Personal Finance

What Offers the Best Return on Investment? 145 Years of Real Estate vs. Stocks

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
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Investmments and asset allocation concept. Where to Invest? Newspaper and direction sign with investment options

Which earns the best return on investment: real estate vs. stocks? And while we're asking this grandiose question, which option is safer?

You probably have an opinion already as to the answer to both of these questions. But opinions are never as useful as facts—and here, we’ve got the facts.

A team of economists from the University of California, Davis, the University of Bonn, and the German central bank set out to answer these questions by analyzing a stunning amount of data collected over a 145-year period of time.

The Best Investments to Make Money: The Numbers

The lead authors of the study—Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor—reported the findings of their massive study in a paper entitled “The Rate of Return on Everything, 1870-2015." In it, researchers looked at 16 advanced economies over the past 145 years to find what offers the best return on investment. They compared returns on several asset classes, including equities, residential real estate, short-term treasury bills, and longer-term treasury bonds.

To better compare apples to apples, with each asset type, they adjusted for inflation and included all returns, not just appreciation. Dividend income was included for equities, and rental income was included for residential real estate.

Their findings, in short: Residential real estate was the better investment, averaging over seven percent per annum. Equities weren’t far behind, at just under seven percent.

Then came bonds and bills, each with a far lower rate of return—surprising no one.

Related: 5 Ways the Next Recession Can Make You Rich

Real Estate vs. Stocks: Average ROI

Rental income proved an important factor—roughly half of the returns on real estate investments came from rental income, while the other half came from appreciation.

Stock investments and investment property each performed differently in various countries, of course. Here’s a comparison of each of the 16 countries:

Keep in mind, these are long-term return averages over the course of many decades. In real time, these returns bounced up, down, sideways, and in circles.

Here’s a curious little chestnut for you: From 1980 to 2015, the stock market, on average, performed significantly better than real estate investments. Across the 16 countries studied, stock investments earned an average annual rate of return of 10.7 percent, decisively beating the real estate market’s stolid 6.4 percent.

Should we all sell our rental property and move our money into a Vanguard account?

Of course not. But the reasons are multiple and a bit nuanced.

First, a few outlier countries threw off the average return on investment from the time period between 1980 and 2015. Japan saw its real estate markets collapse as its population aged. And in Germany, residential real estate has been stuck in the slow lane for decades.

Meanwhile, stock investments in Scandinavia have exploded.

But the most interesting case for real estate investing lies in its risk-reward ratio.

Related: Why Real Estate Beats Stocks During a Recession

Risk by Asset Class

Let’s do a quick stereotype check-in, shall we?

Treasury bonds are low-risk, low-return. I don’t think anyone’s prepared to challenge that stereotype—after all, stereotypes exist for a reason, right?

Stock investments are high-risk, high-return. This one gets a little more interesting, but a quick look at how stock markets have gyrated for the last century—up 29 percent one year and down 18 percent the next—should disabuse anyone of the notion that stock investing doesn’t come with high volatility and risk.

And that brings us to an economic assumption that dates back to, well, the beginning of economic theory. Economists have long held as a given that risk and returns are highly correlated, and that “the invisible hand” of the market will ensure that remains the case.

Why? Because if an asset were low-risk, high-return, everyone and their mother would fling so much money at it that the rate of return would dry up faster than Lindsay Lohan’s acting career.

Except that assumption hasn’t held true for residential rental properties.

Rental Properties: Low-Risk, High-Return

Throughout modern history, residential real estate may actually boast the best return on investment, thanks to its extremely high rate of return with low risk. Take a look at volatility for real estate versus stock for the past 145 years:

Brighter economic minds than mine are scratching their heads as to why that is. But since I can’t resist offering a (you guessed it!) opinion, here are a few thoughts as to why.

First, real estate investing is expensive. Until the past 10 years, with the advent of crowdfunding, you couldn’t invest your extra $100 a month in a tangible asset (unlike the negligible purchase price of some stock shares).

Even if you leverage to the hilt and borrow the maximum mortgage allowed at a low interest rate, that still usually puts you at 20 percent down payment, plus thousands of dollars in closing costs. Which says nothing of credit requirements, income requirements, and/or lenders' requirements for investing experience.

In other words, real estate investing has a high barrier to entry.

It’s also difficult to diversify your investment portfolio for those very same reasons. If each asset requires $20,000 in cash to purchase it, then it takes a lot of money to build a broad, diverse real estate portfolio.

Investment property is also notoriously illiquid. You can’t buy it and sell it on a whim—either process typically takes months.

But hey, that’s also precisely why it’s so much more stable than stock investing.

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

Measuring Risk vs. Return to Find the Best Return on Investment

How do you measure an investment’s risk against its rate of return?

It turns out, there’s a simple way to determine the best return on investment: a literal risk-reward ratio. It’s called the Sharpe ratio after its creator, William Sharpe.

You start with an asset’s return, and subtract out the return of the going with a short-term, risk-free alternative (like U.S. Treasury bills). That gives you a “risk premium”—the extra return the asset delivers over a risk-free investment.

Then you simply divide that “risk premium” over the asset’s volatility, as measured by its annual standard deviation in value:

Risk premium / average annual standard deviation

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If the math is giving you a headache, don’t worry about it. Just think of it as return divided by risk. A higher ratio indicates a better investment—greater return on investment, relative to the risk. Here’s the breakdown:

  • Treasury bonds: Their Sharpe ratio of around 0.2 is weak sauce.
  • Stock investments: Not much better, at 0.27. Sure, their returns were strong, but they’re more volatile than plutonium in a mad scientist’s lab.
  • Residential real estate: The average Sharpe ratio of 0.7 is great.

The Sharpe ratio for real estate has only grown stronger over time. Since 1950, the Sharp ratio for real estate has averaged an impressive 0.8.

Another way of looking at it is return per unit of risk—here’s how stock investments have compared to real estate in each of the 16 countries studied:

Rate of Return and GDP

Advanced economies tend to have slow economic growth over any given period of time, right? So how have returns done so much better than the GDP growth in these countries? Aside from the obvious issue that these economies looked very different in 1870 than they do today, there’s an interesting answer to this query.

It turns out, the best return on investment for a country isn’t tied in a 1:1 relationship with its GDP. Over time, returns on these asset classes tend to grow on average around double the speed of the country’s economy as a whole, measured by GDP.

If anything, that “returns average double GDP growth” summary is skewed low, because it includes the weak return on investment of bonds and bills. On average, the stock market and real estate market perform several times better than GDP growth.

This helps explain why income inequality tends to expand over time in advanced economies. The average Joe does not own stock investments, and if he owns any real estate, it’s his primary residence—a single-family home that he probably only earns appreciation on with no rental income (and remember, rental income makes up half of real estate investment returns!).

So, how does average Joe improve his finances? Only through a raise. His raise is tied to how his employer is doing, which, in turn, is tied to how the economy is doing.

In other words, average Joe’s finances are tied to GDP growth.

But wealth-wise Wendy, who’s not nearly so average as Joe, invests as much money as she can in the stock market and rental real estate. She builds a portfolio of passive income that earns money even while she sleeps. That income is based on the rate of return of her investments, not based on the economy.

Coupled with the impressive tax benefits enjoyed by those with investment property? Wendy's financial advisor undoubtedly sings her praises.

Conservatives and liberals can argue all they want about how much to redistribute wealth. But as an individual, you want to be like Wendy, not Joe. You want your wealth and income tied to the returns of the stock market and real estate investments, not tied to GDP.

Why Real Estate Investments Crush Bonds

Bonds are boring.

No, really. We already talked about how they’re low-risk, low-return. Why bother with this asset class if you can invest in rental properties, which are low-risk, high-return?

A common opinion I hear people say is, “Bonds may not have performed well over the past 15 years, but that’s abnormal! Just look at how well they did in the ’80s!”

Interestingly, this new study disproves that notion. The high bond yields of the 1980s were actually the anomaly—in fact, if you look at bond returns over the past 145 years, there were many periods where they earned negative returns.

Want a few reasons why rental real estate offers the best return on investment compared to bonds?

Here’s a simple one: bonds expire. They pay out for a specific term, then they stop paying. Rental properties keep paying forever.

And not only do they keep paying indefinitely, they pay more over time. With every year that goes by, fixed bond payments become less valuable in real purchasing power due to inflation. But rental income and property value rise right alongside inflation.

It’s actually your fixed mortgage payment that goes down over time in inflation-adjusted dollars! Then one day that mortgage payment disappears, and your rental cash flow explodes.

OK—yes, government bonds offer stability compared to index funds, individual stocks, and even rental property. Bonds pay the same amount every month. They never call you (or hopefully your property manager) about a leaky roof or stop sending payments because they spent too much on cigarettes and Bud Light that month.

But at what cost in returns?

If retirement looms on the horizon for you, familiarize yourself with sequence risk and how owning rental property affects the 4 percent rule so you don’t necessarily have to resort to bonds.

Should I Stop Investing in the Stock Market and Just Buy Rental Properties?

Stocks may be a roller coaster, but in the long run, the good times outweigh the bad. And ultimately, finding the best return on investment requires a diversified portfolio. Stocks balance rental properties well. And when equities go down, residential real estate almost always goes up.

Real estate is illiquid compared to equities. You can buy and sell mutual funds, ETFs, etc. at a moment’s notice. Investment property isn’t quite so easy to get in and out of.

Stock investing also offers truly passive income. Ultimately, rental income can never be as passive as dividend income (even with property management handling general upkeep).

It’s much easier to diversify your investment portfolio with stocks, as well. You can spread $500 across thousands of companies, in every region of the world, in every industry, at every market cap. You’d be lucky to get away with only putting down $5,000 on a single rental property!

Is There a Place for Equities in My Portfolio?

Residential real estate offers excellent returns with low volatility and huge tax advantages. I love rental properties. But that doesn’t mean there’s no place for equities in your portfolio.

If you invest well, rental real estate will start performing for you immediately. Equities will take longer; the stocks you buy today won’t produce significant income for you until 10, 20, 30 years from now. But the long-term returns will grow in value for you at prodigious rates.

Per: Visual Capitalist

Build up your retirement account with passive income from rentals and dividends, and when your peers are still working in a decade or two, their incomes tied to GDP growth, you can offer sympathetic words.

And then you can go back to playing golf and relaxing with your children, having reached financial independence.

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What are your thoughts on real estate vs. stocks? Do you disagree with my dismissive attitude toward bonds? How do you decide how to allocate your assets and investments?

Leave a comment below!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Joseph Oppedisano
    Replied almost 2 years ago
    There are always exceptions to the rule (Facebook, etc….). However, if you took the average of stocks and the average of your RE portfolio like you did (invested over a 5 year period), no way would you have picked 5-10 Facebook stocks in a row. Of course, you could have picked one stock better than RE but the fact that you have to compare the best of the best vs. a RE portfolio even better proves that RE is better than Stocks for the average person. Stocks are more like gambling vs. Real Estate. RE cannot go to zero like stocks .
    Huy Hoang
    Replied 2 months ago
    Well yes you can. If the tenants stop paying rent and you can no longer afford to pay the mortgage. That's zero for you.
    Joseph Oppedisano
    Replied almost 2 years ago
    Christopher – Your example is not even applicable b/c you did not leverage your RE. Leveraging RE is a big value add when comparing to Stocks. Not even a discuss unless done.
    Christopher Smith Investor from brentwood, california
    Replied almost 2 years ago
    Totally wrong. You must compare apples to apples or it is your comparison that is totally without any validity or merit on a risk adjusted basis. That’s finance 101 my friend. Another flaw in your argument is that you need to pick a string a Facebook’s. Again you are totally wrong. Look at Buffett’s portfolio and you will find no Facebook’s or anything remotely similar. What you will find are many very boring stocks that deliver consistent profits year in and year out that were all acquired at reasonable valuation levels. Not to mention the fact his stellar returns on those very boring stocks were obtained without the use of direct leverage.
    Joseph Oppedisano
    Replied almost 2 years ago
    Too bad the average investor is not Buffet. Buying real estate with cash is not a comparison. I don’t need to argue that. If you can return greater than 20% per year in the stock market then good for you. Only you matters anyway. Too bad the average investor can’t to that is Stocks but can in RE.
    Joseph Oppedisano
    Replied almost 2 years ago
    I like the term “smart leverage” in RE.
    Christopher Smith Investor from brentwood, california
    Replied almost 2 years ago
    As I stated before, Buffett himself has noted only a very small percentage of the population will achieve better than mediocre results with stocks. But that doesn’t make stocks a poor investment, it only reflects the simplistic plug and play mentality that the “average” emotionally driven investor applies to buying and selling them. Additionally, the need to leverage real estate to achieve acceptable returns (because you can’t get there otherwise based upon the economic return of the investment itself), certainly shouldn’t be considered to it’s credit, but if anything to it’s detriment. The increase in risk both to the individual, but much more importantly to society when too many Yahoo’s think they can take over priced marginally viable real estate and somehow make it magically “20 percent” profitable through unchecked/irresponsible leverage is part of what got us into a world of hurt in 2008. One thing we certainly don’t need is another Leham Brothers real estate induced debacle.
    Joseph Oppedisano
    Replied almost 2 years ago
    There are bad stock market buyers as well as RE buyers. There are plenty of broke day traders and bad RE investors but we are not talking about the worse of the worse or best of the best…. Simply average and even though you don’t agree the average RE investor makes 20% ROI easily vs 8% in the stock market. Just the way it is!
    Brett S. Investor from Plainwell, Michigan
    Replied 10 months ago
    Great article. Reinforces the posts I put on this board from time to time and my own strategy I used to get my net worth where it is today. 50/50 equities and real estate for ~20 years so far has done well. Only things I'd add is that rent is much easier to spend than capital gains if you're not careful ;) and stocks have a lower tax rate so it pushes into the best performer.
    G. Brian Davis from Baltimore, MD
    Replied 10 months ago
    Thanks Brett, and glad to hear you've seen such success from that formula!
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 8 months ago
    If you look at stocks vs real estate over the past, oh I don't know, say two weeks, then the difference becomes even more stark!
    G. Brian Davis from Baltimore, MD
    Replied 8 months ago
    Haha, seriously!
    Terry Johnson Investor from Mooresville, NC
    Replied 4 months ago
    I enjoyed the article Brian and would like to see more like it on Bigger Pockets. I’m no where near balanced personally (about 90% equities and 10% real estate), but working to shift ultimately to around 80/20. Obviously that still keeps me heavily weighted in equities, but my motivation is more about diversification that returns. My experience is the returns are slightly better in real estate, but the one thing your article didn’t touch on is effort. I have two advisors that do all the heavy lifting with managing my equity and the like investments and I play somewhat of a minor role. In real estate, there’s a lot of effort in finding, rehabbing, maintaining, etc. When one is considering the returns between the two, they also must think about how much time and effort they’ll contribute to obtain them. And hence, why I couldn’t shift to more than 20% of my portfolio into real estate. Again, thanks for excellent article!
    G. Brian Davis from Baltimore, MD
    Replied 4 months ago
    Thanks Terry, and you're absolutely right, investing in real estate takes far more effort than investing in equities, at least if you invest passively through index funds. If you're just looking for diversification, I'd consider investing in a few private REITs, which can be done entirely passively. Best of luck!
    Tamar Hermes from Los Angeles, CA
    Replied 4 months ago
    @G. Brian Davis This is such a great article with clear illustrations of how Real Estate is the best way to grow financial independence. What convinced me the most was that I do not control the stock market, so I have a hard time understanding it. Real Estate, while there are variables I cannot control, still follows logic. I can track it, so I am 100% more confident.
    G. Brian Davis from Baltimore, MD
    Replied 4 months ago
    Thanks Tamar, so glad to hear the article was useful for you!
    Lisa Bennett
    Replied about 2 months ago
    Well done, thanks for all of these comparisons and the timelines, *and* your opinions! Now, please write an article on why people shouldn't be putting their money in "savings" accounts! Oh dear! Lisa
    G. Brian Davis from Baltimore, MD
    Replied about 2 months ago
    Haha, thanks Lisa! And as for savings accounts, that's an argument that can be made in a single sentence: you historically lose 2-5% of your wealth to inflation each year if your money sits rusting as cash!