As you watch the markets tumble, you should ask yourself, “Are stocks the way to go?”

I don’t think they are.  People invest in stocks because they think stocks are safe, stable, and produce high returns.  The reality is quite the opposite.  Stocks aren’t as safe or profitable as they’re billed.  In the views of some very wealthy people, real estate is a much better investment for both the short-term and the long-term.  (Remember that, by investing in real estate, I mean buying a property and renting it out.)

Here are 10 reasons why you should put your money in real estate instead of stocks.

1) Leverage.  The most powerful reason for investing in real estate is because you can use other people’s money to buy it.  A bank will loan you 80% to 90% of the purchase price for a house and ask you only to provide the remaining 10% to 20%.  This allows you to do so much with so little.  Moreover, you–not the bank–realize 100% of the appreciation in value of that house.  If the house gains 10% in value over two years, and you decide to sell it, the bank doesn’t take an 80% cut.  You get to keep that entire 10% gain.    

By contrast, if you asked a bank to loan you money to buy stocks, they would laugh you out of the building.  Why is that?   

2) Less Risk.  A bank will loan you money to buy real estate, but not stocks, because it thinks that real estate is a less risky investment.  And it is.  Real estate is a physical, tangible asset.  A share of stock may be pegged to a business, but, in the end, it remains a paper asset that, if managed poorly, can lose the majority of its value.  Just a couple of weeks ago, Bear Stearns lost over 93 % of its value in two days.  That doesn’t happen with real estate.  In the last 20 years, the largest drop in real estate prices has been about 14 %, which occurred over a two-year period from 2006 to 2008.Cash Flow   

3) Cash Flow.  Unlike stocks, owning a property and renting it out provides consistent monthly cash flow.  You receive money in your pocket on a regular basis.  Owning stocks doesn’t give you this benefit unless you own stocks that pay dividends.  Even then, however, the dividends are not as frequent or as regular as monthly rent payments.   

4) Higher Return on Investment.  When you ”invest” in real estate, your investment consists of the money you offer as a down payment on the property.  The monthly cash flow you receive provides a higher annual return on that investment than the returns you gain from investing in the majority of stocks and mutual funds.  For a detailed analysis of how this works, read my earlier post about investing in real estate for cash flow. 

5) No Taxes on Cash Flow.  Not only does real estate provide you with monthly cash flow (unlike stocks), but you also don’t have to pay taxes on that rental income.  Sounds too good to be true?  This isn’t a fantasy.  There are several deductions (homeowners insurance, depreciation, etc.) you can make that will minimize the majority of your tax burden.     

6) No Taxes on Capital Gains.  If you decide to sell your rental property, you can defer paying taxes on your capital gains . . . forever (theoretically).  This is called a 1031 Exchange.  For example, if you own two small apartments and want to sell them and upgrade to one larger apartment (for greater cash flow), you can take the proceeds of the sales of the two small apartments and re-invest them as a down payment in the larger apartment (or in some other investment property) without paying taxes on the gains you realize from the sales.  And you can do that over and over again and defer paying taxes until you decide not to re-invest the sales proceeds.  

You can’t do that with stocks when you sell them.  You’re on the hook for a 15% tax on long-term gains and 15% to 35% on short-term gains.  Why not the same benefit with stocks?  The tax laws are designed to encourage investment in real estate because such investors provide affordable housing to the general public.  A 1031 Exchange and the deductions provided for taxes on rental income provide that incentive.   

7) Control Over Income.  With real estate, you can make certain improvements to the property–either physical, managerial, or tenant-related–and increase the rent over time.  This increase (which should be warranted based on an increase in the quality of housing you’re providing) will put more money in your pocket and increase the return on your initial investment.  The point is that you control how much you make from the property.  With stocks, you have no control over the return on your investment.  You give up that control to the company in which you invested your money, (and you hope it does a good job with your investment).   

8) Control Over Management.  Real estate also gives you another aspect of control.  You have control over how your properties are managed.  When you own a property, you manage it to your liking.  You have control over maintenance, landscaping, the types of tenants you have, complaints, and when the rent is paid.  You can improve any of these areas by devoting effort to them and changing anything you don’t like. 

You have the same control when you own multiple properties.  When you own more than one property, the burden of managing those properties may become too great.  Thus, investors with multiple properties usually hire a management company to take care of the daily and weekly tasks of responding to maintenance calls and tenant complaints, collecting rent, finding tenants, and maintaining any common areas.  If you become dissatisfied with the company or managers you hired, you can fire them and find better managers.  

You give up this control when you buy stocks.  If a company whose shares you own has spent money frivolously, taken on too much debt, failed to meet sales expectations, or posted a huge quarterly loss, you can’t fire its managers and hire better ones.  The only thing you can do is sell the stock (probably for a loss).   

9) Stability.  After reading the previous 8 items, you can see by now that real estate is a more stable investment.  It is less risky and won’t lose all of its value in a matter of hours; it produces a consistent cash flow and a higher return on your investment; it gives you more control over your investment; it lessens your tax burden; and it gives you the option of using someone else’s money to invest in it.    

10) Insider Information.  Finally, you can use “inside” information to buy or sell real estate.  Robert Kiyosaki raised this interesting point in one of his books.  As you probably know, buying or selling stocks based on inside information–insider trading–is illegal.  But it isn’t illegal with real estate.  You can buy real estate based on a “tip” you discovered from someone with knowledge or from your own research. 

For example, you can buy a piece of land because you discovered that it can be re-zoned for commercial use and, thus, become more valuable.  You can buy apartments in a specific neighborhood because you found out that the government is going to construct a new highway close by and make that neighborhood more accessible for commuters who work further away.  There are various pieces of information you can acquire in your search for properties that you can later act on.  If you did that with stocks, the government would prosecute you for insider trading.   

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