Compounding Stock Market Returns VS Real Estate Returns

8 Replies

I read the Introduction to Real Estate Investment Deal Analysis featured on BiggerPockets, which I found to be an insightful read, but left me with some unanswered questions, which I was hoping you gurus here could help answer.  


In the author's example, the total return on investment (after tax benefits, appreciation, and equity) = 23.71%/year, which sounds amazing. However, it looks like this % is only based off of the initial investment basis:  the down payment.

On the other hand, even though the stock market only returns 8%/year on average  in the long run, that 8% you earn is then re-invested into your investment basis each year.  Therefore, your returns from previous years contribute cumulatively toward your investment basis, which the 8%/year for the subsequent years is based off of.  This illustrates the power of compounding.

It is compounding like this that I didn't see him touch on in his real estate investment deal analysis. Am I missing something here, does compounding exist in real estate? And if not, why is real estate investing superior?

@Mark L. It does, but not the way you would think.  In real estate, to experience compound growth, you would do is take your "dividends," your cash flow, and re-invest them in another property.  

This requires a little more than investing in the stock market where you could just put money in and never do another thing.  But the returns over the long run will definitely outstrip the returns from the stock market over the long run.

Hey @Mark L. ,

Looks like me and you have very similar questions and I'm curious if you've found out anything further? Basically what I'm trying to determine is if the extra returns I can get from real estate are worth the extra time/hassle/liability/etc. vs. sitting on my butt collecting 8-10% compounded stock returns.

This is going to be very broad generalizations that have dozens of factors that could sway the outcomes big time... But in general it seems like the appreciation/equity end up roughly equaling out to what I could get for stocks. Assuming that that's the case, it all comes down to how much cash flow you can make. Is the cash flow I'll make year 1, 5, 15, and even 30 going to be enough to cover all of my extra time/hassle/liability/etc.?

Ex 1 (Basing ROI off of initial investment): Say you need $65k down and after 30 years you end up w/ over $400k in equity and say $350k in profit... That's about $11-12k in profit per year which ends up being say a 18% return each year off of the original $65k

Ex 2 (Calculating compound returns): $65k * 1.0635 ^ 30 gives a number in the low $400k range so the compounded return of 6.35% is slightly lower than stocks at 8-10%

I'm having trouble determining which method to use in evaluating deals and evaluating real estate vs. stocks since real estate has so many other factors like liability/your time/hassle/needing big chunks of money when stuff goes wrong/tax benefits/etc. whereas stocks are an easy 8-10% compounded returns w/ no work and no liability or anything...

Any perspectives on any of this are much appreciated!

Hey @Kyle Seidel ,

I don't remember all the math, but I decided real estate is worth it.  However, my focus is on purchasing from distressed sellers/distressed properties, which offers you a discount, which I don't believe is as possible with the stock market.  So the returns are better with the discount.. passive income & tax benefits is nice too, as well as building your net worth from equity through paying down the mortgage and appreciation.  

Also, with compounding in the stock market, you don't get much of the benefit until the very end.  What if I want to retire before I'm 65?

Hope this offers you some insight, this was an old post! Time flies!


Hey @Mark L. ,

Thanks for sharing your perspective! I agree that real estate is better as long as you have access to chunks of money and nothing crazy happens with tenants. After some more research to keep things simple I'm going to assume that real estate appreciation/equity  roughly equal what I can make in stocks. Therefore, to make it worth my time/hassle/etc. I want 10% cash on cash returns within the first few years of owning the property. Since part of the expenses are fixed (P and I) you should keep getting a higher and higher cash on cash return each year. Once you want to be done managing the property yourself you can then hire a PM to do it which cuts into cash flow but then not only are you still returning an amount similar to stocks via appreciation/equity... You're also getting extra cash flow on top of that and w/ a PM you are making it basically a passive investment. I love it!

@Mark L.

Every week, like clockwork, this thread pops up. Should I invest in real estate or the stock market? Somebody goes in and plays with the calculators and quickly realizes he can get a better return elsewhere according to the numbers.

The answer is simple. If you have a question about it, of course you should invest in the stock market. Mutual funds are good stuff. Real estate's not for everyone.

But do you really think we can tell you everything we do and how we do it in a public forum like this one? Do you think stockbrokers can do so about their industry? Don't be naive.

@Jim K.

I posted that 3 years ago, I already do real estate.

@Mark L.

Shoulda read more carefully. Sorry about that, Mark!

I pulled money out of mutual funds last summer and invested in several flips. When I sell the 4th one (just listed it) the return on my cash  over the last 10-12 months will be over 75%.

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