#109 Top 5 Reasons To Invest In Real Estate vs. Stocks

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. Hope you had another great week. This week I talked to a few people who said they shared this podcast with a few of their friends. And honestly, I see that as the greatest compliment that you know that you can have, that you would spend your time and energy to share a resource with other people that you find valuable. So if you're doing that, thank you so much. I really appreciate that. And that really helps with the growth of the podcast, helps us continue to bring you great content, which I hope and honestly gives me a reason to do what I do. So thank you. Thank you so much for whoever's listening to this. Thank you for being part of our community. So this week, I'm gonna be talking about a topic that, you know, people go back and forth on all the time. There's a big debate out there, real estate versus stocks. And I know that people like to sit in one camp versus the other and just kind of discuss this and fight over this all day. And at the end of the day, you end up just doing whatever you feel comfortable with. For myself, I've always chosen real estate over stocks. And for this podcast episode, I'm gonna talk about why and really five reasons why I prefer real estate over stocks. I feel that both sides have their pros and cons, but a lot of it depends on who you are, what your makeup is, what you're trying to accomplish, what you're more comfortable with, what your basic disposition is, like, all these type of things, what your experiences have been in the past, what your family has gone through, what your mentors and friends have done. These kind of things will help you decide what you like and what's more important to you. Again, investing is different for everyone. Anyone who tells you, like, this is the way, like, this is the only way, I think probably is somebody that you should be concerned about following. I mean, I will tell you that everything depends on your own personal goals and whatever that might be. And whenever I talk about what I prefer, again, is for me and my perspective and what's worked for me. And I just want to share that with you. For me, when I started investing in real estate, the reason I did that in the first place was that I saw a bunch of doctors that, you know, I wanted to Emulate. They seemed to live good lives out there. They had good careers, they seemed to have good family lives. They weren't overworked. They were actually happy to be there in the hospital. And when I actually really dug in with those people and tried to figure out what they were doing to really create that life, it turned out that so many of them were investing in real estate. I said, there has to be something here. And I didn't want to recreate the wheel. I decided, why don't I just do what they do? At least try it and see if it works for me. Now, having invested a ton in real estate, spending so much time in it, learning about it, and in so many different ways, again, I've really discovered why I really prefer it over stocks. Now, I'll give you the punchline right off the bat. The number one reason is cash flow. The main reason I started investing in the first place was to replace my clinical income with other sources of income. I wanted that diversification. I wanted that financial freedom. I developed this goal of replacing my clinical income after experiencing some issues at work. And I've talked at length about this, and I realized that if I ever wanted to achieve freedom, to have that control over my time, my life, I needed to stop trading my time for income. I needed to make sure that what I received at the end of the day in terms of income wasn't dependent on how many hours I spent in the hospital. And then I wanna let you know, it didn't take me long to discover just how much I need in terms of monthly income in order to live the lifestyle that I wanted. What I did was I simply tallied up my current expenses. And everyone can do that by looking at their bank account, credit card statements, and this sort of thing. And then I made it my ultimate goal to cover these expenses with another form of income that was not my day job. And again, I realized that there were other doctors who had done this. I didn't know that this was even a possibility. But when I met these doctors, I saw them achieve this goal, and I decided just to follow what they did. Now, of course, many of us and many people listening to this, and I had heard all these things before, I. I had to decide, like, do I want to go that path or do I want to go what is considered traditional wisdom when it comes to retirement and investing, right? Investing in the stock market. You want to invest in your 401k, invest in your retirement accounts, your Roth IRA, and that would provide you the security that you wanted. I mean, Obviously, we all know that stock values go up and down. And this time, depending when you're listening to this, there's a ton of volatility in the market. The values of your portfolio, if you look at it day to day, it'll probably drive you mad. I see these ticker reports that say this goes up 5%, this goes down 5% every single day. And if you watch it, it goes up and down in value. But your hope overall is if you invest in a diversified manner, that overall, with all the volatility, it still goes up over time. The problem was, was that it wasn't spinning off cash like on a monthly basis. I couldn't feed my family with the income and the growth in the value of these stocks. And in fact, it was really just the opposite. I mean, in these protected accounts, if I really wanted to take cash, I'd have to take a penalty out to withdraw those funds early. Or I had to wait till I was what, 59 and a half years old. And I was not okay with waiting that long to live the life that I wanted. Now, there are some stocks we all know that pay off some small amount of dividends. But I discovered that the portfolio size that you need, that, that egg, that nest egg, whatever necessary to get a meaningful amount of cash flow with these dividend stocks just wasn't practical, it didn't make sense. And I just felt like I couldn't get there fast enough. And plus, they just weren't as predictable as the cash flows I was going to receive and I did receive from my real estate investments. So what I really focused on was building up that real estate portfolio using both direct ownership, meaning owning my own properties, being my own landlord, having those properties, and then also investing passively through these private deals, these passive deals, right, like called syndications and funds. Now, just for anyone out there, none of this is like a get rich quick scheme. It wasn't like that. But using the income from my day job, I just took a lot of it and I funneled a good amount of it into passive income sources, creating those other streams of income, really focusing on cash flow producing investments. Now, this cash flow, one at a time, right, one investment at a time, you know, created that income that would allow me to really buy my time back. And I believe that was the most important thing that money could do. It allowed me to free up and buy my time. It allowed me to give up shifts knowing that income was coming in from my passive investments really reliably. For example, I would give up a night here I'd give up a weekend, I give up a holiday. And for those who haven't been able to do that, there's something amazingly freeing about giving up a shift. I know some people see it as a loss of income, but when you're able to see it as a gain of time and what you're able to gain, it is a very powerful thing to be able to give one of those things up and also know that you're going to be fine financially. I mean, that's one of the greatest benefits of investing in real estate. It's this cash flow. And this continues to grow and has grown significantly over time, and it continues to pay off. And it really allows me to live the life that I want. The second reason I love real estate over stocks is this concept of an inefficient market. Now, I know that when you look at the stock market, historically it's increased in value year after year. They'll say about an average of 7 to 10% annually. So I understand that people just want to park their funds there and then forget it. And I understand, according to many, this is just the smartest way to invest in the stock market. However, the fact that this stock market, overall, it's what's considered like an extremely efficient market. And what that means is that you, as the little person, you're not going to beat the professional investors out there with all the information necessary that you need to make big moves, make huge gains in the stock market. When it comes down to it, the person who has knowledge, and the earlier you have that knowledge, the better off you'll be when it comes to investing in the stock market. Because at a certain point, when all these people have the knowledge, the market is extremely efficient, meaning that prices and valuation and increases are baked in and cooked in, meaning that it's hard for you to find where the actual advantage is. And if you're going to try to find an advantage, you're going to take a significant amount of risk to get there, which is why it makes absolute sense. I understand when people invest in stocks to invest in these diversified index funds, it makes absolute sense because they don't have the information. Even if it is an efficient market, you don't have what it takes to find the inefficiencies to get where it needs to be. I mean, some people might, if they study, you know, one or two stocks, like diligently, and I know some people who do that as doctors, and they've done quite well. But most of us have day jobs. We rather spend Our time doing other things when we're off work, we want to spend time with our family. We don't want to be professional investors. However, the world of real estate, it's very much an inefficient market. That means that even though real estate prices, it seems, you know, they seem to be dictated by the overall market, we hear about it all the time in the news. The real estate market is going up or going down. In reality, most and many investment properties, they're not bought and sold at their true value. Meaning that you can find a ton of good deals in many different situations. For example, maybe the seller is a long term hold. They've had the property forever. They call them mom and pop owners. They haven't run the property to maximal operational efficiency. Like they haven't actually maximized the profit that they can make from the investment. They've had it over time. What, why bother renovating it? They've got tenants in place, they make good cash flow and they're, they're now ready to cash out over time. Or maybe they passed it along to one of their heirs, one of their kids. And their kids don't want to be invested in real estate. They don't, they're not interested, but they want to sell that property off for a gain. Well, this allows the next person to come along who might be, you might be a syndicator sponsor that you work with, who sees the hidden value, who sees where they could go in there and through operational efficiencies and can maximize and increase a profit from day one. And they can buy it at a price where it's priced at a point where they can actually make money on that purchase. They can essentially buy it for under market. And isn't that what we all want when it comes to investments? We want to jump in investments at like under market, but then find ways to, you know, cash in later on this level of control, this inefficiency that is found in real estate, it really allows you and all these other investors out there to make profits and really based on skill, effort, analytics, rather than just purely timing and luck. And if timing and luck work in your favor, great. But there are so many examples of real estate operators who even in the worst times have found ways to actually make profit. And the way they've been able to do that is because again, they're better operationally. They know exactly where the inefficiencies are and they know how to perform in those times. Okay, along with that is the third reason, something called forced appreciation, like when you buy a stock, it's pretty unlikely, I would say, that you have any influence over the price, right? The stock price or the stock value. Unless you're someone like a Carl Icahn or Warren Buffett or even Elon Musk in a tweet, like if you say something, you're extremely influential, maybe you can move the price of a stock, but you know, more or less like you as a single investor, you're just along for the ride. However, you know, as I mentioned earlier, a real estate investor, they can use strategy to improve operations, increase what's called the net operating income or net profit, and they can cause and actually affect what's called forced appreciation. Now this concept is different from something called market appreciation, which we all understand, which is that the real estate market, overall market factors, whatever it might be, like the global local economy, like that, you know, affects prices wherever you're at now, I would say in your current market and most everybody's current market these days, home prices have gone up significantly over time. And that's just really because the market overall demand has gone up. It's based on comparables like you look at what other things have sold at and if it's going up, the next comparables seem to increase over time, but it's not under your control as an investor. You look at trends, but again, that can be unpredictable. However, when it comes to real estate and thinking about it as an investor, there's a way to quote unquote, force appreciation, where you take those units, those apartment units, whatever it might be, they're underperforming in rent because maybe they're, you know, poor condition compared to the market. You can renovate those things and command a much higher rent. Not only can you increase the upside, increase the income, you can decrease the expenses possibly by being more strategic at better all overall management. Maybe you find a property manager that has better resources to maintain the building at a better price. You know, if you take better care of tenants, maybe you get less turnover. And then the repairs that you have to go in and do every time a tenant leaves and you have to do a complete turnover and you have to fix things up, maybe you don't have to do that as often. And that decreases your expenses, changes where you increase the income and you decrease the expenses, that results in what's called a higher net operating income or essentially higher net profit. And that value can significantly increase the value of the property. This is the way it works when it comes to rental and real estate properties. It really is a factor of the income that is created from that actual investment, regardless of what the overall market is doing around the property. The now, if you have both force appreciation, what's called market appreciation, then you're in great shape. But you don't have this kind of opportunity with stocks to do this. All right? This fourth reason, it's leverage. Now, leverage is one of the most powerful aspects of real estate investing. You're able to control a hundred percent of an asset, really, by only utilizing a small portion of capital. For example, you can buy a property for having 20% down payment, 25% down payment, whatever it might be, and then you use the bank's capital for the rest. However, just so you know, as an investor, even though you're only putting in 20 to 25% of the down payment of the equity for that Property, you get 100% of the upside of the investment. Let me show you through an example why this is extremely powerful. Okay, let's say you buy and purchase a $1 million property. You invest $250,000 into it, meaning you put a down payment of 250,000 and then you borrow $750,000. Now, through market and forced appreciation, you know, you're able to increase the value of that property by 25%. So now it goes from a value of $1 million to a value of $1.25 million. That's a 25% increase in the value of the property for you as the investor, right? Well, actually for you, it's 100% return on investment. Let me explain this, that you invested originally $250,000 and then the property increased in value 25%. So $250,000, it increased. Now, based on the return on investment formula, meaning that the return that you have divided by the amount you invested, so 250,000 over 250,000, that is 100% increase. You put in 250,000 and increase 250,000. So essentially you doubled your money and doubled your equity in this property. And that was all made through leverage. That's the power of leverage. It's how investors, especially in real estate, they're able to generate outsized gains and create massive wealth. Now, I just wanna warn you, leverage is also what's called a double edged sword. It can multiply returns, but it can also magnify losses. That's why it's absolutely important and crucial to learn how to mitigate risk. Understand the downside, whether you own the property yourself or you look at somebody else's deal to understand where that risk is. But again, with real estate being what's called an inefficient market, I believe it's possible to mitigate that risk and still leave yourself with a good amount of returns on the other side. And again, when it comes to real estate, there's a level of control that you have or the syndicator has, sponsor has. They're able to use sound strategy and intelligence to not only mitigate risk, but really set yourself for greater returns. Now with stocks, you know, do you have the same ability to leverage? You might be able to buy things on margin. However, these are really short term plays and if you're really unlucky, you're going to come across something called a margin call. In this scenario, investors are going to come up with the capital to cover what they borrowed immediately. So you not only put what you have at risk, you might lose even more money. And the downside is even more, you know, by investing on margin. It's not a long term solution and can be extremely risky. And lastly, this is also one of the most powerful reasons it has to do with the tax benefits. Now investing in real estate, it brings a ton of tax benefits to the table. Now obviously that could be its own entire episode, but there are many amazing tax benefits available to real estate investors. They're not loopholes. Some people call them loopholes. Yeah, that might be a term that people use, but they're actually truly what's called incentives. It's put in place by the government to encourage the holding of real estate. Like when real estate is there and people are constantly holding it and, and improving, it serves a need, it provides housing, provides jobs, provides revenue through all those local taxes, right. For local governments. And two of the biggest tax benefits for real estate investing I want to talk about are called depreciation and 1031 exchanges in general rental properties, at least on paper, the government allows it to lose value, on paper, about 3.6% a year. That's up to about 27 half years in the case of residential properties. So this reduction in value every year is counted almost as a paper loss. You can deduct that from your reported income, which greatly reduces the amount of taxes that you owe for the year. But if anybody can think about it conceptually, right, maybe that property is going down over time, but what is the value of that property actually doing? If you own a property is making good income, the government allows you to write off a portion of it, what is it actually doing in reality? You know, if you're a smart investor and you're Doing it well, it's possible that the value of the property is actually gaining while you're able to write tax losses each year. Now with current laws in place, just so you know, there's something called bonus depreciation and you're able to really accelerate what's called that depreciation and squash it on the early years of the investment. So you can get a massive deduction, not just do 3.6% every year, you can actually do a huge deduction on the front end of owning the property, sometimes equivalent up to close to what you invested in it for just to begin with. And that is a massive deduction that you're able to take just so you know you can get that benefit as a direct owner of the property and then also as a passive investor in a syndication or fund. Now there's something called 1031 exchange where you're able to defer capital gains tax really indefinitely. Like normally when there's a sale of a property, you'd have to pay a large amount of taxes at the same time. It's not like taxed like your normal marginal income, like your day job, which is taxed at that high rate. Usually with these properties, if you've held it for at least a year, it's tax at what's called the capital gains tax rate. So that's already a better tax rate than if you, you know, put in your time in terms of work. But the government, through this thing called the 1031 exchange, allows you to use the money from that sale to purchase another like kind property. Then you just exchange it. You can defer paying capital gains taxes forever simply by using the profits of that sale to purchase a property of equal or greater value. Now this is a powerful tax benefits for real estate investors. Again you're able to get tax protected growth in real estate. That's one of the powerful things. You can do that in your 401k too. But imagine doing that with real estate. Now when it comes to stocks, you're able to get a few tax benefits right from some qualified dividends and maybe certain write offs. And you do have the capital gains tax at a lower rate. But again the tax benefits pale in comparison to the massive benefits you can get as a real estate investor. Okay, I could probably go on and on why I prefer real estate to stocks. Now just so you know, full disclosure, I do invest in some stocks as well. I do have for diversification sake. I do have some money in 401ks and a taxable portfolio as well too. But the majority of my portfolio is in real estate. I've decided that it is my main vehicle to create financial freedom. It worked for a lot of the people that I wanted to emulate. It worked for my mentors, and it worked for me as well. I think it can allow for significant wealth creation and preservation, if that's your goal. And it can create this side income stream for, you know, and it has for myself and many other physicians that I know. So it all goes back to your ultimate goal. My ultimate goal was to replace my income for financial freedom so I can get it now, not when I'm 60 years old, so that I can live how I want to live, so I can enjoy my time with the loved ones that I want doing the things I love. And so I always believe that real estate was the best way to get there. It's worked for me and for so many others that I know. So I'm just curious for you, what camp do you sit in? Is it a little bit of both? Does do any of these things sound compelling? I hope this got you thinking and that you can figure out how to use real estate to ultimately get you closer to your goals. Anyways, have a great week and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs, and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.