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IS THE STOCK MARKET ONE BIG PONZI SCHEME?

Stocks Versus Real Estate

The stock market could potentially be a ponzi scheme, based on its characteristics of high volatility, low loan-to-value, mediocre appreciation, little cash flow, high interest rates and more. Real estate is a better long-term investment for most, if not all, investors.

Executive Summary

Stocks or real estate. The age old question: which one is better? The answer might surprise you. The stock market used to be a place where investors could participate in the income and growth of companies from buying stocks. However, the way it operates now it looks like a giant casino where the house always wins or even a very large trillion dollar Ponzi scheme. The hot tech giant stocks look like massive “Pump & Dump” schemes.

For example, Amazon stock was $185 per share in 2021 and now has steadily declined to about $90.00 per share in 2023, losing over 50% of its value. To make matters worse, Amazon has never paid a dividend, which means no cash flow to investors. The professionals pump up the stock price and then dump it, leaving retail investors and pension funds holding the bag of losses.

To quote Mark Cuban, “The stock market is by definition a Ponzi scheme.”

But in order to affirm or debunk this claim, we need to look at all of the different sources of income, the way people earn money, and the benefits that both stocks and real estate have to offer.

Both asset types have advantages for those looking to store and grow their investment capital. So, let’s see how real estate and stocks compare with all of these shared benefits:

Asset Type

Real estate is a real, physical asset that has intrinsic value for investors to hold on to. Investment properties are tangible with Real estate is a tangible asset, meaning it’s a physical property or land that can be touched and seen. Stocks, on the other hand, are paper assets that represent ownership in a company or corporation.

Unlike stocks that can be volatile and subject to market fluctuations that affect the companies offering investments, real estate investments are known for their durability because they typically appreciate in value over time as physical property is scarce. Real estate investments offer investors a more tangible and stable investment opportunity as they tend to be less impacted by changes in the stock market or the economy as a whole.

Real estate investments are typically more secure and stable than stock investments, especially in the long term. Stocks may be a much more liquid asset, which might be okay for short-term investing, but they can be much more volatile because of the short-term fluctuations.

Income

Real estate income is generally earned through the rental income of the properties you invest in. For unleveraged real estate investments (meaning you own its total cash value), investors earn around 6%. However, Income for stocks is generated from dividends that are based on how well the S&P 500 stock is doing in the market. Though the market fluctuates yearly, the average dividend from a stock is around 2%.

Choosing where your real estate investments are located is a large factor in how much income you will generate. For example, real estate in cities like Boston or Los Angeles would typically produce 4% cash flow. But if you diversify outside of major core areas, you could easily earn 6–8% rental income from properties. This is determined by what is called the Capitalization Rate, which is the total income that you earn from your gross profit less all expenses if you have no loans. So 6% is totally doable, even in a hot market like now, if it’s leveraged, if you have 75 or 80% leverage, you can easily get 10% or more on the cash that you’ve invested. That’s because you have the leverage.

Graph depicting annual returns from 2000 to 2019 for commercial real estate and the S&P 500, showing real estate having an 8.8% annual return compared to the only 4.9% annual return the S&P 500. Real estate offers much better cash flow and stability for investors than the stock market.

Depreciation

Real estate investments also have depreciation that allows you to offset most of your income — something that stocks don’t offer. When you sell your stock or make your earnings, you have to pay taxes on it. But with depreciation on real estate assets, you can offset most, if not all, of your earnings, which are sometimes more than what you’ve actually earned. For example, if you earn $10,000 from your real estate investment, you will generally have around $10,000 in depreciation of the asset.

Depending on the type of asset and a few other items, you can offset most, if not all, of your income, which reduces your tax burden substantially. Let’s say your capital gains taxes are 15% for your property, that’s a savings of 15% right away on your investment.

You can also defer taxes all the way up until you sell the asset, which then you will get taxed. But between buying and selling real estate, you can defer taxes for that entire time. Plus when you do sell, you can possibly conduct a 1031 exchange, which allows you to defer taxes even further.

Related Article: What Is A 1031 Exchange?

Equity PayDown

Now, let’s say you have a non-leveraged asset; there will be no equity paydown on your property because you are not paying down a mortgage. But if you have leveraged your real estate, you will pay down your investment, reducing the principal owed on your loan or debt for the property.

Stocks have no equity paydown. Even if you decide to leverage your stocks, your interest rate may change but equity paydown is not an option. This means that every month you are not increasing your equity position.

Appreciation

Stocks earn most of their value through appreciation. Every year your stocks go up in value, most of those earnings are from appreciation of the assets. Now, the average S&P returns range between 7–8%, depending on what study or timeframe you are evaluating. However, the average return is closer to 5–6% because S&P 500 index your stock belongs to has an inflated score from a relatively small number of high performing stocks that contribute to most or all of the returns.

Real estate typically has lower returns of 2% per year, but this really depends on the market you choose to invest in. It is a broad generalization, but say you leverage your assets: if you are leveraged at 75%, this will multiply your ROI because you will capture the whole return and invest much less. This could bring your returns to around 8%. Strategy and market awareness can lead to high returns on your investment.

Leverage

We’ve been discussing leverage, so let’s look into it. You can leverage your stocks, but most people don’t because they don’t have the ability to. Leveraging stocks introduces short-term debt with high interest rates and the possibility of capital calls in which the company you invested in will collect more funds if they need. If the value of your stocks goes down significantly, the company can also sell the stocks right out from underneath you. There is also a low loan-to-value ratio around 50% or less for many people.

Now, real estate has one of the most well-established capital markets on the planet, especially in the United States. Commercial real estate typically offers 10 or 15-year  loans; residential real estate offers 30-year loans. Interest rates are also incredibly low on real estate, around 4% on commercial and 5% on smaller properties.

Real estate generally cannot capital call either, as long as your property is maintained and the bills are paid. Some caveats to capital calling may happen with very large real estate companies, however, but are much more rare compared to the stock market.

Rental properties also have a high loan-to-value ratio (generally between 70%–80%), and if it’s a residential property with 1–4 units, you can get up to about 97% loan-to-value. Obviously, the higher your loan is, the more risk there is. But in general, real estate can earn 15–18% returns for investors, most of the returns being untaxed or tax-deferred.

Comparatively, stocks earn around 8% returns and if you leverage them, you can earn more if your investments are doing well. But if the market is going up, there is a much higher risk. If you are earning 10%–12% returns, you are doing really well. The important point is note the average return because some years could be 18% while other years could be -18%. Most likely, you could average an 8–10% return but that will all be taxable, whereas real estate is not.

Is The Stock Market or Real Estate Better?

In the real estate versus stock comparison, real estate seems the clear winner. This is not to say you should invest all of your money in real estate because diversification is key to preserve and grow your wealth. Real estate can have crashes just like the stock market can. But in general, real estate assets have much higher returns with more stability and transparency for investors than stocks do. 

*Note: Note: Invest On Main LLC (collectively investonmain.com) have made every attempt to ensure the accuracy and reliability of the information provided. Invest On Main cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.

For more information contact:

Michael Flight

Co-Founder & Chief Strategy Officer of Invest On Main

CEO & Co-Founder of Liberty Real Estate Fund

Co-Founder of Blockchain Real Estate Summit

 

Michael Flight was named the Godfather of Blockchain Real Estate by Forbes Crypto.  Michael achieved that distinction by co-founding Liberty Real Estate Fund, the World’s First Net Lease Security Token Fund, creating the Blockchain Real Estate Summit. More recently co-founding Invest On Main (IOM.ai) the Real Estate & Alternative Asset marketplace of the future and AcceleratedLaw a faster, cheaper way to create and tokenize securities offerings! 

Michael is a real estate entrepreneur and real estate tokenization pioneer who is an expert in retail real estate investment, redevelopment and real estate on the blockchain.  He started his commercial real estate career in 1985, and then co-founded Concordia Realty Corporation in 1990, which continues to partner with some of the world’s most well-known banks, insurance companies, hedge funds and institutional investors in many successful investments.

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