How I Think About Holding Stocks and Real Estate

People love to compare stocks and real estate apples to apples. But they are not the same fruit. They are two different vehicles, and I hold both for different reasons.

This is how I think about it in my own plan. It is my experience, not investment advice, and what fits you depends on your goals, your timeline and your situation.

One question for both

I think about holding both with a simple question: do I believe this property or this stock, or this portfolio of properties or stocks, is going to be more valuable over the next 10 to 20 years?

That longer time horizon is crucial, because this is about holding an asset. Anything shorter, like how a property might perform over three years or a stock over two years, is much more a short-term or mid-term trading strategy. That can be extremely profitable as well, but I would not consider it a true hold.

How I hold real estate

With real estate, I have intended to hold in a somewhat concentrated area. Geographically, it is easier to manage rentals that are close to each other, because you can outsource tasks to a trusted set of professionals: the same landscapers, the same general contractor, the same property managers if you use them. It means fewer moving pieces, especially early on. I wrote more about that in How I Manage Rentals in Several States.

I am primarily looking for real estate that does not require too much of my time, but enough for me to keep learning the asset class. I also want it to provide tax benefits, and to build equity through appreciation over time. Equity is really the game being played, not simply optimizing for cash flow. Tax rules for rental property are detailed and depend on your situation, so that part is a conversation for a tax professional.

How I hold stocks

The stocks I buy and hold are very different. I normally hold low-cost index funds and ETFs, such as VOO, VTI and FXAIX. I spread them across brokerage accounts, IRAs and, while I worked for employers that offered them, accounts like 401(k)s, 403(b)s and the TSP.

The S&P 500 is made up of companies that operate across all 50 states and internationally, yet there will never be a time when I am the one required to do the work or figure out the moving pieces. Owning stock makes you an equity holder in the company, and that comes with a more passive expectation. There are also benefits to not concentrating a portfolio in just one or two companies.

I will add one caveat. If you feel strongly about a certain company or industry and decide to buy and hold it in a concentrated way, you can receive outsized returns and do extremely well compared to diversifying. Concentration also means more risk if you are wrong. In my experience, I have done mostly diversifying, but I have also held on to companies I believed would do well long term.

How the two work together

The two go hand in hand very well. Gains from a stock portfolio can be repurposed into real estate. Sale profits and extra cash flow from real estate can be used to build up a stock portfolio.

But they are completely different asset classes. Real estate is more actively managed, unless you are a limited partner in a larger fund, where someone else runs the property and you invest alongside them.

Leverage is the big difference

Real estate gives everyday people access to leverage. You can acquire an asset worth $500,000 by putting only 3% down while the bank finances the other 97%. You will never see someone finance a $500,000 stock portfolio for you while you put only 3% down.

Low down payment loans like that are generally for a home you will live in. Loans for a pure investment property usually require more down, and terms vary by lender. That is how I bought my first investment property: I lived in it and rented out the other rooms. Leverage also works both ways, because the loan still has to be paid whether the property performs or not.

The bottom line

Stocks and real estate do different jobs. Real estate is more hands-on and gives you leverage and equity you can build. Index funds give you broad ownership with very little work. I ask the same 10 to 20 year question of both and let each do its job. If you are thinking about adding your first rental while you work, read Can You Own a Rental While Working Full Time?

When you are ready to talk to an agent who understands investing, start at findablackagent.com.