Real Estate vs Stocks: Which is Better? (You Might Be Surprised…)

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From time to time, investors need to pause the game and ask themselves: “Is this the best use of my money and time?”  I’ve met people who are so focused on one investment that they rule  out other possibilities.

Buy Gold

(No, I don’t know why we’re in a cave.)

Since I’m doing real estate full time now, it seems an ideal opportunity to give myself a sanity check. I thought I’d share my process with the nice folks here on BiggerPockets.

To figure out if real estate is the best use of my money and time, I first had to pick something to compare it to.  Why not stocks?  To simplify things, I looked at the S&P 500 (a stock index used as a baseline by many hedge funds).

S&P Versus Home Prices

Want to see something scary?  Assume you invested $100 in both the S&P 500 and a “typical” house in 1975.  How much would each of them be worth in 2013?

S&P 500 vs HPI

Note: Throughout this article, I’m going to be referencing the Home Price Index (HPI).  This index is tracked by the FHFA and loosely follows changes in the typical home price (clever name, isn’t it?).

Wowzers!  Not only is the $100 invested in the S&P worth more, it’s worth triple!  Even during the two recent crashes, it was worth double.

The result is clear: say screw it and dump your money in the stock market.

Hold on a second Speedy, we’ve left out a few variables.

Dividends vs. Real Estate

Many companies in the S&P 500 issue dividends: they give you money every so often for being a faithful shareholder.  So, we  should add those to our chart, right?

We could, but it’ll just make matters worse.  Is there income from your real estate investments we can include?

You’re not buying a home hoping for appreciation, are you?  You’re making money every year on the real estate you own.  Maybe you’re a landlord, maybe you’re a flipper, or maybe you grow weed in the basement (don’t do this).  Either way, you’re getting an annual return on your investment.  Let’s toss this in to offset the S&P’s head start.

The two things we’re going to add are:

  1. S&P Historical Dividends
  2. Annual cash flow from our real estate investment.

How much annual cash flow?  Well, how much do we need to “match” the S&P 500?

Over 14%!


Can you make 14% every year?  Perhaps for a while.  For 40 years?  Unlikely.  Hedge fund managers would kill for consistent 14% returns.  Heck, the fourth richest man in the world, Warren Buffet, managed 20% a year for the 40 years he’s been investing.

However, there is one more thing we can include to help real estate compete with stocks.

Reinvestment of Stocks vs. Real Estate

Up to this point I assumed you invested $100 back in 1975 and never added more to it.  You used the dividends/distributions to do things like, I don’t know, live.

What if instead you reinvested every penny you received.  Does this make a difference?  What annual returns on your real estate investment did you need to match the S&P 500?

Just over 6% a year.

6% Distribution Reinvestment

Side Bar: I want to take a moment and draw your attention to that scale on the left.  It doubled.  That $100 is now worth $4,500.  Remember how your math teacher went on and on about the power of compounding?  Here’s a real life example.

Whether you decide to invest in stocks, real estate, or stamps, the most important thing to do is START.

Back to the lecture at hand.  Over the last 40 years you needed 6% annual real estate cash flow for your to break even with the S&P 500 returns.  6% is more doable than 14%; however, you must to be diligent to reinvest those proceeds.

Factoring in Time

So our goal is to beat 6% return a year.  Let’s get to it!

Not so fast.  We want to see if it’s worth our money and time.

Assume the average numbers we’ve been looking at are correct for this year (they won’t be).  If you put your money in the S&P 500 this is the equivalent of investing in real estate with a 6% distribution.   (That statement isn’t strictly speaking accurate, but I don’t want to complicate this simple example with more math).

Now let’s say you invest $50,000 in real estate, then you bust your hump and get 10% annual cash flow for the year.  How much extra money did you get?

Profit from hard work (Real estate – 10%) – $5,000

Profit from no work (S&P 500 – 6%) – $3,000

Extra cash earned – $2,000

Minimum Wage

Is that worth your time?  Would you be ahead to get a part time job and invest  more in the stock market?  Would it change if you had $100,000 to invest?  $200,000?  If your return was 15%?  20%?  How much extra risk are you willing to take?

The answers to these questions depend on your situation; I can’t help you out.

I’ve argued this before, but I’ll say it again: investing in real estate makes sense if you are large.  Economies of scale are a wonderful thing.  If you’re just starting out, it takes time and effort and there are other avenues which pay you more per hour.  If you get larger and want to get into real estate, find someone who has an established track record and invest along with them.

Wrap It Up

I started this article by asking “Is this the best use of my money and time?”  So what’s my answer?

For me, right now, yes, it is.  **phew**  We’re getting a high return and invested enough to make it worthwhile.

Remember, this can change faster than you can say “seller’s market.”  If I were back in the 1980’s when government debt yielded 15% a year I would be shocked if I arrived at the same conclusion.


I know I’m risking the ire of BiggerPocketers with this post.  Let’s preempt a few of the criticisms.

You forgot that you can borrow money to buy homes.

It’s much easier and cheaper to borrow money on stocks than real estate: lower loan origination fees, no appraisals, less time commitment, etc.  If anything, including margin will make investing in real estate look worse.

Don’t forget you pay commission every time you buy a stock.

Real estate transactions cost much more than stock transactions. You can buy a stock for under $5. If you enroll in a DRIP program to automatically reinvest your dividends, there is no purchase cost.

Kenny, you chose the wrong dates! You should have started in the year XXXX.

You could be right. I chose these dates because it gives me enough data and includes a number of volatile environments.

That and it was the easiest data to find.

Drop me a line and I’ll be more than happy to send you my raw analysis.

Real estate is great for taxes. Shouldn’t you be factoring that in?

Very astute. I’ve even written articles discussing how good real estate tax benefits are.  However, long term dividends are taxed at 15%, which isn’t light years better than what you get with real estate. Not to mention if you invest in stocks through a 401(k) the first $17,500 (for 2013) is tax free.  I figured I’d leave it as an exercise for the reader.

Well…that and figuring out historical tax rules and a reasonable investor bracket sounded time consuming and boring.

I invest in area XYZ and it has much higher appreciation than this HPI thing shows.

You can make a similar argument about picking penny stocks.  Or slot machines.  Once appreciation becomes a factor in your “investment” criteria, it stops being an investment and starts being a gamble.  Buy something if you’ll make money without the price going up.  Profits above that are just gravy.

HPI Data from FHFA and S&P 500 Data from NowAndFutures.Com

Photo: Nathan Siemers

About Author

Kenneth Estes

During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Find more by and about Kenny on his personal blog and his recently created twitter account!


  1. I have a mixed strategy.

    #1 Acquire cash flowing rentals and use total rent to pay off loans.
    #2 Buy a handful of stocks that I can manage (not mutual funds which have a terrible track record)
    #3 Invest monthly into an EIUL for tax free loans at retirement

    I evaluate different pools of cash to figure where they work best in the above plan. If I get a pot of money and it requires payback, like a HELOC, then I’m inclined to invest it in my high yield MLP stock that is presently beating my HELOC rates. If I get a chunk of change with no costs (either cashing in a stock option or some bonus), I evaluate either applying it towards one of my rental mortgages or perhaps buying BRK-B, where I don’t need the dividends right away. Or are my cash reserves due to be increased?

    But I track everything on a big spreadsheet month-by-month, so I can see if my wealth building plan is working and how well it’s working. By having multiple assets that have a proven history, I feel much more confident that I can weather any storm. It really let’s me know that dumping the ineffective 401K system and mutual funds has been a huge success!

    • Kenneth Estes

      I like it Greg. Up until recently I tried to stick with Warren Buffet’s advice: there’s no need to diversify if you know one thing really well. I’m becoming more disillusioned with the man after reading books like “Fooled By Randomness,” which started me thinking he might just be a good coin flipper.

      Either way, I’m moving towards a strategy somewhat similar to what you have there: moving 10% of capital into stocks (minus the EIUL)

      • Greg, I have a question about your strategy.

        When you say you use the total rents to pay off your loans, does that mean you use your cashflow to pay off your loans early? As opposed to using the cashflow to expand your portfolio via leverage?

        • My approach is to use the extra rental cash flow to pay off the loans, in particular one loan at a time. When the market speaks, I will sell a unit, apply as much saved up depreciation, and then reinvest in more leveraged properties.

          Jeff Brown has shown me the numbers, and compared it with the other popular alternative where you basically save up the cash flows to eventually buy another property with leverage. Frankly, that approach doesn’t seem to build the total net worth of property quite as fast.

          Of course I have certain amount of cash on hand in case things work against me, like vacancy, repairs, etc. If my cash reserves have fallen below the right levels, the cash flow is used to replenish reserves first. This is my strategy to mitigate the risk of leverage.

  2. Wow, this is a fascinating read.

    I’m actually in the process or re-reading The Neatest Little Guide to Stock Market Investing.

    It has caused me to balance the pros and cons of real estate vs. stocks—not that I think the two have to be mutually exclusive.

    This is particularly relevant because I live in NYC and the market is ridiculous here! I’ve been doing a lot of research as far as investing out-of-state (probably back in my home state) and implementing a good property management company.

    • Kenneth Estes

      Thanks for the feedback Nik.

      Best of luck in your stock and real estate investing.

      Greg brought up a good point. In my former life as a trader at one of the biggest High Frequency Trading shops, I learned an axiom of Wall Street: “The customer is wrong more often than right.” The whole game is designed to rack up fees (explicit and subtle) from people trading at home. The only way I would ever consider entering the stock market is as a buy and hold investor.

      On an related note, if you’re looking to invest in out of state real estate, but don’t want the hassle of overseeing property yourself, this is exactly what we do. You might want to check out our website.



      • Greg, I am ALWAYS looking for new business/investing books. I’ll be sure to check it out. Thanks!

        Thanks for the tip, Kenny. That’s really interesting—yet not too surprising. I’m sure those fees can add up quickly if you’re reacting to the short-term environment, haha.

        I’ll check out your site for sure 🙂

  3. Great article Kenny! Instead of debating either or, I invest in both at the same time leveraging the same money. Let me explain. With my current broker (Interactive Brokers) I can borrow up to 80% of my stock portfolio at a rate of 1.3% interest. I then use that borrowed capital and invest in fix and flips. Once the property sells, I pay off the margin. With this approach my money is always working for me. I invest in inversely correlated ETF’s with a very simple strategy. This limits costs, taxes and volatility. I’ve been using this leverage strategy for three years and have been very happy with the results. Even if the stock market “plummets” and there is a margin call, I may lose a portion of my stock portfolio, but I still have the underlying real estate as an asset!

    • Kenneth Estes

      I like the thinking Chris. That’s about the cheapest financing you can get (outside of tax liens, which present a slew of other problems). 80% LTV on the stock is a bit high for my taste, especially with the current volatility in the stock and real estate markets, but to each his own!

      • Kenny, I usually don’t go higher than borrowing 65%-70% so there is wiggle room for volatility. Also, by investing in inversely correlated stocks my beta is lower than the market and therefore subject to less volatility.

        • Kenneth Estes

          Interesting Chris. I’m not quite sure I follow why the Beta would be lower in an inverse ETF. Assuming the fund manager is doing his job, a 10% increase in the underlying ETF/index would equate to a 10% decrease in your inverse ETF. Strictly speaking the market Beta would be less since it would be negative, but I got the impression you were talking about the absolute value. Unless of course I’ve forgotten how to do a linear regression.

    • Best read I’ve seen in a while. Thank you Kenny!

      I don’t know a lot about how leverage work in the securities world. But insofar as I understand it, leverage in securities typically VERY risky (in that if you guess wrong, you owe cash today) and often short-term (such as options). Because RE leverage is so long-term in nature, the risk associated with the leverage is… different.

      I hope that this thread becomes a series! If it does, I’d love to see a monto carlo comparing historic S&P gains against a conservative buy-and-hold strategy. For example, In 1980, if I had 25% down on a house, what would have happened if that money went into the SP, and what would have happened if it went into a house (with rent assumptions built in). My preliminary view is that the buy-and-hold wins 9 times out of 10, but I’m interested in your thoughts.

      • Kenneth Estes

        Thanks Jeremiah!

        I might try and bust out some analysis using other time periods. Would be interesting.

        You are correct about leverage on stocks being called in more quickly and that has to do with the length of the investment.

        That doesn’t make the leverage any more risky though. In real estate, as in stocks, if you put no money down and the market pukes, you’re in a really tight spot. The only difference is they force you out of your position almost immediately in the stock market. You get more sleepless nights with real estate. 🙂

        Thanks again. If you have any thoughts on what other types of analysis you want to see, let me know.



        • With all due respect – the statement “That doesn’t make the leverage any more risky…” is something that i really disagree with.

          If you have a rental leveraged during a big hit to the housing market, your hit to net worth is huge; but you can delay that hit and even keep a positive cashflow. However, with similar leveraging and a similar downturn in stocks, and the hit to your net worth expresses itself as a capital-need. What would hurt a good real estate investor’s pride might bankrupt a stock investor.

  4. Brandon Turner

    Hey Kenny,

    Thanks for the article. However, you know I have to debate the other side 🙂

    I would actually say the opposite of you: that real estate is best for small time, not big time.

    Here’s my reasoning.

    I just bought a 4-plex and I’ll have $5,000 into it by the time I’m finished because of leverage. However, I’ll make – even using the 50% rule, around $800 per month in cash flow on this property, or $9600 annually (Almost 200% ROI). Even if I were to drop that cash flow in half because I’m not managing myself, that’s still WAAAAY better returns than I’ll get from the Stock Market. Now – obviously this kind of deal is not scalable. If I had $1,000,000 I’m probably not going to buy $50,000,000 worth of real estate that cash flows at 2,000,000 per year (at least not passively)

    I believe the larger you get, the lower returns you can expect (passively.)

    So I think real estate investing at a small level is MUCH easier to get higher returns.

    But yes – an person paying 100% cash, and paying 100% full retail for a home would not do as well as the stock market. We are in 100% agreement on that. However, someone who buys at a good deal and utilizes leverage, will crush the returns on stocks any day.


    • Kenneth Estes

      Thanks for the healthy debate, Brandon.

      Hate to break it to ya, but you’re an experienced flipper and editor of the one of the largest real estate source online. Your returns, deals, pricing, knowledge, and risk tolerance aren’t a good comparison for a new investor (someone doing it part time while managing a full time job).

      Investors need to find good deals. There are at least three parts to this:
      – Finding investments – easier when you’re bigger because you have a reputation and a network helping you to find properties.
      – Getting work done cheaply – wholesale pricing comes with size.
      – Being diligent – you gain experience as you grow. You yourself wrote a blog about a remodel gone awry that you had to “pick up a hammer” to finish past the deadline and over budget. Does a new investor have that luxury?

      Want to get some serious leveraged returns? We can go buy some S&P 500 big future at a 250:1 leverage and make money hands over first. Well…until we don’t. 🙂


      • Hey Kenny – what do you know, I agree with Brandon. That’s never happened before 🙂

        I get where you are coming from having experienced the big time hedge fund game (some would say scam 🙂 I get all the risks, and I get the experience and education. Having said this, there is one small problem with the argument that if you don’t have money – stay out. And it is exactly that. Without leverage most of us would need to stay out – not an option.

        Most of us don’t have high-paying jobs. Most don’t have family money. Most entrepreneurs make something out of nothing – that takes leverage. You know what I mean?

        Let me give you perspective. It used to be that in order to gain the right to be a land owner you had to have the blood line. RE is still very privileged, but fortunately the limiting factor is no longer the title or the blood line – it is knowledge. Leverage is what makes this so.


        • Kenneth Estes

          Thanks for the comment Ben! Interesting to see you come down on Brandon’s side. I had no illusions mine would be a popular opinion though. 🙂

          I appreciate where you’re coming from that most people don’t have high income/net worth. Let’s think about this from their point of view:

          – You have no savings to speak of
          – You have very little excess monthly income to cover expenses

          What profile of investment should you be looking for? No matter how you cut it, the term “low risk” has to be at the top of list. 50:1 leverage doesn’t meet that criteria. If things go sideways, you’re bankrupt. I’ve seen this happen more times than I can count with new investors. One of them is in jail because of it! (Long story)

          Not only that, when you first start out, you’re paying retail for everything and dumping a ton of time finding and potentially managing your properties. You can entirely avoid the risk if you take that same time (10 hours a week?) and get a part time job. At $10 an hour, that’s an extra $4800 a year you can get invested and start compounding. With no investment effort or leverage risk!

          It’s not as sexy as a guru spouting that “no money down” will make you millions over night, but it has the distinct advantage of working. Every time.

          On your point about real estate and blood lines. In the 1930’s you couldn’t own gold. Ghandi did his famous march because Indians couldn’t mine Salt. The historical status, or current “privilege”, of an asset class shouldn’t have anything to do with evaluating it as an investment. It comes down to numbers.

          Many/most entrepeneurs “build something out of nothing” without leverage. Prior to the influx of tech companies this was the norm. You had to have solid returns before a bunch of VC money flew in the door.

          If you want leverage for the sake of leverage, there are much better ways to go about it.



        • Kenny – you are well-spoken, highly intelligent, and not afraid…pleased to meet you 🙂

          I do not disagree in principal with what you say. However, when you have nothing, you can’t loose much. Dare circumstances demand equal and opposite response…

          I’ve built a portfolio with 100% leverage – it was the only way. Furthermore, I guess I am one of those gurus you speak of seeing as I have a course for sale walking people through the process as I know it to be. It ain’t easy and it requires more education, but it works.

          Finally, my capacity to hang on to a 10-plex is a function of CF. The market can take dumps all day long and you won’t see me crying 🙂

          Pleased to meet you. Keep it up!

      • Tom Sylvester

        @Kenny – To offset Brandon’s experience and background (and agree that real estate can be great for the small time), I was working a full-time job developing software when I started in RE. I had little experience in RE. I focused on a small rural market that I grew up in (check out Because of this I was familiar with the area and could/can find good deals. I didn’t use my father for my first deal, but he has worked in construction for 30 years, so I partnered with him on subsequent deals. This is obviously a benefit that I have and others may not, but being successful is all about finding what advantages you have and exploiting them. By doing this, I have been able to personally get much better returns through RE as compared to when I attempted SM investing.

        With that said, fantastic article. It is rare to have articles that have actual numbers/research associated with them. I am still of the though that RE can be a better investment for most people, but it is important for each person to find their own advantage to exploit to achieve the most success.

  5. Great article.

    I think too many “real estate” people go all in on real estate when pretty much every one should have some stock and other financial instruments for liquidity and diversification. An index fund based on the market like the Wilshire 5000 or S&P 500 should really be a part of everyone’s investments in some form. People will say I have no control over it. Yes, but the numbers speak for themselves.

    I use rental real estate to diversify some more and because I enjoy it, but it shouldn’t be the whole pie.

  6. Kenny for some reason our chain broke and I could not reply to your reply. So continuing the chain…..

    Kenny, I was not talking about one inverse ETF, I was talking about multiple ETF’s that are inversely correlated. In other words, some of my ETF’s may go up with the general market, while others may go down when the general market goes up and some ETF’s may have little or no correlation with the general market at all. Due to the diversification and non-correlation the end result is (potentially) a lower beta to the general market.

  7. Steve Johnson on

    You really did throw me for a surprise here. I completely thought you’d be rootin’ for REI all together. I do feel that what isn’t taken into consideration is the leverage you can gain through real estate and the partnering you can do. I don’t know squat about stocks, so maybe one can find similar avenues, but from what I understand REI offers advantages that stocks can’t compare to. And yes the HPI is never as good as the S&P but that graph doesn’t take into account the advantage of leveraging.

    Anyways, great article. I’ll keep checking back on this to read peoples’ comments.

    • Steve, don’t forget that leverage adds to risk and can be a disadvantage as well as a possible advantage. Anyone who leveraged an expensive property at the top of the market can relate to this.

      On top of this, you can use leverage in both real estate (mortgage) and stocks (margin). So neither really have an advantage there.

      One advantage not mentioned is idle cash and liquidity. Stocks are much easier to sell than real estate. Also, if you have money to invest, it’s much quicker to put it in the stock market than to find the next real estate deal.

    • Kenneth Estes

      Heya Steve,

      Thanks for the response! I mentioned it briefly in the article, but getting financing/leverage on stocks is much easier and cheaper than real estate. Especially when we factor in derivative trading (futures and options).

      If we include that it’ll actually make things look worse for REI.

      Trust me, I started doing this analysis totally rooting for REI. I surprised myself with the results.



  8. Comparing math is worthless because not everybody gets equal returns – or even similar

    I think its more about personality and skill sets

    Someone who really knows what they’re doing can do serious damage with 5K in either stocks or real estate

    Would you rather be out and about, or invest from the comfort of your own home?

    Would you rather build connections or study news, charts, whatever?

    Would you rather learn business systems and how to hire people etc., or would you rather learn ?

    • Kenneth Estes

      Thanks for the comment John!

      I think we have quite different views on investing. When presented with the option of “A) would you rather build connections or B) study news, charts, whatever,” my answer is C. I want to pursue my life’s passions (in my case I’ve some explicit charity goals).

      The means to that end is invest my time and money to build passive income and financially free myself.

      The best way to do that is to do “worthless math,” evaluate various options, and come up with an optimized strategy.



  9. Clay Huber

    I agree! Everyone should stop investing in real estate and invest in the stock market… particularly those people in West Michigan and Grand Rapids! 😉

    All kidding aside, I’m a big fan of diversification. For me, I don’t “invest” in the stock market, but I do “trade” it, so I’m not anti stock market, I just prefer real estate for my long term strategy.

  10. I always love this debate and appreciate all of the comments. This debate always gets me thinking. I’m over 60 years old and I have made money in stocks and lost money in stocks and I have made money in real estate and lost money in real estate. My final principal is buy low and sell high no matter the investment. Know what economic cycle you are currently riding and invest accordingly whether that is stocks or real estate. My background is that I have been involved in commercial real estate since 1973.

    The other principal I live by is to do what you love, not what feels like work.

    Thanks for the great article. Happy Investing!!


  11. Chris Rosenberg on

    Maybe someone said this and I missed it in the comments but what about cash on cash returns. In the stock market you will never use less than 50% of your own money if you buy on margin (even if you can borrow 100% on margin your own money is still 50% of the total funds). In real estate if you find the right deal you can use very little cash out of pocket and really maximize your cash on cash returns. Ben bought a 10 plex for $5000 out of pocket (I loved that article) and his return is better than what almost anyone can do in the stock market with $5000 cash and $5000 on margin. Plus he’s building equity and getting a tax write off. He is also in control of his investment. In your stock investment you have no control over what the company does. Real estate is definitely a bigger commitment though. You can sell a stock in 2 seconds. There is convenience in that. And it’s pretty low maintenance. I personally own stock but no real estate. It was just easier for me to get started in the stock market. I’m looking to purchase my first buy and hold SFR in philadelphia within the next few months tho. I live in manhattan so I think it’s safer (cheaper) for me to get started there instead of where I live.

    Chris, how do you make money in the stock market by owning etfs that trade inverse of each other? If one goes up the other goes down, so are you writing options on these etfs to make money?

    Robert, why do you recommend gold over any other commodity or the sp500?

  12. Hi Kenny,

    Interesting article. Have you examined the following:
    (1) You can apply far more leverage (30% down, 20% down, and lower if you qualify for FHA) in real estate, which should affect results meaningfully.

    (2) You cannot get fixed rate (or long term) loans on stocks, but you can on real estate. Therefore, real estate should be the best protection against inflation.

    Also, can you please e-mail me a copy of your raw analysis.

    Many thanks,


    • Kenneth Estes

      Hey Nathan,

      It is much easier and cheaper to get leverage in stocks than real estate (and you can get more of it). Feel free to read through my other comments on this subject.

      Real estate is a worst hedge against inflation than stocks. You are correct that you can get longer fixed rate loans, but that’s only part of the equation. If you look at the analysis, over the long term stocks outstrip real estate in increasing price. This more than offsets any gain you might have from inflation. Even if hyper inflation comes about, the extra liquidity in stocks works in your favor.

      I didn’t see an email address to send you any data. Want to pm me?



  13. Good stuff, all.
    Just this year I begrudgingly decided to use my mom’s trusted financial advisor to manage some money I am going to put into stocks. Diversification. And simplicity.
    But I still think that if I had $100,000 I would at most put $50,000 into the stock market (and cross my fingers it’s not headed for a bubble-bursting) and buy a $200,000 house with $50k down. Over 25 years, the appreciation of 4% a year plus the cash flow is I think attractive. And again, I find that not only my lack of knowledge about stocks but my medium-rate knowledge about houses makes the latter much more enjoyable.
    I also think that cash flow on responsible leverage for a buy and hold can be better than dividends, though I could be wrong. It’s definitely not easier, though – as in, dealing with a tenant, putting on a new roof, etc. But having a tenant in place who will pay your mortgage and generate a little cash flow is superior to dividends, esp. if times get tough.
    I also have some concerns about bubbles in regard to the stock market, the real estate market, the national debt, and the dollar. I haven’t totally worked those things out, but I have to believe that printing money to the tune of a trillion dollars a year combined with a stock market at an all-time high combined with a debt that will simply never get paid back, combined with flat wages and weak consumer demand can all put the stock market into a long period of decline. What I am getting at is, for that whole period your ability to sell the stock is hampered. However, if you have a loan gotten in 2009-2014, the rate is going to be low, and if you get a good tenant in there 96% of the year, that beats dividends, and so where the rubber meets the road, that is superior. Then again, I could be biased since as I mentioned, I like real estate and am afraid of stocks/companies.
    In ending, here are a few quotes from Warren Buffett from 2012:
    Q: Should I buy real estate?
    Warren Buffett: “If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now.”
    Q: Why invest in real estate now?
    It’s a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out rates rise, the other guy’s stuck with it for 30 years. So it’s a very attractive asset class now. (paraphrased)
    Quote: “If I had a way of buying a couple hundred thousand single-family homes I would load up on them.”

  14. Nice post, Kenny. I, too, wonder about the Warren Buffets of the world being just the lucky “coin flippers.” I once read another insightful point that superstars in the investing world like Warren Bufftet and Peter Lynch also have the added benefit of fame boosting their portfolio; in other words, if the public catches wind of their purchases, the purchases of that stock skyrocket, pushing up the price. Something the average investor could never replicate.

  15. Great article Kenny. Surprisingly I actually agree with you even though I am a very active RE investor. I am asset class agnostic and believe that RE is absolutely NOT for everyone. In fact Ben Leybovich and I have been debating the viability of long term investing in large multifamily properties. I’m sure Ben will have more on that later.

    Your analysis and data is spot on but only when comparing two retail investors of the two asset classes. I will say that an inexperienced investor buying in an unfamiliar area at retail prices absolutely has no business being in RE. If fact, I can think of many other asset classes that are better investments. Probably any other asset class.

    The point that is missed and the reason I invest in RE is the fact that investors easily gain a competitive advantage in their respective markets. This is nearly impossible with stock investing. In my market I know what rents will be, what a good deal looks like and most importantly, I can go into a deal with a 20%-30% margin from day 1. I can combine that with 8%-15% cash on cash yields and do that infinitely. I can move assets tax free and have multiple exit strategies if the market goes south.

    With stocks, there simply is no competitive advantage. In fact its the opposite. The little guy is at a great competitive disadvantage. The hedge funds that show large returns have and have had access to inside information for decades. With RE, I have legal access to such inside information and as such can produce consistent returns.

  16. Christopher Moran

    I know I am very late to reading this, but I just saw it, and wanted to point out some clarifications.

    As you note, your chart comparing S&P500 to HPI does not account for cash flow, only appreciation. But your next chart trying to compensate for this, titled S&P + Dividends and HPI + 14% Distributions , apparently does not include compounding on any of the distributions, but does include compounding for the S&P500. It is not a fair comparison to assume reinvestment of SP500 dividends, but not of RE distributions. Even though it is easier to reinvest S&P dividends with a mouse click, versus RE distributions with buying another property, it is still not fair to compare one without compounding.

    The fair way to compare the two is looking at annualized return.

    The S&P500 return from January 1975 to January 2012 was 1,692%, or 8.11% annualized.

    Many folks on this forum have an IRR of greater than 8.11% on their real estate investing.

    The S&P500 return, with dividends reinvested, was 5,320%, or 11.39% annualized.

    That return is certainly more rarefied air, but I know alot of the folks on here beat even that with REI.

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