Real Estate Investing Basics

Bonds vs. Stocks vs. Real Estate: Which One Wins?

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There once was a time when private real estate wasn’t even on the same playing field as stocks and bonds as an investment category.

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But as investors sought higher yields and less volatility, along with greater control over their investments, they began to place more capital in private real estate—and the category has thrived.

Still, it is worth examining whether private real estate has lived up to the hype and performed better than stocks and bonds from a historical perspective. Over time, did real estate generate better returns for investors with lower risk?

In previous articles, we defined private real estate and how it differs from other types of investing and explored which expectations were and were not realistic for private real estate investments.

Now, let’s take a look at bonds, stocks, and private real estate and compare how they’ve performed over time.

Young Asian businesswoman frowning with concern as she tries to understand something she is reading on her laptop computer scratching her head with her pencil in perplexity

Bonds Returns

Bonds are typically low-risk, low-return instruments. They also expire after a certain time, ceasing to pay out investor returns.

While bonds offered high yields during the 1980s, that time period was an anomaly, according to The Rate of Return of Everything, 1870-2015, an in-depth study by several researchers released as part of the Federal Reserve Bank of San Francisco Working Paper Series. (1)

Related: Real Estate vs. Bonds: “Inflation Shelter” vs. “Naked and Afraid”

The study, which examined rates of return on various investments in 16 now-wealthy economies and adjusted for inflation, showed that during this 145-year period, bond yields averaged 2.5 percent annually and were actually often negative.

Bonds do offer stability, paying about the same amount to investors each month, but the cost in lost returns over time is high.

Stock Returns

Stocks (also known as equities) are liquid investments that can provide quick cash flow when needed. Income from stocks is passive, and individual investors have no control over the amount of this income.

Stocks do allow diversification over a variety of companies and industries, and there is no minimum amount to investing in them, but it can take decades for them to produce significant income for investors.

Related: Should Real Estate Investors Sleep Soundly Despite Stock Market Scaries?

In the study mentioned above, the researchers found that equities yielded a 6.9 percent average annual return during the time period studied.

close up of hand stacking quarters in various piles

Private Real Estate Returns

Private real estate is an illiquid investment that is noted for its low risk and high returns.

The category provides immediate, steady returns in the form of rental income and long-term returns in the form of capital gains.

In the rate of return study, housing (residential real estate, including multifamily) yielded a 7.05% annual average return, outperforming both stocks and bonds during that time period.

What’s more, real estate is a physical asset that offers many benefits stocks and bonds do not. Profits can be increased by improving real estate through renovations and strong property management, boosting rental income and increasing valuation at disposition. The category also offers numerous tax benefits and can positively impact local economies and communities.

In addition to offering strong returns, private real estate is rightfully viewed by investors as a safe haven for investment, providing wealth preservation for generations to come. For all of these reasons, it makes an excellent addition to many investors’ diversified portfolios.



What’s been your experience with bonds vs. stocks vs. real estate? 

Let’s talk in the comment section below. 

Since founding Trion Properties, a private equity investment company that specializes primarily in value-add multifamily real estate investments and ground-up developments, Max Sharkansky has led t...
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    Kevin Smith
    Replied 3 months ago
    Looks like the conclusion is real estate nets you 0.15% extra return for incredibly more effort. That certainly makes me lean towards stocks where I can just have a portion of my paycheck go into an index fund twice a month and not even think about it. Curious to hear other's thoughts. Has anyone read the cited source and determined whether the 7.05% return rate is based on average returns by real estate investors, because then the added gravy the author describes by increasing profits through improvements and efficiency will have already been factored in, as investors do that already. Thanks for the article.
    Darius Ogloza
    Replied 3 months ago
    Comparing efficient markets like the ones that exist for equities and most bond offerings to private real estate investments is apples to oranges. Comparing the S&P 500 to a REIT index makes more sense, I think. To make the comparison work, you need to compare buying stock A versus Property A.
    Nick Barlow from Warsaw, Indiana
    Replied 3 months ago
    The cited reference quotes the categories as a whole-since 1870. That’s over 145 years! What’s really interesting to me is that it also demonstrates the increased volatility that is inherent in stocks, compared to real estate. I would argue it understated Real Estate, as I don’t remember them accurately quantifying cash-out refis or taking advantage of forced appreciation. Those aren’t options with equities. 2008 style crashes happen WAY more frequently in equities than real estate, and in my opinion, the illiquid nature of RE keeps you in the game when fear otherwise makes people sell. Telling yourself you invest “for the long term” is one thing. Not selling index funds when they’re down 60% (like folks invested before October 08 and thru March 09) -when there is blood in the streets -is another thing altogether. Real estate does take more effort, that’s for sure. Thanks to OP for posting.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    i did not read the Fed white paper. the 7.05% for real property asset investment is not leveraged. the benefit of investment in real property assets is that it can be a leveraged investment. sure, you can trade equities on margin. you can investment in commercial grade and investment grade real property assets with 20% LTV. that leverage pushes the before tax IRR way over 20% easily.
    Kevin Smith
    Replied 3 months ago
    Can someone confirm the 7.05% from the sourced paper is not leveraged? If so, this is an important distinction.
    Tushar P.
    Replied 3 months ago
    The opportunity cost of putting 20% down is too high - was that taken into account? Stocks need zero effort and have guaranteed bigger return, but it requires the stomach to digest the volatility of the stock market.
    Caleb L. New to Real Estate from Georgetown, Tx.
    Replied 3 months ago
    I disagree. If you invest in stocks the right way, you'll have to do a heck of a lot of research before you choose to buy it. Also, the stock might not even be at it's buy price, most aren't. I'm not afraid of the market volatility because I buy a wonderful company at 50% of it's REAL value. I also make sure it has a moat and good management so it will be here 10+ years later. I also analyze all the financial statements. The whole process takes a few months. This is something that anyone can learn. And this strategy is what has made Warren Buffett and others wealthy. He either buys a large chunk of the company's stock, or buys the whole company. But he never buys it unless it meets his criteria and his at his price.
    Caleb L. New to Real Estate from Georgetown, Tx.
    Replied 3 months ago
    This all depends on how you invest in each one. If you value invest in stocks, you can see a return of 15%+ per year. But if you just blindly follow the analysts suggestions, you'll probably end up with 5%-7% before tax. Real stock investing has gotten lost, and not many people know how to do it right by value investing.