I have a ways to go at age 33 but it seems to me like RE is the way to go in terms of retirement planning. Of course, there is nothing saying one can't do BOTH (which I do) but here is my thought process and point out any flaws please:

To afford say, a $60,000/yr lifestyle in retirement. A commonly used "rule" in stock market investing says you can take no more than 4% from your nest per year if you want to maintain that amount for at least 30 years (adjusted for inflation is subsequent years) and this % protects against the wild market swings historically.

So $60,000/yr / .04 = $1,500,000 nest egg is needed in stocks.

In real estate, thus far (and I only control 2 properties) I've been able to maintain a bit above 10 cap rates, but lets assume 10.

So $60,000/yr / .10 = $600,000 in paid off properties needed.

That means there is a difference in $900,000 of "equity" needed to achieve the same cash flow!! Switching one's focus to REI "affords" them to be able to retire with 60% less than the recommended amount for 401k/IRA savers, saving almost $1M less than someone who invests solely in the the stock market!

What am I missing?! (other than of course the "work" with the management aspect of owning RE).

Kurt, you have hit the nail on the head. Unless one subs out essentially all of the work involved in maintaining and managing properties, then RE like the way 90% of the folks on this forum have is a combination of investment AND job. As we get older, work, both physical and mental, becomes more taxing and less fun. In many instances, it becomes impossible to keep up a portfolio of rental properties. Hiring on of a manger and subbing out all maintenance can lower the cap rate to below zero. RE tends to, in most markets, not rise in appreciation even at the rate of inflation (coasts and mega city centers the exception).

On the other hand, RE can have a spectacular cash on cash return due to leverage. Borrowing for stock investing is extremely limited, but the standard in RE investing.

Stocks are infinitely more liquid, and, if purchased in a diversified ETF or mutual fund, much LESS likely to have dizzying ups and downs of real estate. Think 2007-2009. “Wild market swings” do occur in the stock market, but by balancing your stock investments with secure investments in bonds, you minimize the impact to your retirement security. As you say a combination of stocks, bonds, cash, and real estate is probably the best shot that middle class people have at having a really comfortable retirement.

It is said that unless you were in the stock market on certain exact DAYS, the ups and downs wipe out the returns for the long run. I don't know if that's true, but we've certainly lost a lot there in the past!

For me it's just scary: you have no control over it, and no one can predict what's going to happen next.

As someone who has been in the stock market for 30 years, my advice would be to focus on real estate.

the biggest plus is you control it. You succeed or fail on your own brains and brawn

the biggest negative is lack of liquidity. You can't get cash out if you need it fast.

If there is anyway to obtain a line of credit on the properties you do have, then you can have access to cash should you need it.

Wmh I don't think that is true. I believe that if you don't sell but simply buy your entire life that virtually no one loses money. I saw a paper saying if you bought just before the last 3 crashes and that's the only 3 times you bought but held all your money thereafter, you still would be up in total.

Allin, just to clarify, the 4% number is NOT that stocks only return 4% on average, but that if you want to nest egg to last at least 30 years during your retirement years, it is most prudent to take no more than 4% your first year, then adjust that number up each year by the rate of inflation to maintain purchasing power. I believe the portfolio they used was 75% in stocks (total market) and 25% in bonds (total market).

Diversification. Some money in the market, some in bonds, some in RE, etc. The more you diversify the less one sector affects your money. Of course you will not make as much money as being in the right sector at the right time. That balances with not losing as much too. The younger you are, the longer you have to wait for the lows to become highs, so the older you are, the less you want to be in something that can take a hit.

Definitely wise to do BOTH. Stocks and RE are different strategies with different pros and cons that offset each others in many ways. I like the "mailbox money" of mutual funds. They literally take no more effort than deciding to sell, and in 3-5 business days I have cash in hand. House must be maintained, monitored, etc. On the other hand, the RE returns are why I'm willing to put forth the extra effort.

Kind of apples to oranges to simply look at return on equity.

When I was younger and even more impressionable than I am now, I was sitting next to a very wealthy and old man from my town.

We were talking about things like this and he said, "The money is in Real Estate, not stocks." That resonated loudly in my mind and still does.

My dad hammered stock down my throat often when I was young. I could never get it to make sense to me.

He then gave me Rich Dad Poor Dad to read. That made the difference.

It comes down to who you are.

My dad can't do or understand real estate, I can't do stocks.

Kurt, hopefully you are still reading this thread as I will take my time to respond. You are where i was 30 years ago. No one told me what I am going to tell you...I wish they had.

I have held stocks and real estate for many years.

For most people real estate is the most likely path to wealth than stocks. Apparently real estate creates more millionaires than any other financial vehicle.

Over the years real estate for me has been far more profitable than stocks. (and I now only own solid blue chip stocks with a long history of rising dividends).

But as pointed out earlier, for most of us our real estate investments are ALSO part-time jobs. Therefore a direct rate of return comparison between stocks and real estate is not accurate.

Advantages of real estate vs stocks:

-its value is unlikely to fall to zero

-you have MOST of the control over it, you dont have to worry about corrupt ceo's, plunging share prices ect although (rental legislation can negatively affect your investment)

-you can refinance it tax free and reinvest this money for further leverage

-You can usually only deposit 10 to 30 percent to own the property (and its benefits), unlike stocks which usually require a 100% investment. (stock options, buying on margin is beyond the comfort level of most smaller investors)

-Quality residential real estate in cities is always in demand regardless of the economy. This means tenants are always available for these properties.

-you are providing a useful service and can make a positive difference in peoples lives, thru decent reasonably priced housing.

Disadvantage of real estate vs stocks:

-unlike stocks, it is NOT a passive investment. It requires on going repair, maintenance (not the same as repair), administrative skills, and management skills. In most cases you will be the person providing this work. Like many people here I have spent thousands (yes thousands) of hours keeping my rentals running over the years.

It is not only difficult to sell quickly at a fair value, it is also expensive to sell. (yes I know in some areas you can throw up a for sale sign and do a VTB mortgage ect, but in larger cities in a normal market to get a proper price you need good exposure and agents who are willing to bring thier buyers to you).

It has risk thru changing rental legislation.......... Ontario has become so tenant favorable, no one will build affordable rental housing anymore. There is also liabilty, lawsuits, fires, bedbugs, professional tenants, ect.

As you get older, (unlike stocks), you will not be able to aquire more properties unless you have significant cash flow to pay others to do the necessary work, which will greatly diminish your returns.

In my opinion, rental real estate (for most small landlords who must be hands on), is a younger person's investment. As we get older I think we loose the passion, find we are unwilling or unable to do some of the tasks required and realize we are running out of time and dont want to spend it running rentals, unclogging toilets ect. (I know I have). But until that time, I think rentals are the best investment path for most of us.

Yes, WMH this "4% rule" accounts for that.

As you only withdraw the 4% even on the years when the market is up say 15%.

I have found that the most important difference is your ability to learn what the business is all about.

Investing in the stock market requires that the investor know what he is doing, in a very complex environment. Landlording also requires knowing how to proceed, but it is not so complex. Failure to learn the appropriate ins & outs will lead to failure in either case.

The calculation of 4% means reducing principal by 4% of the CURRENT BALANCE every year, in order to make the principal last 30 years. It assumes 9% consistent year-to-year gain (before tax, per annum) in the principal. In the market, gains are not at all steady and consistent, so the fidelity of the model is not so good on that score. Higher gains are certainly possible, but it requires know-how and agility, plus risking capital that you may be depending upon.

But the biggest requirement is to know what you are doing in the market. If you don't, you deserve to lose your shirt, and someone who knows will get it from you. If you don't know, stay out of the kitchen.

Thanks for the detailed reply Andrew!

As a young landlord I now hire out a lot of the maintenance work, certainly not all but I don't do any unclogging, renovations, etc.

I do "manage" field calls, lease signings, etc.

I would agree that Real Estate is an "easier" way to gain wealth, particularly with leverage.

Kurt............be very careful with that 4% rule...its a very general rule promoted by those whose livelihood may depend on stock market investment.

WMH makes a good point.....think about it carefully.

If you portfolio drops 30 percent from 1M to 700,000 and then you take out 4% (now at 672k and market goes up 15%, now at 773 apprx)........thats a big drop from the calculated 1M less 4%. If that happens a few times.....and it can over the 30 years you might be drawing on the money.......you will probably run out of funds.

Too many posters write about "the market", forgetting that purchases are individual investments.

In terms of large, medium-term swings of general market behavior, as documented by Dow or other indices, they are fairly predictable, and an agile investor can not only deal with them, but they are a very good source of very substantial gain.

But stick to what you know.

Andrew, the 4% rule does not "work" the way you described.

If you retire with $1M you'd take 4% ($40,000) the first year to be at $960K initially. Even if the market dropped 30% from 960K to $672K you'd still take $40,000+inflation the next year to maintain your spending.

Surprisingly, this method of withdrawal would have lasted during crashes such as the 1930, 1987, etc.

I should add that a lot of people currently are very pessimistic about the future of the stock market and suggest revising the "rule" down to 3% instead of 4%.

Generally speaking, many mutual funds return ~2% in dividends so in order to achieve 3% you'd only be selling off 1% of your principal amount at the start of retirement.

I don't own one stock. I think its a rigged market by hedge fund guys. Unless your a big fish you don't have enough info or pull to make good money.

No one should invest all of their retirement funds in one category e.g. Stocks bonds or real estate. A truly great book that covers personal financial planners my including the four percent rule diversification etc is Charles Farrell's "your money ratios".

I like investing in stocks, bonds, and real estate. I use a buy and hold strategy for all three, only investing in tax-free muni bonds in safe economy states, buying blue chip stocks with a long history of dividends and dividend raises. I also buy rentals that are in family locations, close to elementary schools, playgrounds, etc. It's a strategy that has worked for me no matter what the markets threw at me.

As for stocks, everyone is suggesting that you have to sell stocks to make money. That's not true. They pay dividends, anywhere from 2%-5%+. Make sure that 4% everyone is talking about extracting to live off of is produced by dividends. My stock portfolio has survived 3 generations and will pass to my children, growing larger every generation.

I like stocks over real estate, because they raise dividends, stocks split, companies merge, and they never need updating or repairs.

LOTFs has a good point; multi-generational wealth transfer. For stocks, that's relatively easy. Let them sit and live off dividends, reinvesting enough to grow the wealth. Anyone can do that whereas managing a portfolio of rentals is not within everyone's skill set.

I intend to pass our rentals on to our kids so they get the stepped up basis (and I finally beat Uncle Sam on the tax game...sweet!), but once we're dead I don't care if the kids keep them or sell them. Whatever best fits their strengths. I'm pretty sure at least one of my kids will have no interest in being a land lord.

I'm also with JR on folks who claim they consistently beat the market. Anyone who can do that would be worth well north of 8-9 figures and I doubt they'd be interested in hanging out with a bunch of grouchy land lords. ;-)

Kurt..... dont believe the 4 percent rule. Its all fine if the market rises constantly. But where it really fails is when you have to still take the 4 percent out after a big correction.

Now I only own blue chip stocks with a history of rising dividends. The dividences are reinvested automatically, commission free thru drips, dividend reinvestment plan.

Andrew, I don't think that is true (historically anyway, who knows what the future holds)

People have backtested every rolling 30 year period using 75/25 portfolio of stocks/bonds from 1871-2015. Taking 4% (then adjusting up for inflation each year) has been able to last 30 years 99% of the time. Taking 3.75% (then adjusting up for inflation) one would have never run out of money, historically.

Well here is a thought.

If you had 1.5M in stocks you could hopefully withdraw 4% plus inflation for 30 years, after which time it would be close to being depleted according to the experts.

Yes that it somewhat correct.

In the historical worst case scenarios ones funds would be close to being depleted.

When all scenarios are averaged, withdrawing 4% usually resulted in ballooned portfolio values. The "catch" is no one knows whether their retirement will be historically "good" or "bad" so the 4% rule says it is prudent to plan for the worst, hope for the best, in historically 4% has gotten everyone through the worst.

I agree with your sentiments about rental property cash flow and appreciation too.

In my experience so far (very limited) a stock portfolio can grow "easier" but real estate provides for much quicker "dividends".