It's harder to get rich off stocks than it is to get rich off real estate. The main reason why is due to the absolute amount of money you need to risk to get rich in stocks. Even if your $5,000 stock investment goes up 50%, that's only $2,500. But if your $500,000 rental property goes up 20%, now we're talking a significant $100,000.
With stocks so volatile (see March 2020 and 2022), it's hard to invest as aggressively in stocks as it is with real estate. With real estate, it's much easier to borrow a bunch of money and pay a large amount because real estate generates income, is tangible, provides utility, and is less volatile.
Ever since making a goal to accumulate $1,500,000 more capital or generate an additional $60,000 in retirement income by the end of 2022, I've been thinking of various ways to make more money. Given neither my wife or I have a job, we are facing an almost impossible financial challenge.
After much consideration, I decided one way we could achieve this stretch goal is by taking more investment risk. When you also have two little kids to take care of, taking more investment risk is not my favorite way. But I was running out of options.
Harder To Get Rich Off Stocks As It Takes More Guts
Take a look at this graphic below and tell me what you see.
What you see is a purchase of a measly three shares of Tesla stock at $694.04, $698, and $698.94 for a combined total of $2,090.98. The Tesla stock purchase comes after the account was funded with $243,000 that was safely earning 1% in an online savings account. In other words, less than 1% of the capital was deployed to purchase Tesla stock.
The example is a great definition of the phrase: chicken sh*t.
Being chicken is the number one reason why it's harder to get rich off stocks than it is to get rich off real estate.
Harder To Build A Significant Position
After Tesla rallied to over $950 a share, I began to feel FOMO that I didn't build a large enough position in the name at a reasonable price. I had about a $150,000 position at the time and wanted to build a $200,000 position to one day get rich.
For roughly 20 years, I've always had a “Punt Portfolio,” equal to 10% – 20% of my public investments, where I buy individual stocks to try and outperform the S&P 500. My decision to take more investment risk to hopefully get rich meant hitting the top end of the 10% – 20% range.
With Tesla, I began to daydream that 15 years from now the company could be a $1.5 trillion market capitalization company (10X from here). If I had a significant size position, I could brag to my kids that their old man had the foresight and the guts to invest in Elon when his company was still in its relative infancy. I could also tell them the reason why I was able to be a stay at home dad all these years was due to this one investment.
Based on my analysis on whether to buy Tesla, I decided to attempt to buy $50,000 more Tesla stock under $700/share, a 35% pullback from its highs. When the share price dipped below $700/share on the morning of February 6, I began to buy one share at a time given trading is now free.
I figured I would buy around 75 shares over several hours in the morning. I was simply too scared to buy a significant amount of stock at one go due to the stock's tremendous volatility. Unfortunately, Tesla shares stayed under $700/share for less than 30 minutes before rebounding higher.
Now, Tesla is around $1,500/share as of July 24, 2020. Nuts! I ended making a little over $100,000 in Tesla, but that amount isn't going to change my life one bit. I'm still holding onto 30 shares to see what happens.
Fear Is Why Buying Real Estate Is So Much Easier
My fear of instantly losing money on Tesla stock was my main reason for not buying $50,000 worth of stock all at once. If I had really believed Tesla would be worth at least a double in five years, does it really matter whether I buy the stock at $698 or $750? It doesn't.
But before buying, I considered what if I buy $50,000 worth of stock and it goes down another 35% that afternoon. How would I feel? I would feel so pissed! I have no desire to watch $17,500 of my hard-earned money instantly vanish.
Chicken sh*t I say.
Now let's go back to my latest real estate purchase, a single-family home in San Francisco with panoramic ocean views. Although I diligently put in the work before buying, I had no problem paying over $1,700,000 in cash for the property. In fact, I'm ready to buy another home for a similar price if one becomes available.
How is it possible that I had no fear paying 34X more for an asset? The answer is that I had conviction in the value of the house and I had no fear the house would disappear soon after purchase.
Too Much Uncertainty With Individual Stocks
With Tesla, although I'm bullish, there is a myriad of exogenous variables outside of my control. For example, Tesla could very easily miss earnings next quarter because the coronavirus halted production and affected demand in China.
Will analysts and investors see past a disappointing earnings result and still look to the future? Or will analysts and investors punish Tesla stock, providing me a better entry point to buy? Who knows! All I know is that I have an entry point at below $700 and I hope it gets there.
Now let's compare the likely performance of Tesla stock and the price performance of a single-family home with an ocean view in San Francisco over the next 10 years.
I can see the ocean view home appreciating at a 5% annual clip. A 5% increase on a $1,700,000 position is $85,000. Whereas I could easily envision Tesla growing at a 15% annual clip, thereby doubling its share price in just five years.
Tesla is, after all, planning to dominate the electric vehicle market and build an autonomous global taxi market. However, a 15% increase on a $200,000 position is only $30,000.
Despite Tesla's massive growth potential, there is no way in hell I would ever invest $1,700,000 in Tesla stock. Tesla could certainly be a nice double or triple in 5-10 years. But there's also a chance it might go bankrupt.
Conversely, even if my house burned down, I'd still own a plot of land worth at least $1 million. I'd also receive $750,000 – $1,000,000 from my home insurance company to rebuild a brand new 2,500+ square foot house.
The Requirements Of Getting Rich
So many things have to go right in order to get rich.
1) You've got to invest in the right asset. Instead of investing in Friendster, you better have invested in Facebook. Instead of investing in Yahoo, you better have invested in Google.
2) You've got to have enough guts to invest a sizable amount in the right asset. Even if your $5,000 position goes up 10X, a $50,000 gain is probably not going to change your life.
3) You've got to hold onto the right asset for a long enough period of time, through even the worst of times. When the world feels like it's coming to an end, as it did between 2008-2010, it was very easy for people losing their jobs to try and protect their remaining wealth by liquidating stocks. But the people who got rich not only held on but also bought aggressively through serious uncertainty.
Clearly, it's harder to get rich off stocks than it is to get rich off real estate.
Most people, including myself, cannot do all three consistently with stocks. Therefore, we end up buying a mutual fund or index fund with the majority of our position. Investing in index funds over the long-term is a great way to build wealth.
However, by definition, index fund investors will never outperform the market. And if you never outperform the market, are you really getting rich? Doubtful, just like the person who makes $1 million a year is not really rich if everybody else makes $1 million a year. Besides, $3 million is the new $1 million anyway.
Your goal is to outperform the masses in order to achieve financial freedom sooner, rather than later. The easiest way to outperform is to work more, save more, and invest more. The riskier way to outperform is to take more risk in your career, in business, and in certain investments.
It's not easy to get rich off stocks.
Related: Why Real Estate Is Less Risky Than Stocks
Getting Rich Off Real Estate Is Relatively Easier
Real estate is a tangible asset that generates income and provides utility. Thanks to real estate's relative illiquidity, it's easier for real estate investors to hold onto their asset over the long term (point #3).
It still stubbornly takes at least two weeks and a 3.5% total commission to sell a property. But after the NAR settlement, real estate commissions are coming down and homeowners are now much richer as a result.
See this interesting chart below that shows the top 10 U.S. markets with the longest average home seller tenure in Q42019. Compared to the year 2000, the average homeownership tenure has more than doubled!
Now let's look at the average U.S. homeownership tenure below. The average has also slowly climbed from about four years in 2009 to currently about 13.5 years in 2024.
People are living in their homes longer because the intrinsic value of real estate has gone up. There's also the “locked-in” effect after most homeowners refinance to lower rates during the pandemic. As a result, real estate is always going to be more desirable than stocks.
People simply aren't moving as often because transaction costs are still high, the desire for bigger and better homes has dissipated, and more owners understand the wisdom of holding for the long term.
As homeowners hold onto their homes longer, they are able to build more equity. With a larger equity cushion, there is less of a need to sell during an economic downturn. When you're just busy living life and regularly paying your mortgage, you're more than likely going to build a significant amount of home equity.
Big Money In Real Estate
Given the median price of a home in America is ~$320,000, the median home buyer is also investing a significant amount of capital into one asset (point #2). In some cities, of course, the median home price is much higher.
In comparison, the average stock position size or entire equity portfolio is much smaller, especially since we know the median American has less than $20,000 saved for retirement.
We can also take action to improve a property's value or increase its rental income. With stocks, we are a passive investor at the mercy of management and various unforeseen exogenous variables.
Finally, it may be easier to select the next outperforming real estate investment versus the next outperforming stock. With real estate, we simply need to understand demographic trends, valuations, and job growth while benefitting from tax benefits and leverage on the way up.
Take a look at the national home price appreciation well into the coronavirus pandemic. Look how the appreciation rate is accelerating.
Get Rich Off Stocks And Real Estate
Although it's harder to get rich off stocks, investing in stocks clearly has its merits. 2019 was a banner year for stock investors after a dismal 2018. But 2020 has been a terrible year for stocks so far as real estate significantly outperforms.
Over the long-term, stocks have consistently outperformed real estate. Just make sure you actually hold for the long term and not sell or not sell too much during bear markets. You've got to have the courage to continuously buy.
I say that for most people, getting rich off real estate will not only be easier. Real estate will also be more rewarding given the utility real estate provides.
It feels wonderful to be able to provide shelter for your family, especially during a pandemic. Making money down the road is the cherry on top. When all you're doing is enjoying life in a significant asset you own. You feel like you're getting a two-for-one special all the time.
There's no reason why you can't invest in both.
Consider Hybrid Real Estate Investing
If you want to invest in real estate while also experiencing the ease of investing in stocks, you can invest in a publicly traded REITs. Or, you can invest in eREITs through Fundrise or or individual deals across the country CrowdStreet. Both platforms are free to sign up and explore.
I've invested $954,000 in real estate syndication deals online since 2016. The IRR has been a passive 11% so far. Fundrise and CrowdStreet are my favorite real estate marketplaces today. They are both sponsors of Financial Samurai and Financial Samurai is an investor in Fundrise funds.
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out theInnovation Fund, which invests in the following five sectors:
- Artificial Intelligence & MachineLearning
- Modern DataInfrastructure
- Development Operations(DevOps)
- Financial Technology(FinTech)
- Real Estate & Property Technology(PropTech)
Roughly 35% of the Innovation Fund is invested inartificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
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