show real estate being pretty much right around like what most people claim inflation to be. I want to address that. I ran the numbers again, 30 years exactly to the date that I’m recording this.
There could be variation, but I made sure the stock market was up. This is as of September 7th, when I’m recording this. I got on a good update. It came back and the stock market for the real return average about 7.78% from September 7th of 1992 to September 7th of 2022, so 30 years. Not great but better than real estate. I went to CEICData.com. They have the growth and they show from March of 1992 to March of 2022, an average growth rate of 5.3%. That’s nationwide.The stock market has done really well, but real estate has kicked the crap out of it. Click To Tweet
Many of the markets that we were looking at, I looked at Georgia, North Carolina, the Southeast. I even looked at Missouri. I even looked there. Missouri was like 3.9% or average growth there, about 4.25% for places like Georgia, North Carolina, South Carolina. The thing is I’m going to use more conservative numbers than even the 5.3% that they’ve been showing nationwide because that includes places like Seattle on the West Coast, Salt Lake City, where I am and all the places around the country.
A lot of the markets we look at are not huge hot markets like Phoenix or Vegas, where they can go up and down. We go for the boring markets, which as you’ve heard me say, boring is sexy. That’s what we’re going with. When we’re looking at this, this is where we see the stock market’s done much better because if I’m looking at 4% or 5%, let’s say for the real estate market, the stock market does still beat it even with the more conservative, accurate numbers of about 7% to 8%.
Right there, based on that alone, that’s a win. That’s what I said as a financial advisor. I tell people, “Real estate only does like 3% since the beginning of time. The stock market’s done 10% or 12% like they show you on the chart here. Look at when dollar would’ve done over the last 90 years. It’s amazing.” That’s the thing I would show and that’s true at face value if you’re only looking at the value of the property.
The truth is this. When you want a retirement, you’re not worrying about the value of a property. Real estate’s not the same thing. It’s like apples and oranges. You can’t compare because in real estate, the thing we’re looking for is income. Technically, even for our retirement accounts with mutual funds and things like that, we want income, but they’re very different animals because if you try to pull out a retirement account, we can’t pull out much more than about 3% a year. Two percent if you’re trying to retire early.
It’s Apples And Oranges
That’s a much different game than if I have a rental property. Maybe I make 7%, 8% or 10% a year on that cash-on-cash return. It’s a very different thing, so it’s apples and oranges. Real estate is safer. There’s no doubt. They don’t have all the market swings where it’s very volatile in stock market. Very much of a gamble when you’re in the market. You can have big swings, but you also have big drops too. The real estate market doesn’t have that thing. I’m going to compare. I’m going to show you the numbers and what they look like, specifically using $110,000.
Why did I pick $110,000? It’s because I wanted a good number that could show three scenarios? One is investing in mutual funds, earning about 7.5% net, which by the way, I saw an article that the whole 60/40 split, 60% stocks, 40% bonds. They’ve only been doing about 6% to 7%. In fact, in 2022, even if you have bonds in your portfolio, you’re probably already lost about 20% year to date. I’m looking at a 7.5% return. The better the one most people are getting in the stock market. I’m giving you the benefit of the doubt and playing devil’s advocate against my own point about real estate being better. Spoiler alert.
I might have spoil it for you, but I’m going to show you how that works. I’m also showing you two types of real estate. These were both real properties. On one of these properties, you’re buying cash outright, very simple home. This one was out of Georgia. Another one, you’re putting a 25% down payment. Also, putting about $110,000 with closing costs and everything. I do include that in the numbers. I want real accurate numbers here.
I know I’m being such a nerd about this because I know there are some people out there are going to be trolls that are going to say, “You didn’t do this.” I spent hours on these numbers to double-check and make sure that these things are as apples to apples if we can make these apples and oranges be. We’re basically taking these oranges and turning them into red, delicious apples. If you’ve been in the store, red delicious don’t taste delicious anymore, do they? Anyways, that’s another topic for another episode.
I’ve got mutual funds, a real estate property that’s paid off free and clear but has good cashflow, then I’ve got another property that you use a mortgage for to buy and also has cashflow on that. Here we go. Let’s show you the numbers. I use the beautiful thing called Excel to help you see this. You can already see the mutual funds. We’ve got the mutual funds putting $110,000, so end of year one, 7.5%, you got $118,000. It goes all the way to year ten. You got $226,000. Now again, I’m looking at market values. I’m not even factoring cashflow yet. That’s the next tab, but I want to see the values.
Now this other one that we bought with a mortgage, this one you buy at full appraised value like turn-key properties often are. You’re not usually getting equity from day one. The other example does but this one does not. This one, you buy it with a mortgage. I show the mortgage balance here then how much equity you have afterward. Now, just because of the fact that you’re creating leverage, whenever there’s appreciation. I’m only showing 4% appreciation on this. That’s it.
On rents, I’m only showing 3% appreciation or 3% increase per year because that’s been about the average for a long time. It might be more in some places, but again, I want to round down on the real estate side while giving you a better benefit of the doubt on the mutual fund side. I’m not even playing fair for real estate. I’m being a little bit of a jerk here. Here it is. We got equity in that, then we also got another one. This property was free and clear, $110,000, but it was worth $125,000 from day one. This one had equity and also has strong cashflow.
In fact, it has better cash and cash returns in the beginning than even this other one, but you’ll see what happens here. I’ve marked year four because I’m comparing in the yellow section here, the mutual fund with the blue section. Remember, that property that was free and clear was ahead. It had $103,000 year one, $118,000 on the mutual fund but the mutual fund because it does get a better return than appreciation. It got to $146,000 whereas this one was $146,000. Eventually after ten years, $226,000 versus $185,000. The base if you’re looking at market value to say, “I told you, mutual funds win. They won hands down. If you’re playing with real estate, there it is.”
It’s right. Based on the value of the property versus the value of the mutual fund. Mutual fund can win out, assuming you get a 7.5% average. I did also do 10% average and guess what? Ten percent gives you about $285,000. Even those you that are saying, “Chris, remember when you talk about the 401(k) and you get 100% match? You boost up to maybe about a 10% return,” if you’re lucky. I did. I remember that.
$285,000 is what you would get if you had this in a 401(k), assuming all these factors. In any case, but for the most part, people, if they’re lucky, they’re going to give out $226,000. You beat the real estate property. Now in the middle here, this is when we bought with leverage. Why did this work? When you put a 25% down payment, whenever there’s appreciation, you get a quadruple effect because that’s what happens. I’m just using simple math here.
Say you bought a $100,000 property. If you put 25% down, that’s $25,000. Now if the property appreciated 10%, that’s $10,000 on $100,000 property. It’s more than 10% because for you, because you only put $25,000 into it. A $10,000 increase in the value gave you a 40% or a four times effect on your money. You put 20% down on your property and you get a quintuple effect. You get a five times effect. What happens here is that we are paying the mortgage balance down and just so you know, when you’re paying the mortgage balance, it’s not you. It’s the renters. They’re paying it down.
For those of you that are asking, I did take out money for maintenance and costs like that. Maintenance and vacancies I took out. I brought the cashflow numbers down from what the actual cashflow would be. This would be cashflow that you’re saying, “I’m going to take his profit while leaving the rest of the money in to grow and accumulate in savings in case you have to use it for vacancies or you have to make repairs on the property,” but these properties are already repaired when you buy them.
Usually, not that big of a deal. This is after the fact, but even if the mortgage balance does pay down, the value of the property goes up. The value of the property goes up to almost $600,000. Your mortgage balance goes down below to $50,000, leaving you about $352,000 of equity in that property. In this case, you beat not the mutual fund. You also beat the free and clear property. Now I’ll tell you this. Normally, if you have that situation that we’d say, we probably want to sell this, get the equity out. You can even make a 10% cash on cash on that $350,000.
That’s $35,000 a year or almost $3,000 a month then these numbers become sick. Let’s talk about the cashflow. That’s where we’re moving into. Mutual fund, pretty easy. Now remember, I said the 3%. You could pull out 3% on that $226,000. That’s about $6,800 per year that you can pull out. Remember, I didn’t take out any taxes. Stocks and mutual funds are taxed nicely. I only took out 24%. That leaves you with about a little over $5,000 a year of income.
Now, I’ll move over to the free and clear property. This one, remember we had the $340,000? This is net value because if you take the cashflow and you reinvest it, it’s the first year the cash flow. The net cashflow is about $13,500. It’s more and even this other one you bought with leverage. Primarily because they had a much better cash-on-cash. This one, because of interest rates, was a little bit lower with the mortgage. It’s interesting that the free and clear one, which is not normally the case, end up being a better cashflow.
Anyways, you got $13,000 a year, but you’re adding that to your balance. I had that add to the balance. It took me a while to get those calculations to work properly. I got it to work. What that means is net value with cashflow and with the value of the property you end up having because you made $155,000 cashflow over ten years. Guess what? $340,000, that’s again, still more than the $226,000. Remember, we’re looking at the $226,000, but because of the cashflow that was coming in, it jumped up to $340,000.The stock market will even flat out say the market is not based on anything real. It's arbitrary numbers. Click To Tweet
The other one was $480,000, but what’s interesting because it ended up getting more over time. What’s interesting is that this one only passed in the actual rental income by year ten, barely. Notice that both of these are about $17,000, $18,000 a year. Not $5,000 after tax. Most of this money, by the way, when you get it from rental real estate because of depreciation and everything. You keep most, if not all of your profits from that rent, from that cashflow.
You’re more than triple the income on that same $110,000. I’ll tell you this, think of the $100,000 you invest. Most people, again, 3% on that. You’re thinking, “I live on $3,300 a year.” The mutual fund’s letting it grow over time, you can get that higher. You can get that over double of that number because we double the numbers. Even with a real estate property, one property, not even reinvesting, not selling the property to make more like we’re saying. You could take the equity from these properties and probably generate pretty close, I would say, conservatively $2,500 a month or about $30,000 a year.
If you kept the property, held onto it, $18,000, $17,000 a year with tax advantage income, passive income, this thing over here, that is huge. That’s triple. Remember, I gave very liberal numbers to the mutual funds, conservative on these real actual properties. I’m using historical numbers but look at the difference. There alone should be a huge factor in your mind to say, “If I’m doing the math here, if I want to retire in ten years,” extrapolate this out.
Even if you went for the lower number, the $17,000, think of it. If you multiply that by six, you get over $100,000 a year. We start with $110,000. Someone could say, “Are you saying if I had $600,000 now, added no more money to it. I took the money and reinvested the cash flow. Are you saying that in ten years, I could have $100,000 of income?” The answer is yes, you could. You could have more. You could have a little less.
Here’s the difference, though. We’re getting triple to cashflow of this other one. Better tax advantages and better safety because you have real assets. Even if you go to places like Investopedia, which is like the stock market, they’ll even flat out say, “The market is not based on anything real. It’s arbitrary numbers.” Bed, Bath and Beyond is tanking now. Maybe going bankrupt completely. Unless they get bought out, they’re going bankrupt. That was a stock that people have. Invidia is an actual semiconductor chip company. That one’s been tanking.
It lost half its value in 2021, yet mutual funds love to invest in it. You got companies like that people are buying into. These mutual fund companies are buying into them and you’re losing money. That’s the point. This is a big difference. Not only do you have more value, more equity than your mutual fund, but you have what’s most important, more cashflow coming in. We’re not even touching the equity of these properties. That, my friends, is the difference right there.
The Nut Analogy
What does this mean for you? I don’t know. It depends. I hope this education helps enlighten you like it did for me. This is why as a financial advisor, I got the real fact that this is about cashflow. I’m not accumulating money and trying to save like a squirrel and store up my little nuts and hope that they don’t go ranting and nasty because they’ve been sitting around for a while or I lost them and everything else and whatever nut analogy you want to make. The truth is, I’ve seen it work. Look at the evidence.
Remember I said last week, where’s the evidence of people retiring off mutual funds? They’re hardly out there, but if you’ve been reading to my show long enough, how many times have you heard real estate investors, including our own clients here at Money Ripples, saying, “This is what we’re creating. This is the income we have.”
When we had like Tomomi or Louis on, they’re talking about like even $4,000 or $5,000 a month, the passive income after a few years and a few hundred thousand of investing. We’ve had Dan Marker come on. Where after he retires being a Colonel in the National Guard, he’s creating $11,000 a month. Spoiler alert, that episode’s coming out soon. I spoiled one of the next episodes but we’re going to have him back also sharing his experience.
These are real scenarios. These are real people but isn’t that fascinating that millions upon millions of people still put faith into the stock market, into mutual funds? Although, as we showed in the last episode, we don’t have the evidence of people living a life that’s not in fear, but we’ve had plenty of people making, if not thousands a month, tens of thousands a month. Yours truly included, myself included, that are making this passive income, doing these very strategies. We are everywhere. There are literally millions of us, yet.
The Safest Bet
Even articles in The Wall Street Journal and in other magazines of publications, they can’t find someone who says they feel comfortable unless they’re 85 years old. Let me ask you, where would you put your money? Where would you want to put that safest bet? Where is the evidence? Where’s the proof? The thing is, I don’t have to prove much here because it’s easy to see. Historically, it’s easy to see and we have real people, real stories that you’ve seen here on this show that have done it.
If you haven’t seen them, go to our playlist on YouTube. If you go on Money Ripples channel, you can go to the playlist and see people. You can see that there’s a client testimonial. Many of them are episodes of people doing these various strategies. We’ve had dentists that have come and retired, be able to sell off the practice and retire doing the same stuff. You don’t find that in the mutual fund game. You don’t find that with people with normal retirement accounts but in this space of various kinds of real estate investing or oil and gas and things like that. This is not buying rentals. I showed you rentals. This is not that.
There are even syndications and I’ve shown you things about that before. Even making 10% returns, yet you have more cashflow. You bring more money home. As we’ve said, you get at least triple, if not quintuple the effect. Especially as time goes on with that cashflow, so the choice is yours. What are you going to do with this information? Are you going to be a hero only? Are you going to sit around and be another statistic? Another person proved my point that mutual funds suck, that retirement plans like 401(k)s and IRAs suck. They don’t work.
Are you going to become one of those statistics or will you be a real person? Someone who lives an extraordinary life that takes the path that is less traveled. The path that has been less chosen, but it makes all the difference. It’s the path that millions of us, there are 25 million-plus millionaires in the United States. All of us, the one thing we have in common is we own at least one property. Many of those cases, especially if they have more than $2 million net worth, own multiple properties. That’s not accident, that’s math. That’s statistics. That’s reality. What are you going to do with it?
Now, if you haven’t done so already, go to MoneyRipples.com and try the passive income calculator. See what your number is, especially if you got at least a few hundred thousand dollars. You probably should be seriously considering saying, “Maybe I need to hire you.” Maybe you hate us. Maybe hate me. Maybe we’re not for you. Find someone to help mentor you to do this stuff, but that’s the thing, folks. We are strategists and connectors. We have vetted deals.
These deals I showed you were real scenarios. These were actual deals presented to our clients. These are real. The question is, what will you do with this? Will you do something about it or not? Will you be the person that your kids look up to and say, “Thank you for choosing a different path because my friends’ parents, they’re not doing it or my friends, now I’m in the workforce. They’re still thinking that 401(k) works. They’re so dumb.” Yes, they are. They’re not dumb. They’re ignorant. They don’t know any different because every financial expert advisor will tell them to do this.
They’ll tell you to do that 401(k) or the IRA. We’re telling you to try something different. Something that’s been proven to work. Now, is it guaranteed? Not at all. Could something go wrong? Absolutely. Could the world go crazy? Yes. We’ve seen it. Despite all the craziness, we still have people doing what they’re doing. They have results.
Will you be one of those people? Will you be one of our thousand people become financially independent? That choice is up to you. Reach out to us at MoneyRipples.com. If you have questions, we want to know if this works for you. Go and make it a wonderful process week and change your life. Take this information and use it, so you’re not a hero of the world, but you’re a doer as well. See you later.
- iTunes – Money Ripples
- YouTube – Money Ripples
- Previous episode – Past episode
- Tomomi – Past episode
- Dan Marker – Past episode