Stocks vs Real Estate: Why You Should NOT Buy A House | Shelby Church

Welcome back to the Graham Steffens Show. So with the election somewhat over, we have to evaluate what we need to do with our money and which investments are going to make the most amount of profit. And that brings me to this video here posted by Shelby Church, five years in stocks versus real estate, which made me more money. So with that said, I want to comment on this and which investment actually makes more in the long term. As soon as you hit the like button and subscribe, oh, and also a big thank you to Policy Genius for sponsoring this video. But more on that later, let's begin. Real estate has long been regarded as the best investment you can make. It's how you build wealth here in America, right? Well, some people are now saying it's maybe not the best. The stock market is a true passive investment with historically pretty solid returns. Well, I've been invested in both now for about five years. And today we're going to look at which is doing better so far. Yeah, I'm just going to say right off the bat, it really depends how much work you put in real estate. Real estate is not a passive investment by any means. And if you want a substantial return on real estate, it's going to take you a lot of work. Sometimes more work than it's worth. I'll admit, like I've been a real estate guy since 2008. I got my real estate license. I worked full time as a real estate agent. I saved all of my commissions to be able to buy real estate. And my early real estate purchases have been fantastic. I have done really well on those purchases. Some of its timing and, you know, the stock market would have done also as well. But I put in a ton of work on those properties and it's not for everybody. If you just go and buy a house willy nilly and like, oh, a house is a good investment. So I'm just going to buy anything. Probably going to lose money on it. But Shelby makes some really good points in this video that I just want to emphasize. Let's keep watching. So this house behind me was purchased for $300,000 in 1988 and is now for sale again for $1.75 million in 2024. But what's even crazier is how much that same amount of money would have made in the stock market. The problem with this comparison, though, is when you look at inflation, I mean, yeah, a lot of real estate purchased in like 1980 is going to seem like really cheap compared to today. But when you look at the inflation rate, I mean, sure, that property went up 400 percent. But let me show you how much that would be worth with inflation. OK, so if you want the answer to that with inflation, $305,000 in 1988 is equivalent today to $831,000. Now, that also doesn't include property taxes, insurance, maintenance, upgrades along the way, little repairs that you have to do. It all starts adding up. But yeah, if you're looking for a place to live and you bought in 1988 in West Los Angeles, you're still doing incredibly well. That same amount in an index fund tracking the overall market would now be $14 million. So that's a 4000 percent return. Yeah, that's the thing. It's like with stocks, too. You often get dividends that then could get reinvested. And if you did something like this in a tax advantaged retirement account, you could have a substantial amount of money just completely tax free. So not only are you saving a lot of money in taxes, but you could also get a higher return. We'll go into how you could actually make money in real estate a little later on in the video. But let's continue with what Shelby has to say. And this is not even to mention that the house probably had maintenance costs over the years that the stock market portfolio would not charge you. Also, closing costs when they bought and sold the home. There's generally a lot more fees when it comes to investing in real estate that we have to factor in when we compare it to the stock market. Yeah, I completely agree. It's really hard on the surface to compare real estate to stocks because it's real estate. It's leveraged, which means you put down a small amount, then you pay a mortgage over time versus the stock market. You're usually just investing what you have. It's like you're not taking a 30 year loan to go and buy stocks. And if you buy in margin, it's usually short term. It's a lot riskier. The interest rates are a lot higher. So it's difficult to compare them on the surface. You really have to get into the nitty gritty of how much am I putting down? What's my monthly payment? What's the overhead going to cost me? How much is it going to take to sell the place? How long is that going to take me? Is this a good area? Do I want to play? There's so many variables that go into this. The index fund that I invest pretty much all my money in was at 266. And today it is at 532. So that actually is kind of tough for real estate to beat because those are unusually high returns. And not to spoil anything, real estate also did quite well. Here's the thing, though, with real estate, if you put $100,000 down on a $400,000 property, it's now worth $900,000. That $100,000 investment now just turned into $500,000 of equity because, again, you're putting down a small amount, but you're getting to capture the entire upside when it goes up in value. Now, obviously, you're going to have expenses and commissions and all that. But even even if $100,000 goes towards expenses that you're not going to get back and closing costs, it's still getting forexed your money instead of just doubling it. So real estate can be good in the right times when you're intentional about it. But yeah, let's continue. If we sold today, we would have $271,000 before any fees. However, we did have some maintenance along the way. I would say we put at least $15,000 into it. So that brings us down to $234,000 in like profit divided in half, of course, with my sister. My amount would be $117,000. So in this case, it actually did beat the stock market return and real estate was the better investment. Here's the thing, though, with this $117,000, it's not really taking into account property taxes, insurance, mortgage interest after tax deductions. So this number could actually be lower than that of stocks. It depends on how much overhead that she's carried on this property for the last five years. It might be lower because, yeah, on the surface, you have the $117,000, but to be able to get the $117,000, there's extra costs also associated with that that, you know, will drive down this number here. When we bought the Palm Springs house, it was kind of midway through that jump. So we weren't buying at the very bottom. We're buying like, you know, a little bit of the way up. But I think it is interesting to note that I would have made a lot more money with a lot less hassle had it just been in the stock market. Here's the thing. 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And 10 percent annually over the next 25 years, that would be four point four two million. And just simply having that amount in an index fund, getting a 10 percent return, you know, that's four hundred and twenty thousand dollars in a year. So not only would the portfolio value be more than the home value, but also the yearly investment income would be far more than the potential rental income. Yeah, I agree. You know, it's weird. The older I'm getting, I don't want to say I'm old by any means, but like mid 30s trying to realize there's a lot of value in simplicity, just not having hassle. I value peace of mind now. So even if I'm not getting the highest returns possible, if that means I don't have stress, I could just be cool with how the day's going as it is, without, you know, my mind wandering somewhere else of like, oh, what's going to happen? It's worth it. It's so worth it. And that's something that like 10 years ago, I would say, like, no, give me the extra stress, give me the extra workload, give me the extra, you know, mental capacity that I got to take up doing this thing because I want to make an extra half a percent return on my money. It's worth it now. It's not. It's not. But you know what? That's just a big perspective change. But that's given me a lot of appreciation, I think, for index funds and just the set it and forget it approach, even though, you know, it might not be as optimized as certain rental real estate. My gosh, it's simple and it's worth it. The townhouse, though, is a different story. So that would have been about $80,000 today in 25 years at a 10 percent average return. That would be $866,000 compared to as a real estate investment in Seattle. If it appreciates at 4 percent a year in 25 years, it would be worth $2.4 million. And the rents would have increased so that it would be bringing in $134,000. Now, the property taxes would increase as well to $25,000. But then there's also maintenance, probably, you know, $5,000 a year average, really more like $103,000. I think maintenance is going to be more than $5,000 a year. Now, it is a townhome, so you're probably going to have an HOA on that to some degree that might cover like roof and landscape. I don't know, $5,000 a year. I guess it's doable, but the issue is going to be after 25 years, that place is going to be so dated that you're going to need to remodel it after 25 years. So what's a full gut job on that? We'll call it, you know, $80,000 if you do it on a budget. But again, $80,000, 25 years from now might not be that much. Maybe you're looking at like $100,000 to remodel this thing, divided by 25, an extra $4,000. So I don't know, to me, maybe like $8,000 a year is probably a little bit more likely. Just factoring in that after some point in the future, you're going to have to update it. I wish I could just say clear cut stocks are always the better investment. But the truth is, it's really different for each house and each housing market. But in general, doing this whole exercise did make me personally favor just investing in stocks because it is so passive. You don't have to deal with tenants, vacancies, maintenance, unexpected costs and hassles. I agree with her. The thing is, if you want to get really good at real estate, and I've done this before, it's just a lot of work. You have to find a property that is undervalued and then you have to go and remodel it. You have to fix it up, add value to the property. That's really where you end up making your money in real estate is when you buy it, not necessarily when you sell it. But when you buy a property under market value, then you improve on it. Now it's worth this. You're in it. This that spread now is going to be a bit of a buffer and you're going to be able to rent it out at a slightly higher price. That return is going to be fairly stable. You would hope at least if you do it correctly, that could spin off a lot of tax free income because you're depreciating the property. You're able to borrow on an asset long term that over time has historically gone up in value. So a lot of benefits to that. But you have to be very active with that sort of thing. If you don't have the time, stocks, index funds tend to be a lot easier. The other issue that I'm seeing, honestly, since like 2020, I've seen very few deals out there. Like I don't see many opportunities. I'm not saying they don't exist anywhere, but with mortgage rates the way they are, inventory as low as it is, you're competing with so many people. Like as an investor, you don't want to compete with people. You don't want to be in a multiple bidding scenario. So there's very limited upside that I see right now in the real estate market. Unless you find a needle in the haystack, you have the perfect opportunity. Fine. I'm sure those exist. But is it worth the time and the effort to find that deal, renovate it strategically, improve certain areas to maximize rents? I don't know. And you know what? The other thing is certain areas, too, are very difficult to rent in these conditions. Like California is a market that I will never touch ever again because of how restrictive they are with rent control policies. There's so many different things that have to feed into whether or not an area is a good investment. And, you know, with with the current climate right now in a lot of California, it just doesn't make sense. The risk reward ratio isn't there. I think they're doing that on purpose because they don't want investors there, which which is fine. You know what, you know, whatever areas it is, investors always going to adapt and move somewhere else. That's totally fine. But yeah, it's just there's not that much opportunity that I see, which makes me feel like index funds overall can be the better choice for most people unless you're buying a house for yourself to live in long term, in which case is that really an investment? But it's an investment in yourself in terms of, you know, just personal satisfaction. It's made me realize that to me anyways, I expect my rentals to not make me anything, period. Like even if like I'm buying them to cash flow right now, but I'm expecting they make zero. I'm not counting on anything because I'm expecting they're going to have some drama that's going to cost me something. Yep. And what I'm looking at them as a piggy bank tax advantage thing. Yeah. Yeah, that's the thing, too. Over the last few years, I went over all the numbers on all the rental properties. And, you know, if I'm not raising rents, honestly, like five to six percent a year, which is more, by the way, than I'm allowed to increase rent under Los Angeles rent protection laws, like I'm losing money. So every year in real estate, in my in my rental portfolio, I make less money than I take in because my costs are going up higher than what I could raise the rent. Like even if I could just raise the rent to match my overhead costs of property taxes, insurance, maintenance, repairs, like everything is costing more. Like I lose a little bit every year. So, you know, what used to cost me 100 bucks is now 150, 120. My property tax instead of this, they're, you know, 15 percent higher versus the eight percent higher that I've raised rents. You know, it just doesn't pencil out anymore. They made it so restrictive to even just break even on certain things. It just doesn't really happen. So that is my analysis of my real estate investment, you know, how it measures up to how the stock market did, because a lot of people do ask me about this in real life. Let me know what you guys think of this analysis. Do you think it's accurate or is there anything I didn't factor in? Yeah, let me know what you guys think of this. And this video has really inspired me to want to make my own version of this for the real estate that I purchased and like just compare it with that of the stock market and see like in real world scenarios, what ends up making more money? That's a video you want to see this comment down below. If I get a lot of people saying that it's a video they love to watch, I'll do it in the next like a few weeks or so. So let me know down below in the comments. Thank you so much for watching. As always, thank you to Policy Genius for sponsoring this video with the link down below in the description. Thank you guys so much. Like subscribe. And until next time.