Motley Fool Money - Better Investment: Stocks or Real Estate?

Episode Date: May 18, 2024

So, you want to grow your wealth. What’s the best way to do it? In this special episode of Motley Fool Money, we team up with our friends at the real-estate investing site Bigger Pockets to debate whether stocks or real-estate investing will get you more bang for your buck. Fool analysts Jason Moser and Matt Argersinger are our fighters for stocks. They go up against Bigger Pockets’ CEO Scott Trench and Dave Meyer, the company’s VP of Market Intelligence. Chris Hutchins from All the Hacks moderates the conversation.  Host: Chris Hutchins Guests: Matt Argersinger, Dave Meyer, Jason Moser, Scott Trench Producers: Kailyn Bennett, Jennifer McCord, Ricky Mulvey, Mary Long Engineers: Exodus Media, Steve Broido Learn more about your ad choices. Visit megaphone.fm/adchoices

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Really, opening, like I said, downloading that app, Clicking a few buttons, buying an index fund, maybe putting $100 in there a month if you're 22 years old out of college or something is an amazing way to get started. And it is about the easiest thing you can do. I'm Mary Long and that's Matt Argersinger. We love stocks here at the Motley Fool, but there are other ways to grow your wealth. Just one example, real estate. In this special episode of Motley Fool Money, we got together with our friends at Bigger Pockets, the online community for real estate investors, for a debate about which is the better investment, stocks or real estate.

Between the two, which one actually grows your wealth faster? Does one strategy provide you a higher return over the long run? Which has more liquidity? Is better for financial freedom? Better for your time? Fighting for stocks and reppping the Motley Fool, we've got Jason Moser and Matt Argusinger. Both are fool analysts and regulars on the show.

In the other corner, punching for real estate, Bigger Pockets brought Scott Trench and Dave Meyer as their fighters. Scott's the CEO of Bigger Pockets, and Dave is the company's VP of Market Intelligence. both are longtime real estate investors, podcast hosts, and authors. Last but not least, our friendly moderator is none other than Chris Hutchins, host of All the Hacks podcast. If you don't know Chris, he focuses on financial wellness and upgrading all the elements of your life,

whether it's money, travel, career, or something else. A quick note before we kick off. Since this episode is a bit longer than usual, we won't be posting a show tomorrow. And now, without further ado, on to the debate. Welcome, everybody. I'm so excited to be hosting this. Let's just kick it off right now. I want to jump to the Bigger Pockets team, the Motley Fool team. Thank you for being here. Can you guys just start on each side explaining to the audience what stock investing in real estate investing in real estate is? Maybe define it for people. Sure. So I'll start on that one. Real estate investing in real estate is purchasing real property, holding onto it and operating it at its highest and best use in order to generate cash flow and benefit from long. term appreciation. You can also, in the act of doing that, experience tax benefits and amortization of debt if that was used to finance the purchase.

All right. I guess I'll do the stock side. That was nice and succinct. I will say, I think it's easy to think of stock investing as trading a bunch of green and red numbers on a screen, prices, ticker symbols, many of which we don't even understand, jumping around every day and some days jumping around a lot. But I think the key thing to remember was stock investing is what those symbols and prices really are. They are pieces of real businesses. You as an investor, as a stock investor, can own pieces of real companies. Yes, you can own a piece of Apple. You can own a piece of Nike. If you want to invest in artificial intelligence, you can own a piece of Envidia or Microsoft. And by owning a pieces of those businesses via shares in your

brokerage account, you are at least indirectly entitled to a portion, however small, of the profits generated by that business. In many cases, you're directly given a portion of those profits via dividends or cash payments directly to you in your brokerage account, usually on a quarterly basis. So you're not buying bits of data on a screen or random ticker symbols. You're buying equity in real companies that earn profits and hopefully grow over time. Awesome. All right. So the goal here today is to have a fun and healthy, spirited debate talking about these two areas. We both set out the outline of what they are. I'm going to give you guys each a minute. Either side, go first on why you think your type of investing is the best way to build well.

Well, I'll jump in in regard to stock investing at least. I mean, there are a lot of benefits that really come from it. I mean, you look at things from capital appreciation, right? I mean, stocks, ultimately, they have the potential to increase in value over time. You know, as companies grow, as they improve, as they get better, as they do more things, that gives you the opportunity to see the value in the business that you're invested in, you know, continue to grow. You know, another thing that stocks do, a lot of well-established companies, they'll pay dividends in order to return value to shareholders. And so you look at companies like Starbucks, for example, they will continue to reward shareholders through holding those shares over long periods of time.

by returning cash to shareholders in the form of dividends. There's compounding, right? I think that's something that probably doesn't get enough attention, but the longer you own certain companies, and that comes with dividends and also capital appreciation, stocks go up. Liquidity, I mean, hey, listen, I mean, if you own stocks, you can buy and sell, right?

That's a great thing. It's not so hard to buy and sell stocks, which is a nice part of it. And then obviously there's the diversification part of it, right? Real estate is a great way to invest, but stocks are too. And ultimately, what we believe, the fool here, is that you should own a little bit of a lot of this stuff. And so whether it's real estate or whether it's stocks,

I mean, holding a lot of that stuff together makes a lot more sense. Diversification really makes a lot of sense. Because as we've seen here over the last several months and really over the last few years, it becomes a little bit more difficult to predict exactly what asset classes are going to make the most sense for investors. And so owning stocks is a great way to sort of look at what's going on in the world today and say, well, we have that sort of exposure to companies that are sort of the, leading the way towards where we are going, and they give you the opportunity to stay well diversified. All right. That was great. Matt, I saw you raise your hand. I'm going to give you 15 seconds to chime in before I jump over to Scott to talk about real estate.

Yeah, I just want to put a quick finer point on something Jason said, which is long-term returns. If you look at, say, the past 150 years of data, on an unlevered basis, stocks have definitely delivered the best nominal returns, 10% annual, annualized for 100%. hoteers, you can't really get that with real estate, bonds, gold, or what have you. So stocks have been kind of the winner in that specific regard. That sounds pretty good. Scott, let's hear you make a case for real estate. First, I want to say I completely agree that unlevered stocks are going to outperform real estate. The reason I'm going to, you know, and I think you should own both, right, long term. But since we're in a Mortal Kombat style, Duke it out real estate versus stocks debate here, I'm going to make the case for why I think you should start with real estate on your

financial journey. And a couple of reasons here. First is that leverage component. Long-term leverage against long-term appreciation makes a huge difference in returns. You can integrate real estate into your lifestyle through house hacks or what's called a live-in flip. And that can generate huge long-term returns that are really tax-advantaged. You can generate more cash flow from real estate. And so if you want to retire early or use that to fuel your lifestyle, that can be a huge advantage. Real estate is often less volatile than stocks. And so, So that brings us back to the concept of leverage, which I'm sure we'll get into multiple times throughout this debate.

And then I think I've already mentioned this from other tax advantages. But that makes a huge difference over time. A lot of that cash flow can be completely tax-free during the early years of a hold period, and especially if you're levered. And also just wanted to mention particularly right now, the fact that real estate tends to be an excellent inflation hedge is also pertinent. Yeah, Scott, I like how you said you're going to advocate for real estate being a way to start.

I'm curious if you guys could talk a little bit about the base. barriers to entry for someone to just get into this. What does someone need to have? What kind of capital? What kind of experience? Maybe we'll start with stocks. Well, stocks are super easy to get into, but I would say stock investing takes very little time other than the minor hassle of opening a brokerage account, which today is like as simple as download in an app and pressing a few buttons on your phone and connecting your bank account. I mean, that's really it. And I mean, in some cases, it's almost too easy today to start to open a brokerage account. But once you've opened a brokerage account, You can buy and sell stocks in a few seconds, and boom, you're done.

You can start earning those profits, those dividends that Jason was talking about, and really without lifting a finger more than maybe a few times a month or a few times a year. So it's really one of the fastest, easiest ways to get into investing. And you don't need a lot of capital. You can buy $100 with a stock today, and that's probably a good start for a lot of people. Real estate, though, seems like it could be expensive, right? There are greater barriers to entry, I think, for real estate investing. because it tends to be a more capital-intensive asset class.

You can't just open an app and buy rental properties for $10, although there are some funds and some modern crowd funding platforms that do allow you to do that. But generally, I think of real estate investing as more entrepreneurial than buying equities and buying stock. And so in addition to capital, you need money for a down payment. Do you need to have solid, predictable income, typically to get leverage on a property and take out debt.

You need decent credit. So you do need all that to get started. And you also need a bit of an entrepreneurial spirit. You are starting a small business. And so you're going to need some level of business acumen and expertise to be able to operate that business successfully. Yeah. And I'll just piggyback on Dave's great point by saying that expertise.

I think it comes in the form of several, maybe at least a several dozen, maybe several hundred hours of self-education on the topic. you need to know how to screen a tenant. You need to know that when a tenant is applying for your rental property and puts down the phone number as a reference for their previous landlord, that that might be their buddy, and you need to back channel that and make sure you're actually calling the previous landlord and getting the referral from them. There's so many little tips and tricks like that that you need to be aware of, or if you don't learn them up front, you will learn them downstream in a much more painful and more expensive fashion later on in that journey. So in addition to those

things that, you know, credit, income, down payment, you also need this expertise. that can be a real investment of time that is probably not needed, especially for like index fund or other stock investing approaches here. Although I think the Motley Fool guys will put in just as much time and energy as many of the real estate investors to take it very seriously in trying to find that alpha. I don't know if that's true, but we'll take the compliment for sure. There's a question, Matt. You said, you know, 10% average returns on the stock market, highest returning unlevered asset class. I'm curious, how much work does it take for someone to kind of be in that group because the way Scott and Dave put it, you know, real estate can take a lot of work,

but, and you made it seem, oh, you just open a brokerage account. Is it that simple? Just open a brokerage account. And boom, you get those returns. You know what? It actually is. And I'll explain why. It doesn't, it shouldn't, it shouldn't be that way. But what most investors should do if they're investing in the stock market is simply by, and Scott mentioned it in an index fund, ETF, S&P 500 index fund, right? Right off the bat, you're probably outperforming 95% of active investors if you do that. It's simple. It's cheap. It's cheap. It's the fees are really low. And yes, if you do that, you're matching the return of the overall market, which I said, going back more than a century is about a 10% annualized return. So that

is what you can do. Now, we stock investors like to make things complicated when they shouldn't be. So we tend to buy individual stocks. We think we can outperform the market. We think we can be the next Warren Buffett. So we're doing things. We're trading. We're sometimes doing leverage, which is really dumb in the stock market and we're losing our shirts. But really opening, like I said, downloading that app, clicking a few buttons. buying an index fund, maybe putting $100 in there a month if you're 22 years old out of college or something is an amazing way to get started. And it is about the easiest thing you can do. But here's a question for you, Scott and Dave. Matt talked about 10%. You guys talked about

how it might take a little bit of work. We talked about leverage. If you start to think about the leverage you can bring into real estate, what kind of returns do you think we've seen or people can expect in their real estate investing? So this gets kind of complex here. I'll take a stab at this. So let's say that we assume that real estate's going to appreciate at an average. of 3.4% per year, right? And if you lever that 5 to 1, right, at least in the early years, you're going to get an appreciation rate that multiplies 3.4 times 5. So that's what, 15 plus another 20, 17% from appreciation. You're going to be amortizing your debt during that, debt service on that for the 80% of the property value that is levered. And then you're going

to hopefully be producing some cash flow as well. So you add those up, you should be looking at upper teens returns, maybe low 20s returns. And if you can't get there, you should invest in stocks because it's totally passive and you don't have to spend all this time thinking about how to buy real estate at the beginning. Now, over the 30-year period, you're slowly de-leveraging, assuming things go reasonably well, right? You're paying down the loan, the property is appreciating, so your equity balance grows. And once it's paid off, now you're getting the unlevered real estate return of like 3.4% plus maybe a 4% to 5% cap rate. This is the 4% to 5%? percent cash flow component of the total equity value. So at the end of that hold period, in a typical,

you throw a dart at the wall and pick a rental property, a true actual rental property across the United States, you're probably looking at a seven and a half to eight and a half percent unlevered return. At the end of that hold period, once you paid off the debt, and you're looking at more than that in the early part of it. It can get more complex from there if we want to talk about tax benefits and those types of things. But that's what you should expect. And that's we have to kind of keep in the back of your mind as you're investing over the years and decades in real estate there. And if you can't get it, again, I would go to stocks. Well, let's talk a little bit about volatility, right?

That's, you know, averages, right? You gave a scenario of an average. Matt, you gave a 10 year or a century long average. What do you think it looks like year to year and what kinds of volatility can people expect? How much risk are they taking? What could they lose? And maybe even as far as what is just an amazing year look like? Sure. Well, I will say for the stock market, which we know it's most more volatile, let's use the most recent bear market as an example. 2002, the S&P 500, the broad market index at its lows was down about 27%. That's a pretty big hit for a lot of people. And if you were investing in technology stocks, the NASDAQ was down about 40% at one point. Typically in a bear market, which we know happens roughly once every five years, the average loss is about 30%. And one of those is always around the corner. So that's what you can look forward to.

with stock investing. What you can also look forward to, though, is the gains can be pretty high in the good years. If I look at, like, for example, the last 20 years, five of the last 20 years, the stock market was up more than 20 percent. The average return was 26 percent. And so that's a pretty good year. Imagine compounding your asset. You're not worth by that amount. So the highs can be really high. And as Jason mentioned, stock market tends to go up over time. And so that's great. but you have to be ready for those nasty bear markets that come that are inevitable, and the next one's always around the corner. Dave, what do you think about real estate when it comes to volatility and kind of downside upside? Well, I think that is one area where real estate does stand out

versus equities. Of course, many people listening to this, myself included, all remember the great financial crisis and the sharp declines where we saw home prices on a national basis go down somewhere around 20%. But that is somewhat anomalous. in American history, that's not saying that it won't happen again, but that is unusual to see large drops in home prices like we saw. And so to me, the real name of the game with real estate and the way you mitigate against volatility is just time. This is not a quick get-in and get-out strategy. But with real estate, if you can manage to hold on to properties, you are very likely to be able to wait out any short-term volatility. And the risk of principal law,

is actually, I think, significantly less than in the stock market. You talked about time. What about diversification? On real estate, are you suggesting just worry about time? Don't worry about multiple properties? No, I think I would absolutely recommend diversifying into multiple properties and even doing multiple strategies within real estate investing. You can invest in long-term rentals. You can do short-term rentals. I personally diversify across geographies into different markets to take advantage of different market fundamentals. But I think, ultimately, not to be overly simplistic, but the name of the game in real estate investing is to avoid forced selling. And forced selling is just basically what we say is like

when you get in a situation where you can't hold on to your property and you are forced to sell at what might be an inopportune time. In real estate investing, if you get to choose when you're going to sell, you are almost always going to make money. And so the way I think about being defensive and mitigating risk is one time, you know, just try and hold on for as long as possible. And the way to hold on is to generate, in my opinion, positive cash flow. Because if you're able to make sure that your properties generate even two, three, four percent cash flow after all of your expenses, after all of your capital expenditures, then you get to sit back. You're still, at worst, you're making a couple percentage points off of your cash flow and your

amortization. And then you don't want to necessarily try and time the market on the buy. But then you do get to time the market when you're selling. And in those situations, it's pretty difficult to lose money in real estate. Jason, I'm curious what you think about risk mitigation in the stock market, right? What is someone who's kind of nervous about a 20, 30% drawdown do other than just weight? Yeah, you know, I think there was a great point that was just, just mentioned there in regard to force selling, right? That's something that applies to real estate.

It applies to stocks. It applies to a lot of things in life. But you just, you never want to be a forced seller, right? You never want to be forced to sell anything. And that's one of the things we love about investing in stocks here at the Fool is that, you know, taking that longer view, you can sort of ignore the near-term noise and let yourself sort of watch the story play out. And I will say in regard to real estate, that's another really beautiful thing about real estate is you don't have to sell, right? And I think that's one of those things. It's always worth remembering is in real estate, sometimes that can be a situation where you're in a little bit more of a situation. where you might not have the options, whereas in regard to stocks and the way we look at stocks,

you know, we're buying shares into businesses where we feel like these businesses have the opportunity to perform over the long haul, over 10, 20 years, hopefully much longer than that. And so I think in regard to diversification, making sure you put yourself in a situation where you don't own assets where you feel like you need to sell anything, right? That's a big difference. I mean, that can really make a big difference in how you view your portfolio and ultimately the allocation there. The stock guys, Matt, Jason, you talked about how you can buy an index fund and have access to lots and lots of stocks in a very simple vehicle. Scott, Dave, when it comes to real estate, how can you diversify without having a massive amount of capital to get going and buy lots of

properties? It feels like that would be a huge barrier to entry to diversification for the average person. So when I got started in real estate, I didn't diversify, right? One duplex was five or six times my annual income. I was highly levered and concentrated on a single asset in a single market. And all of my properties today that I own and operate personally are in the Denver metro area. So I'm making, I have a diversification in my real estate portfolio. I'm highly, my returns will be highly correlated with the Denver metro market. And I want to chime in on the last point here around, you know, risk here. Difference between stocks and real estate is that the stock can never force you to sell, right?

Like something about your personal life could force you to sell. But in real estate, it absolutely can force you to sell. People who do not have reserves set aside, do not produce cash flow and have some sort of problem in their portfolio, they call this a digital. disaster. Investors who are well capitalized, call it a capital expenditure. And you want to be on, there's a clear side of that equation that you want to be on if you're in the real estate investing world. And so, look, my portfolio is a highly concentrated, not diversified investment, and bet on long-term appreciation in U.S. housing prices and rents and specifically concentrated on

Denver, Colorado prices and rents. So it is absolutely, in the way I do it, and the way that most real estate investors in this country do it, at least in the residential space, they're not in REITs or these other types of commercial assets. It is absolutely, you're giving up some of that diversification across all these different asset classes for a concentrated bet. Matt, I saw you how to follow up. I just, well, let me, let me, Scott here's throwing a bone to the stock investing guys. Let me throw a bone back and say, you know, the one advantage of the big advantage of real estate,

even though you're super concentrated, is that those Denver properties aren't getting priced or repriced every day. One of the things we fight against here at the Motley Fool and just stock market investors in general is that they're seeing the value of their portfolio change on a minute-to-minute basis. Stocks going up and down, you know, minutes-to-minute day-to-day, sometimes with big movements, especially during earning season and other periods of time. And that's a big challenge. Getting some of the things Jason said was being, you know, being forced to sell. We deal with a lot of more emotional rollercoasters here on the stock side.

I love the fact that real estate is not repriced every day. So you can make your own decision. I think Dave said that, which is you can time your exit there with lots of foresight. Stock market, you know, can push a lot of people out quickly because they just get, they see their portfolio down 20, 30 percent during a bear market. They see the headlines in the news about recession and all these bad things that are going to happen. And it can cause people to panic and the fact that they can see their stocks and all the red in their portfolio and it can make them make an emotional decision.

So I like the sort of pacifying patience and generating nature of real estate versus the stock market. Now, Scott just mentioned REITS. Jason, no one's made this case yet. I'm curious. Like, couldn't you just invest in real estate through your stock brokerage account and not have to worry about any of the other work? You absolutely can. And I think that's a great way to do it, actually. I think honestly, that's probably the best way for most people to get real estate exposure is to, rather than, you know, buying and selling properties or trying to become landlords. I mean, there are plenty of opportunities out there in things like REITs, real estate investment trusts where you can invest in real estate without necessarily.

necessarily having to have that direct exposure. That direct exposure in real estate is just really difficult, right? I mean, I think we can all agree that one of the most, one of the most difficult parts about investing in real estate, it's sort of the, it's the getting into it, right? It's, it's, they're, there are barriers to entry in just needing the capital to get in there. And that's what real estate investment trusts and things like that helped to, to break down. And so I think in regard to investing in real estate, real estate investment trusts represent a terrific opportunity for investors. If that's your thing, right? If you're interested in that real estate opportunity.

Okay, Scott, Dave, Jason just said, Reitz, great way for people to get started in real estate, completely different from the path you laid out. What do you think? Look, I think that rental real estate that I directly own and operate has the advantage to give me that leverage, but it also gives me tax-advantaged cash flow, which to me is super important. And index funds of REITs or stocks really just don't produce the same levels of cash flow that I believe I can get from rental real estate. And my goal in all of this is early financial freedom. Everybody has different goals when it comes to investing. But I can, like, I'm not going to sell off chunks of equity. in my stock or REIT portfolio to fund my lifestyle.

Like mentally, I just will not make that leap in my mind as a, you know, a guy in my 30s, a long time horizon ahead. I will spend a chunk of my cash flow that is being pulled off by my, my portfolio. And to me, like, that's the Trump card for real estate in my portfolio at this point of my life for that. And why I like it a lot is because it offers that opportunity. And I feel like it's much harder to do that. without dramatic tradeoffs in the equities markets at the highest level.

One other thing I wanted to talk about and one benefit to real estate that we haven't even discussed is this concept of value ad investing, which isn't for newbie investors necessarily. But this is similar to the concept of flipping houses, but you can do this with long-term rental investing as well. When you buy a property, you fix it up and you're able to drive up the value of that property directly. ideally, by more than what you put in to fix up that property. And that's just not something that you could do with REITs. It's not something that you can do with equity.

If you're an experienced good real estate investor, you have more direct control over driving your own profits than the stock market or REITs because they're just inherently more passive and you don't really have a say in the operations of those businesses. How much time does that take? Well, it depends. I mean, you can go everywhere from a, you know, down to, to the studs renovation. I've never done that myself. I have a full-time job, so I would not take on a project like that. But I do what they call cosmetic upgrades, which are, you know,

paints, floors, renovating kitchens and bathrooms. For me, maybe takes two or three hours a week if I was doing something like that. For the contractor, I pay to do it, I hope they're working full-time on it, but sometimes I'm not sure. Yeah, I think the term is semi-passive. Yeah, I think about cost basis, and we've got to include our time in there. I know none of our financial statements often do, but Matt, Jason, how much time are you spending, maintaining your stock portfolio? Well, this is a great thing to bring up, right? Because, I mean, I have the experience myself personally. I know Maddie does too, of being a landlord.

And when you're a landlord, you know, you go into it thinking, holy cowman, I hope I don't have to really deal with too terribly much, right? let's hope this is as easy as it can possibly be. But inevitably, I mean, things come up, right? If you're going to be a landlord, if you're going to own real estate, if you're going to rent it out, I mean, things are going to come up. It's going to require a part of your time. It's going to require a part of your life. And that's not always so easy to budget, particularly when there's so much uncertainty. Now, when it comes to stocks, I mean, you kind of go into it thinking, well, there's going to be uncertainty.

just in buying shares in this company. I'm buying shares in this company. I don't know exactly what's going to happen with it. And so, I mean, you know, a year from now, five years now, maybe things will be different. But it is something where I think when you look at investing in equities, it can be certainly a lot of, it can be a much less stressful situation, right, than investing in something like real estate, particularly if you're going to invest in real estate. with the intention of being active in being a landlord in renting that property out.

And I mean, just my experience, and I had a great experience, trust me, I had a great experience renting property out. It could have been a lot worse. But certainly it made me realize that there were situations that could have been a lot tougher. And there were situations that I didn't necessarily look forward to wanting to deal with, so to speak. So that was kind of one of those things that made me think, well, you know, investing in stocks, I mean, that is absolutely an easier way, a more passive way to let my money kind of compound

and grow over time. So, you know, it goes to say, like there are, you're going to make money either way, right? If you make wise decisions, whether it's stocks or whether it's real estate, there are plenty of opportunities there. But it's just, it's worth remembering if you're taking that real estate angle and you're looking to, you know, be a landlord or be a little bit more active in that style of investing, there's a lot to say in that time sense, right? I mean, time is money, as they say. I don't disagree with that. Being a landlord is more time, and it probably is more stressful, but I also still think it's worth it. If you think about the difference in returns, Scott was talking about, just the difference between a 10% compounded return

and a 12% compounded return over 30 years, the difference between that is $1.25 million. That's an $100,000 initial investment. And so, for me, is it worth putting in a little bit of effort every couple of weeks, and it does come in waves for that increased return. Yes, because that's just the difference between 10% return and 12% return. If you're doing real estate well, you can be getting 15, 17, 18% returns. And so I personally do think it's worth it. And the other thing I'd say is that especially in the beginning, I recommend to all people who want to go into real estate investing to do that stuff yourself. It's not fun all the time. But you learn a lot. And I think maybe Scott can comment on this too. But for me, over time, as I've built my portfolio,

I do less and less, even though my portfolio has gotten bigger and bigger. And I actually have a rule that I use. I won't spend more than 20 hours a month on my real estate portfolio. So I'm willing to put in five hours a week in an effort to get that outsized return. And over time, I just, the stress goes away. You just get used to it. Once you've seen it all, man, you don't got surprised by anything. You just roll with it. Yeah, I'll just chime in here and say that there's, you know, I go back to that startup cost for real estate investing, which includes not just capital, but time. And where I think the real estate really pays incredible dividends is like, let's say someone's making $100,000 a year, their time is worth $50 an hour, assuming they work a 2,000

hour a year. So the startup cost of 250 hours to learn real estate is $12,500 for that individual. Well, a doctor making $600,000 a year is going to have a dramatically higher startup cost because them investing 600 hours is dramatically different from an entry-level financial analyst. And so that's the kind of fun thing about real estate is for me, that cost was so low 10 years ago when I was getting into it and just kind of obsessing over learning all the ins and outs of real estate. And now I'm going to reap the dividends of that or the cash flow because we're talking about real estate, not stocks on this one, for the rest of my career.

And because I put in that, I still have to put time. am in on a continuous basis, but not that enormous upfront investment. Matt, Jason, I'm curious. Dave said 20 hours a week, a little bit of extra work generates over a million dollars. How are you guys using your saved 20 hours a week to either generate more returns for your portfolio or, you know, increase the value of your life? Well, I don't know about Maddie, but I'm using that time to work for the Motley Fool, right? That's my employer. They're the ones that are paying me. week in and week out. I think that's one of the things, I mean, just given my experience, having served as a landlord and investing in real estate, I'm a homeowner today, I mean,

I understand the dynamics of homeownership and the benefits of that investment. It just, it really does boil down to time to me. And in certain cases, I think, you know, you look at investing in stocks, in that as a way to help your money grow without necessarily having to commit so much time, so much attention on an ongoing basis, whereas with real estate, you know, you may be a little bit more committed. Scott earlier said that one of the great things about real estate is it spits off cash flow. And it's way easier to use your cash flow to fund your life than it is to use sell stocks to fund your life. Matt, Jason, whether it's selling stocks or dividends, do you find that same problem, or is it actually easy? Yeah, I think that's a great point. I mean,

I have a much better time spending income and dividends than I do selling stock, because that's when I have to make a decision. I hate making decisions about selling stocks. And so that's, I think that is a clear advantage for real estate. It's much easier to spend cashful. I feel the same way. I just want to get back real quick to the whole time conversation as well. I think any incremental time that Jason and I have, I mean, I talked about the cheat code of investing in the market ETF and getting that 10% annualized, right? Any incremental time we have is all about beating that number, right? Because otherwise, what are we doing, right, at the Motley Fool? So that's kind of where we're spending our time is what additional hours can we do to find the stock that's going to go

up 10, 15x over the next five to 10 years. And there's many examples of that, of course. That's where we're dedicated a lot of our time because that's where we're going to make the difference for our members, for those who read and subscribe to our services, right? And one word answer, do you think that you could beat Dave's return on his 20 hours with that stock research? Yes or no? I don't think so. I don't think so because he's got, no, I mean, he's got tremendous advantages with, like you said, with leverage, knowledge of that asset, adding value. That's hard to do.

That's hard to do in the stock market. So I'm going to give him props for that one. Well, since you're throwing some bones to us, I'll give one back here, which is like in real estate, you're never going to 20 yet. you're never going to get a 10-bagger in real estate and not have to do anything but research, right? Like, that's just never going to happen in our world. That's a really good point. A few topics.

Maybe they're a little nerdy, little in the weeds, but I think we need to hit on them. We briefly touched on leverage. Anything else important to talk about leverage, especially when it comes to the stock market, because if real estate has lower returns but levered, it gets higher, can't you just lever the stock returns and get a better return overall? Right. But it's the clearest way to go. bankrupt if you're a stock market investor. Most of the time, even well-heeled investors can only

get about 2x leverage compared to the 5x leverage that Scott talked about because most brokerage companies, most brokers aren't just going to give you that. But even still, even doing that 2x leverage is incredibly dangerous, right? I talked about the bear market where the stock market went down 27%. Well, imagine you'd levered that up 2x and now all of a sudden your portfolio is down 60%. And that's going to be a devastating hit to someone, especially who might be near retirement and needs those assets. So, leverage is a dangerous game in the stock market. I think it's a tremendous advantage in real estate.

And Jason mentioned where actually we have experience being landlords as well. And I will say this, this is probably the biggest bone I'm going to send back to the bigger pocket scene, which is, I've made the best returns investing in the stock market, personally. I've made the most money investing in real estate purely because of the leverage factor. It's an incredible advantage. It's done well. And as you say, if you make the right investments and add the right value with your time,

I'll chime in here on leverage here. Like, I think that any invest, like, I plan to invest in both stocks and real estate for the next 50 years, right? Ideally, I live that long at least. We'll see how things go. But, you know, I think that the stock market, like, I know it will crash 50%, at least once, maybe twice during that time period, maybe even more at a higher, maybe even more frequently or at, or larger. And I also know that real estate will likely crash probably. once or twice in that same time period, at least 30% in there. Probably not 50%, although that is possible. And I think if you're investing in either of these asset classes, you're not planning

on those happening. Like, you're going to get wrecked if your portfolio is always dependent on that not happening. So I think that that's like a part of the thing that you have to be ready for defense here. And if you're levered in real estate, you have to be much more defensive than you are in stocks. Because if you just lose half what you have, that's very bad in the stock market. it's not like, oh, now my properties are underwater and I can't cash flow them because I can't find like that. So there's risks in both of these that you have to be really prepared for. The advantage of real estate's lower volatility and the fact that it doesn't swing as much as stock market is, again, that you can leverage it as we've discussed several times. Two other things. Let's talk liquidity.

I think that's an important thing for a lot of people listening. Life is unexpected. Sometimes people need access to capital. How do these two types of investing give investors? access to their capital. I think it's my turn to throw you guys a bone. I haven't thrown one yet. So this is really one of the better advantages for the stock market. Real estate is relatively illiquid asset class. There are ways to get some liquidity, you know, through cash out refinances, or there's sometimes options for lines of credit. But I think for real estate investors, the key is really to use your capital elsewhere in your portfolio to maintain some liquidity. So that's whether that's keeping personal emergency funds in terms of cash or cash reserves for every property or on a portfolio level,

it's important that you have some liquidity outside of the actual capital that you're putting into an asset. Because right now, it's relatively easy to sell real estate, but there are times when it could take months or even years to sell assets. So it's really important to make sure that you have easily accessible capital elsewhere in your financial life if you're going to be investing in real estate. estate. Yeah, I mean, I think, you know, when you look at real estate versus something like stocks, I mean, obviously, stocks are more liquid. Like, if I need to sell a stock today, I can do that. If I need to sell real estate, that may require a little bit more time. And, you know, we mentioned earlier in the show here sort of that concept of being a desperate seller. You never want to be a desperate seller. And so, you know, trying to realize those returns from real estate doesn't always

work out on our timeline. Now, the flip side of that is, you know, as real estate owner, and I think I'm a homeowner. I think some of us are, at least if not all, but you build that equity and you're able to borrow against that. And that really does make a big difference, particularly in a lower interest rate environment, which we used to be more familiar with than we are today. But hey, listen, we don't have any control over that, right? But it's really nice to be able to borrow against that equity to do other things, right? That enables all sorts of things, whether it's funding college education or, you know, upgrading to a new house. I mean, there are a lot of things that owning a home can really facilitate in regard to equities, in regard to stocks.

Sure, I mean, they're much more liquid. You can buy and sell them at the drop of a hat, and that's great. But that doesn't necessarily always work out so well because you, you, you're much more liquid. you're still subject to the vagaries of the stock market. Okay. We got one big topic that came up briefly, but we didn't really drill into it. Let's talk about taxes. Let's talk about the tax advantages each of you get from your style of investing.

We're going to start with real estate. Yeah. So, you know, real estate is a business. So all the, like on a rental property, all the expenses like interest, property management, if you hire that out, maintenance, those types of things can all be expensed. the land, the, not the land, the structure and any improvements made to it can be capitalized and then depreciated. And that depreciation can offset cash flow on the P&L, which means that if you get a five, six, seven percent yield on your cash flow, you often are actually having a tax loss

show up on your income tax returns. So you're not paying any income tax on that cash flow for a long period of time. And then when you go to sell the property, you have to recapture that depreciation, which is a trap that investors who think that they'll never have to do that, sometimes run into. But there are options to continuously defer those taxes through what's called a 1031 exchange, where you can kind of continue to buy bigger and bigger properties using the equity in your portfolios. And some real estate investors like to play that game indefinitely never pay taxes by deferring them indefinitely die, pass on their properties to their errors at a stepped up basis and go from there. This is wonderful in theory. In practice, investors sometimes

run into challenges with that. For that reason, however, real estate's not really a good option in my opinion, for people to invest in their 401k. So real estate, if you want to get into it and you're not trying to move out of your house and move into a new rental property with a really low down payment, you've got to accumulate liquidity outside of that 401k and outside of your home, probably to the tune of $50,000 to $100,000 in most markets to begin to put into down payment. So that's a challenge there. I'll speak for the stock side. We're not going to win this argument when it comes to taxes. I agree. I think real estate has a lot of tax advantages. I think when you look at the stock market, what we get, well, our advantages are in deferral. In other words,

whether it's through retirement accounts, Roth IRA, 4-1K, I know there's certain vehicles, real estate you can put into a self-managed IRA. Those processes are hard, though. But with stocks, it's easy. So you can defer taxes, A, by never selling or rarely selling, or by putting in their retirement accounts, which are advantages. But I would say you're not, you're not going to get sort of the very juice levered tax advantages you get with real estate in the stock market and plus in stock market, even though dividends are great, they're double taxed and we're paying 15% rates or higher on those as well. So we've got, that's a disadvantage for us, except for those investors who, again, take a long-term view of it and buy a company and don't sell it or have

to sell it, you can defer those taxes for a very long time in stocks. I think we're at the point that I want you guys to stop throwing bones to each other side, stop arguing for the other person. I'm going to have you guys do your closing arguments. Like pretend you're, you know, you're on the courtroom floor, really trying to convince the listeners. I'm going to let real estate go first this time. And Dave, you want to take that? Yeah. My closing argument is that if you want to maximize your wealth, especially early in your career, real estate investing is by far the best way to do it. If you have the energy to put five or 10 hours a week to get started in, you can literally generate returns that are double that of the average of the stock market. And yes, it does take work.

but if you have a good entrepreneurial spirit, the total return method of real estate investing, which includes cash flow, appreciation, amortization, value add, and tax benefits is really unmatched in any other asset class. All right, Matt, you want to take it from the stock side? Sure. I will say, listen, if you want to invest easily via an app on your phone, as I talked about earlier, and you don't want to get the 2 a.m. phone call from a tenant whose toilet broke, and you've got to go there and fix it. Check out stocks. Like I said, the unlevered return is probably the best in the world that you can get. It's simple. It's highly liquid. You can buy something today and sell it five minutes later and get your cash out if you want to, not that that's recommended. So I just think

if you're starting out, you have a little bit of money. You don't have enough for a down payment or big capital to become a big real estate investor. And you don't have a lot of time. Stock market investing is probably the way to go. I'll let the listeners decide who won this debate. I'm not going to make any judgments here, but I heard the entire time, I think every single one of you at one point mentioned that you've dabbled in the other one's sport of investing. So how do you guys think broadly about real estate and stocks fitting into your overall investment portfolio? I didn't hear anyone advocating for a portfolio exclusively of one or the other. Yeah, I'll jump in there right now just say, listen, I own a lot of both, right? I mean, we have, we're homeowners here in

Northern Virginia. We have equity in our house. We've utilized that equity in our house. We're big investors in stocks and ETFs. So we're big participants in the equity markets. I mean, to me, this really all boils down to sort of diversification. I don't think it's one or the other. I think that's the beauty of this system, is you can participate in both. It's just a matter of how you do it, right? And if you want to be more active on the real estate side and act as a property owner and a landlord, then that's great. Do that. Try that. I mean, I've tried that. And there are a lot of things you learn from it. It can be very rewarding. But regardless, whether you're a landlord or just a homeowner,

building up that equity can be tremendously valuable. By the same token, you can still invest in equities at the same time. right? You can continue to build that retirement portfolio and just sort of ignore all of that short term noise that we always criticize, right? And just sort of let the equity sort of do their thing, let those companies continue to grow. So to me, it's not a one or the other thing. It's really the beauty of the system is you can participate in both. And they can be very, they can be very powerful to ultimately getting to where you want to go in regard to your financial freedom. One of the things I always think about is I call it the middle class trap, right? Where what I don't want to do with my portfolio is I don't want to have all of my wealth in my home equity and then my 401K balance and not have any liquidity outside of that, no cash flow, no optionality.

So every couple years, I take out a piece of paper and just literally a piece of paper and I draw a circle and I think, say, this is how much wealth I'm going to have in three, five, seven, ten years. You pick a number, right? and I say, okay, what do I want my portfolio to look like at that point in time? I just slice it out into different pie chunks, right? Probably financial advisors are crying about how simple and stupid this exercise is, but it works for me. And I say, okay, what do I want it to look like at that point in time? And if I'm not on that track, I start changing my behavior, even if that means I'm doing

slightly inefficient things, like not maxing out my 401K to save more for real estate, for example. So for me, I want a third, a third, a third in real estate, a third in stocks, and a third in private business. That's what I'm looking for for my long-term portfolio, and I keep looking at it, and every once in a while say, am I on the right track? I need to course correct a little bit with where I'm allocating the cash coming into my life in order to make that true. And so I think it's that simple for me as an exercise and that hard to make those big challenging tradeoffs about where to direct your cash flow. I think in getting me and Scott to represent real estate here, Jason and Matt, you're getting the two most, maybe, stock-friendly personalities in the Bigger Pockets Network.

I have a lot of friends who are 100% in real estate investing. But I typically, my target allocation is like 60-40 real estate, and I would split my real estate in half for passive and active. So I try and do like 30% into actively owned rental properties, 30% and more passive opportunities, 40% stocks. And as Scott said, it's never perfectly there, but that's sort of what I shoot for. Matt, any final thoughts? Yeah, I'll just say, I'm glad we did this because I think these are the two, in my view, the best, the two best asset classes out there, right? We're going to talk about bonds or gold or, God, crypto.

But these are the best. And I think, yeah, for me as well, I think everyone here has a good mix of both. I'm obviously more weighted stocks than real estate. But I see so many advantages to both and I plan to invest in both for the rest of my life. All right. Well, I think we've convinced everyone at least of what the two best asset classes are. If you want to go a lot deeper on the real estate side, check out the bigger pockets, real estate podcast and all the content you guys create.

If you want to go deeper on the stock side, check out the Motley Fool podcast, everything on your site. I've been a user of both of them. So I've consumed the content. I've read the blogs. I appreciate all you guys have done. Thank you for being here. If anyone wants to go deeper on other stuff, I've moderated, I have lots of conversations over at all the happening.

So thank you for being here. As always, people on the program may have interest in the stocks they talk about. And The Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you on Monday, Fools.