Until the great sun belt real estate meltdown of 2008/2009, many investors I would come across in California insisted that real estate was the only way to go when it came to investing. “Real estate is something tangible, something I can touch and feel; I can go and physically kick a building or investment condo I own, therefore I am comfortable with it. I can't kick stock!” would be the usual reprise. To be sure, you can look at an investment property, you can go slam the door and open/close the cabinets, but does this make the investment inherently less risky than owning a basket of equities, or for that matter even a single stock? Let's look at some real dynamics of real estate ownership.

Real estate investing is highly leveraged, with the debt to equity ratio often 5 or 10 to 1. It is funny how hedge funds are viewed as speculative when they leverage 3 or 4 times, but putting down 10% on an investment property (thus leveraged about 10:1) is viewed as normal if not conservative. To be sure, leverage works for you when prices are rising and income (via rent, etc.) supports the cost of leverage (in this case the mortgage). But when (not if) the proverbial price-increase music stops and/or when there is a hiccup with rents (e.g. your tenant bails for cheaper digs in Texas), then leverage rears its ugly head and works against the investor in dramatic and economically damaging ways.

As another potential disadvantage, real estate is inherently highly concentrated when it comes to the paying consumer. In the case of a second home or condo as an investment, you are dependent upon a single customer for your revenue (rent). Imagine a company with the business plan of having exactly one customer. Such an operation could never be funded given the risks associated with the single customer approach. Compare the reliance on a single renter as a source for that much needed regular income with the number of customers a company like Coca Cola (KO) has. KO has literally billions of happy (and thirsty!) customers in virtually all countries of the world. Its revenue base is highly diversified – the company not being dependent on any single person but rather hundreds of millions of consumers spread out across the globe. KO has paid a dividend (its equivalent of sending you a rent check) every 90 days for a century with no excuses that “the check is in the mail” or that they won’t pay you until the roof is fixed.If I had to bet as to whether KO will make its regular payments versus a single tenant whom I know as well as a one page renter’s application, I will take KO every day of the week and twice on Sundays.

Further, real estate is by its nature local. If the economy surrounding a given investment property goes south, you can't exactly uproot the business for more robust economic environments elsewhere. In the case of large, multinational companies, they have tremendous geographical diversification such that if a particular region is slow, often other parts of the world are experiencing faster growth and these varied economies can offset each other. It is very difficult for the average investor to get adequate diversification in direct real estate investing – you would have to buy a wide variety of properties around the world which is not a reality for someone with a portfolio under 9 figures. With stocks you can create a well diversified portfolio, to include international exposure, with a thousand bucks.

At the end of the day, just because an asset is tangible – just because you can kick the side of a building – does not in and of itself make the investment less risky. One must look, sans emotions, at the various economic dynamics to determine the risks associated with real estate and equity ownership. When an analysis is done beyond superficial considerations, a conclusion about the lower risks associated with investing money in a broad portfolio of stocks versus a single or even small basket of real estate property(ies) becomes evident.