Real Estate vs. Stock Market - Which One Will Make Me More Money?

Jason is with us in Oklahoma hi Jason welcome to show how can I help hey Dave thank you for having me sure what's up I'm having a hard time wrapping my mind around the value of money in the stock market especially in today's environment and so it just seems like the price of the price of a lot of stocks is completely irrelevant to the company's earnings I event so my question is if my money is more effective in real estate than it is in the stock market since if I buy a rental property for example it actually generates cash whereas the only value that you get from a from a stock is whenever you you sell it and if somebody wants that particular certificate of stock well or if you buy a dividend paying stock which I don't buy single stars anyway but we can discuss the philosophy or the concepts behind it generally speaking generally speaking you would make a lot if you do a good job with it you would make a lot more rate of return on real estate but it involves more hassle more of your time even if you hire management company or whatever you've still got more time than just buying a mutual fund and throwing it in the drawer and forget it okay and you get the statements on your email you know once a quarter once a month or whatever you have zero hassle factor buying a mutual fund or buying stocks unless you're gonna try to buy and sell them which I would never recommend but a buy and hold strategy on real estate while it generates cash flow it should outperform stocks but it has more hassle it outperforms mainly because it's an imperfect market in terms of that's an economic term you may be familiar with a perfect market is one where all buyers and sellers have exactly the same information in the exact same access to buy and so the stock market is closer to a perfect market than real estate real say each item is unique its unique to a certain area and all buyers and sellers never have even close to the same amount of information or belief about a piece of real estate and so real estate gives you a lot more opportunity to get a bargain in other words and and if you're willing to invest the time you should make more on it real estate creates three types of return one is as you said increase in value and cash flow is 2 which is the rental income on it and 3 is you get to depreciate it so you actually get a tax break that covers a portion or all of your rent that comes in and that actually has a cash value to it so when you put those three together that's called an internal rate of return have you ever heard that yes ok so an IRR on a piece of a piece of real estate that is under under a million dollars a piece a small apartment or small you know a basic home a small office or something like that your your IR RS ought to be north of 15 percent mine are almost everything I own that's income producing and your cash on cash in most cases with a typical piece of real investment property would be 8 to 12 percent somewhere in there your cash on cash alone would be that now again on stocks you got two possible places of return one is the increase in value and two is the and twos possible dividend payouts which are profits shared with the owners of the company and when your stockholder you're an owner of the company so you could get dividend payout stocks and you'd have a you'd have a cash flow with that kind of a thing and you'd have the increases in value so in both markets though people make the statements that you were making that it's artificially high or it's ridiculous or there's a bubble or there's no way that that supports that when in reality there's a few times that that's the case we had a tech bubble in 1999 the the.com rage where people were buying stocks on companies that have never made a profit so that was ridiculous obviously and they shot through the roof most of those didn't survive a few name brands that are household names did survive like for instance Amazon and so but but by and large the stock market overall is never overpriced over the scope of time there may be a moment in time that it is or there may be a moment in time that it's under priced I'll give you an example you remember the oil plutt because the ships were all parked off the shores because nobody was driving and oil went down to $0 it's a bear arm sub-zero a barrel about five weeks ago do you remember that yeah okay and so that drove Exxon's stock way down it was artificially low because it was a temporary situation so the numbers didn't justify how low it was other times something pipes up and the numbers are artificially high but over the scope of time they generally correct back and forth and you know you can look at p/e ratios profit earnings ratios and you can look at the book the value of the company the assets that they own and compare that to the stock prices and the outstanding shares and you know most of the stuff's pretty close so to say that the Dow is at thirty thousand and it just cannot maintain why because you emotionally can't accept it when the math is actually there that's absurd so that's like saying you know this piece of real estate is never worth this well their rents coming in off of it actually say it is worth that and so you know I'm looking at a cap rate on my Noi my net operating income on this piece of real estate says it is worth that and so and seven people right around that have just paid similar prices for that so yeah it is probably worth that just cuz you know when I was a boy that piece of property sold for you know a hundred times less does not mean that it's not worth that today just because I can't emotionally keep up with the prices there's math on all of it now again there's there's examples of individual companies on stocks or individual pieces of real estate where they are overpriced or where they're under priced but buying law you have a better chance of sneaking up on a deal with a piece of real estate I like real estate I've got a bunch of it that does that help at all yeah it does this I mean especially in today's environment it just the stock market personally just seems like a giant casino I mean in some in some instances why is what why well it's similar to the two did to the example to ExxonMobil I haven't checked what their what their dividend pays but you know the the stock was was artificially undervalued but if you know if at the time whenever it was supposedly correctly valued if I purchased shares of ExxonMobil I don't get a portion of their earnings with the exception of the the amount of dividends that they pay Hilary the only way that you are bet you are betting that Apple McDonald's coca-cola Home Depot are going to be worth more five years from now than they are today and why would you make that bet well you would look at their track record of growth the stock price growth and you would look at the management team and you look at the profit margins and you would also kind of project in the future what you think the business climate is that they're going to exist in right so it's not a casino casino is I see no it's truly a game of chance you have nothing to analyze there except dice are going to turn up or cards are going to turn up right it just seems like the stock price though isn't tied to that realistically at all the only way that it's going to go the stock price is going to go up in value is if somebody else wants to buy it for more than I paid for it well no if the company continues to grow profits and continues to grow in size then the stock price would go up in value let's take home let's just pick out Home Depot I don't even know what their stock does because I don't follow single stocks I'm just using an example okay but let's just say with Home Depot let's say that why would their stock price grow well let's say they opened another 500 stores and all those stores make a profit more and they have 500 more profitable stores than they did have or coca-cola opens up some new lines of product and continues to grow so as long as these companies are diversifying and growing and adding profits to their bottom line the stock is going to continue to be worth more I think you could probably make the case that Apple has done a really good job with that it's almost an iconic stock it's kind of ridiculous actually but you know and I don't play single stocks for this reason but I do buy them as a group in mutual funds as part of my portfolio and no it's not a casino it's really not there's a lot of things you can look at there that give you a feel for it

Channel: The Ramsey Show - Highlights

Views: 906,722

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Keywords: the dave ramsey show, budget money debt cash, real estate, insurance, how to make money, dave ramsey, save, credit card, compound interest, buying house, buy, snowball, Real Estate vs. Stock Market - Which One Will Make Me More Money?, real estate investing, stock market investing, stocks vs real estate, stock market vs real estate, stock market, how to invest, how to invest in real estate, investing, real estate vs stock market, real estate vs stock market investing

Id: 9QbwphRMZnA

Length: 9min 31sec (571 seconds)

Published: Fri May 29 2020