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Why selected property investments are a better choice for financial independence than stock investments (Part 1)



Economic independence is a golden dream shared by the hardest working people around the world. Wouldn't it be wonderful to not have to worry about not having money to maintain a decent living tomorrow, no matter how old you are now? If you have a hen that can lay golden eggs permanently or a money-making machine that makes enough cash to pay for all your living expenses, you can choose to do only what makes you happy, or even do whatever you want. This is called economic independence. You no longer have to spend time on money; your assets work for you, so you don't have to work. It's a wonderful concept, but how many people in the world have achieved economic independence? Actually, not a lot.

The good news, though, is that a person is perfectly capable of achieving financial independence in their lifetime, even if they're not very young. In the United States, the most traditional way for smart people to achieve financial independence is to buy stocks, and most of them build a portfolio of stocks. The method follows an accumulation pattern where, over a long period of time, you save enough money to accumulate stocks. You hope that your stock will appreciate or at least maintain its value so that one day you accumulate enough, and then you can start selling little by little, living off the proceeds from selling your stock. Most retirement funds in the United States are run on this principle. However, there are serious flaws in this model.

Question 1: As you begin to enjoy your financial independence, you also begin to deplete your portfolio. Each month, you sell a small portion of your stock to cash out as a living expense. In the long run, your portfolio will shrink until it is completely depleted.

One option to solve this problem is to invest in dividend-paying stocks. With this method, you will be able to live on dividends and you won't need to sell any stock or expect it to appreciate in value. This is a very good solution, but there is a problem. Dividend yields are lower in the U.S. and most countries in the world, especially safer, more reputable companies. In fact, the current annual dividend yield is only around 2% (see chart). Higher yields do exist, but most yields don't even exceed 5% per year. That's the equivalent of saying that to get $10,000 a month, you have to save at least $2.4 million to build a stock portfolio. How feasible is that for most people?

Question 2: How do you know how long you can live? It is impossible to estimate because no one knows when he will die. The only thing that is certain is that life expectancy is increasing all over the world; in 1960, the average life expectancy in China was 43.47 years; in 2012, it reached 75.20 years. People live longer and later in life, and things like senior health care become more expensive. Therefore, there is a very high risk that if you live "too long", the dream of financial independence could become a nightmare. The risk of living too long and not having enough money to spend is real, and you long for a future that doesn't deserve it. Therefore, relying too much on this approach is not advisable!

A better option for achieving financial independence
The good news is that there is a very good asset type that can be better used to achieve true financial independence: real estate. It's actually easy to see the reason behind this. First, real estate investments do not need to follow an accumulation pattern. If you build a portfolio that yields well, it may give you a lot of cash flow income in the first place. You will be able to live off the net rent generated by your real estate portfolio and not have to sell your property for cash. Second, by the same token, you really don't need to estimate your own lifespan. Investing in real estate, problem 1 and problem 2 no longer exist!

Nevertheless, critics are quick to point out some of the shortcomings of real estate investing:

  • Real estate is not a short-term investment.
  • Vacancy, tenant default, demolition are considerable risks.
  • Real estate may become obsolete. There is a certain amount of wear and tear over time that requires expensive renovations.
  • What to buy? Residential real estate is very local in nature, and it is not like stocks that can be reasoned about its future value through research.

Thousands of highly educated researchers with decades of investment guidance experience in the equity field. In residential real estate, however, there are not so many researchers, most of whom buy properties through the advice of real estate agents, who may give biased advice. They often represent the interests of the seller, not the best interests of the investor.

Sidney Shauy Professional Review
I agree with all the real estate investment drawbacks listed above. However, remember that I used the words "selected real estate investments" in the title of this article. Obviously this doesn't mean that any property is an acceptable investment that will enable economic independence. In fact, I would venture to say that over 90%-95% of the homes on the market are not very good as investments. Even some real estate investments can be described as very bad, even if they look aesthetically pleasing. Unfortunately, in the real estate sector, the word "investment" is grossly misused. It is important to know how to choose and distinguish between good and bad.

In the end, identifying and buying the right investments is only the first step. Success in achieving the goal of economic independence requires more steps than that. You must be able to make your investments perform in line with expectations. Using the right analytical methods and tools, you can surely achieve great and stable financial independence through real estate investing. In the next article in this series, I will discuss how to overcome these challenges and achieve this goal. Stay tuned!


This article is contributed by Juwai Columnist, Sidney Shauy.

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