Guest Article By: Robert Hubbard
Robert Hubbard is CEO & Sr. Investment Advisor of Safeguard Financial, a full-service Advisory and Consulting Service for the set up, maintenance and investment of Self Directed IRA & 401(k) plans. Safeguard’s Managed Investment Program offers opportunities to own turnkey, income-producing real estate with tenants in place, or to participate in notes and loans secured by real estate. Targeted ROI is 9% to 15%.
Real Estate Investing vs Stock Market Speculation
Wealth building is a matter of perspective and methodology.
Both stock market and real estate investors believe that they understand how to create profits. But generally speaking, they take quite a different approach regarding the “how to”.
A real estate investor is focused on one thing…cash flow. Seeking out properties that will provide a constant stream of income is the top priority and with distressed properties still abounding, there is no shortage of cash flow.
On the other hand, stock market investors buy a stock “hoping” it will go up in value, but do not receive monthly income unless the stock pays a dividend (and even if they do, dividend payments can be suspended at any time).
Unlike real estate investors, the stock market investor must become an expert in “market timing” (knowing when to get in and when to get out) in order to maximize any gain that may be realized.
Even then, just knowing when to get in and out isn’t enough. The investor must possess the tenacity to take action…and actually get in or out. Unfortunately, 99% of stock investors are simply not disciplined enough to execute at the right time.
Just like a gambler, if a winning streak is occurring, there is great reluctance to get out…until it’s too late and everything is lost. If a losing streak sets in, the same problem exists…just one more day, one more week…and then it’s too late. So much for timing.
During the recent real estate bubble, record numbers of people jumped into to the real estate marketplace thinking that they were investing. Nothing could have been farther from the truth.
They weren’t investing in cash flow properties, they were speculating and gambling. Some people were lucky and didn’t lose their shirt…most did.
“Real” real estate investors never speculate or gamble. They run the numbers and detach themselves emotionally from the property itself. They are entirely focused on “cash flow”. If the property appreciates…it’s icing on the cake.
To highlight the “investing vs speculating” claim, let’s take a quick look at some numbers. Numbers do not lie.
On April 5, 1999, the Dow Jones Industrial Average was at 10,652. On Sept 30, 2011, the DJ Average was at 10,913. That’s a whooping 2% gain over a 12 year period. In other words, $100,000 placed into the market would have produced a $2000 gain. So, cash flow could be calculated as $13.89 per month.
If the same $100,000 had been invested into a single family rental home with 0% property appreciation, and using nationwide average rents and expenses, the cash flow would have been more than $120,000 or $833 per month. (For more information about this specific illustration, go to this link: The Lost Decade of Retirement Investing.
Another very interesting tidbit of information is that most Wall Street cheerleaders like to point to the performance of the stock market vs the housing market by comparing stock market gains to owner-occupied housing appreciation. That’s just patently ridiculous. It’s smoke and mirrors…apples and oranges.
When the stock market is compared to investment property (not owner-occupied housing), the results are breathtaking as illustrated above.
So, the next time you’re tempted to buy more stocks or mutual funds, remember…you’re not investing. You’re speculating.