8 Similarities Between Stocks and Real Estate

This year, I made the move from trading stocks full time, to investing and selling real estate. I’ve spent a lot of time talking to both local and national real estate investors, and learning about their strategies. I consider myself a student of markets. It’s been interesting to look at real estate in the context of much faster moving markets. I’ve been surprised by the similarities. Here are 8 similarities between stocks and real estate you might not have thought of.

1. Returns vary by sector

At any given time, returns on a certain sector may be higher or lower than other sectors. For example, Telecom stocks will have different returns than Technology stocks. In real estate, “triple net” shopping mall properties have very different returns than C class single family properties.

2. Returns vary by strategy

Buy and hold investors in both stocks and real estate generally make solid returns between 5%-20%. However, in both markets there are strategies that have allowed the more “hands on” investors to consistently make 100%+ annualized returns.

3. Nothing is guaranteed

A staple of all investment and risk taking is that the outcome is unknown. This can be tough pill to swallow.

4. The illusion of risk = reward

Many academic careers have been built around the idea that RISK = REWARD. Try Googling “Efficient Frontier.” It sounds nice, but in my experience the reality is much different. In both stocks and real estate, there are ways to tilt this equation in your favor.

5. The real danger is leverage

You can’t go bankrupt if you don’t have any debt. owning stocks or real estate over the long term should make you money. However, it’s important to study and understand leverage. If you put 5% down on a property, a 5% reduction in value wipes out your equity

6. Fragmented exchanges create arbitrage opportunities

High frequency trading has been a hot discussion in recent years. These traders take advantage of slower, less informed orders by buying at $1.01 on one exchange and selling at $1.02 on a different exchange. They do this in nano-seconds. This happens in real estate too, but at much slower speeds. People who are consistently informed about local development are able to buy before development has an effect of prices. National investors do the same thing, but on a bigger playing field.

7. Broker/Dealer spreads

Stock traders must pay commissions to brokers, and spreads to market makers. The real estate equivalents are realtors, brokers, and wholesalers. Facilitating transactions is not free. Sophisticated markets almost always involve these “transaction” fees.

8. Varying betas

The hottest new micro-chip stock will go up a lot more than Pepsi as the market moves higher. Some stocks are more sensitive to economic movements on the way up, and also on the way down. Real estate is the same way. Las Vegas real estate will rise and fall much more dramatically than Birmingham. I’ve spoken with a number of investors, who’ve made large gains in markets like San Diego or Las Vegas, smartly transitioning their portfolios to parts of the country that won’t get hit as hard should the economy pull back.

Here’s what I learned in my 6 years as a full time trader.