Stocks versus real estate

A lot of people contact us asking about buying real estate. “It’s a hard asset and they’re not making any more of it,” they say. When we’re asked this question, we try to explain the advantages of owning stocks instead of or in addition to real estate. One way we do this is explaining how our portfolio managers pick stocks, and then comparing the costs of stocks to real estate. Picking stocks isn’t that different from looking for a good piece of real estate. First, you look at the quality (who built it, where it is, etc.). Then you figure out its worth, or valuation. Next up, you figure out your best- and worst-case scenarios for rent and taxes. (For stocks, you look at things called price-to-earnings ratios and cash flow return on investment). When the real estate is priced below your worst-case scenario, you buy it. That’s how it works with most stocks, too. There are, however, a couple of differences between real estate and publicly traded stocks, namely liquidity and low transaction costs. This ought to make real estate investors sit up and take notice. Let’s look at liquidity first. If you need cash, selling real estate may