Stocks beat real estate over time?

78 Replies

I've been running the numbers and although real estate has been very attractive to me with leverage (I own 3 properties), running the numbers even with leverage real estate is not as attractive in the long run, because although you are earning higher CoC returns on leveraged real estate, the reality is the asset itself is eventually deleveraged once paid off, and it didn't appreciate in value as much as stocks would have over the same period. Over time, the advantage of leverage is removed, and you're left with an asset that barely kept pace with inflation. Even Seattle has been at 3-4% over the last 20+ years when averaged.

If I buy a 100K house that appreciates 3% over the long run (per study by famed economist who called the last crash, Robert Shiller), in 30 years I have 242,726.25 dollars. Not only is this a petty return, since it just keeps up with inflation, I got to pay for all kinds of repairs during that time.

Even if I Buy the house with leverage, due to the low appreciation rate, I'm still not earning that much. When you compare it with stocks:

100K invested in an index fund that earns 10% a year over 30 years, gives me: 1,744,940.22

To make it even worse, a 4% safe withdrawal rate for the actual value of what my assets would be in these two scenarios, I'm making about 900K a year in SWR eligible funds, compared to a paltry fraction of that with my real estate, which is ultimately a job. Even if we continue with the numbers for the above two scenarios, you are making $20,391 a year in profits after expenses (all rents and expenses adjusted for inflation of 3%) from the house being rented out, compared to what I could be making with the stocks $69,797

Am I wrong here? Was initially thinking real estate was the way to go, and it has certainly been good to me buying during the downturn, but I think I may be better off cashing out and putting 500+K to use in the market. Maybe not now, with the run up, but DCA over time.

Yes you are missing a key point. Income producing Real estate does just that - produces income which you have not figured into your equation. 

I got to pay for all kinds of repairs during that time.

No your tenants and the cash flow pay for the repairs.

Real estate can, and I believe should, cash flow over 10% net after leverage. AND it also appreciates. The total IRR of real estate I think pretty easily beats stocks. How much it beasts stocks depends on many factors.

However real estate is very risky. That greater return comes with substantial risk to those that do not know and understand real estate.

Your real estate doesn't have to deleverage.  That's up to you.

Aside from that, are you assuming zero cash flow from your income producing properties?  It seems you are.

I have some capital in paper securities as well @Jack B.   Just based on numbers once your asset is paid off, I agree your return on equity may be better in 'the market'.

However, over 'the market' I have no control and no say. Greece defaults? Doh!  Chinese Yuan re-positions? Doh! Congress can't agree and holds us hostage again? Doh!  You are rising and falling with the tide and CAN DO NOTHING ABOUT IT.

With paper, I can't buy below market value or with leverage (other than some margin accounts) nor can I get creative when purchasing it, nor can I solve a sellers problem or improve it (and the community).

Just a few thoughts off the top of my head.  Going to mention a knowledgeable colleague that loves this stuff.  Look forward to your insight @James Park!

I think real estate almost always beats the stock market. Mostly because real estate is a physical asset that in a down market has some minimal value and everyone still needs a place to live. If a company you had stock in folds you are stuck with nothing.

It all depends though on how you are investing. If you are paying 100% cash for real estate you probably won't get desirable returns in a buy and hold long term. I believe the leverage is the key thing here.

For example, I own property in DC that is leveraged and someone else is paying for the leveraged loan (a tenant). I lived in the property for a time (owner financing) and in my mind, I've made myself that much wealthier because I'm not paying that loan and but I can drive on and take more leverage and eventually someone has paid those loans and the property is 100% mine.

A purchased another house recently, and I plan to rent out my current house in 2-3 years and again it is a large sum of money that I would have otherwise not had to invest in the stock market. I plan to do this 2-3 more times for personal portfolio growth.

I've calculated that in the areas I'm "investing in" my totals real estate portfolio in today's dollars will be about 3-4M when I retire in 30 years. That being said my only investment will be about 15-20% of that total amount (down payments to buy the home). Sure there will be some vacancy here and there but I'm not factoring in cash flow.

I guess you could leverage in the stock market to a certain extent but it can be very risky. In my scenario I'm investing but it doubles as a place to live.

Anyways, just my two cents and one way to look at your return.

Originally posted by @Ned Carey :

Yes you are missing a key point. Income producing Real estate does just that - produces income which you have not figured into your equation. 

I got to pay for all kinds of repairs during that time.

No your tenants and the cash flow pay for the repairs.

Real estate can, and I believe should, cash flow over 10% net after leverage. AND it also appreciates. The total IRR of real estate I think pretty easily beats stocks. How much it beasts stocks depends on many factors.

However real estate is very risky. That greater return comes with substantial risk to those that do not know and understand real estate.

Actually I did factor it in, you do realize stocks pay dividends as well? And if you look at the numbers I posted, the dividends of stocks are far better, because the appreciate more than inflation.

Tenants pay for them in a best case scenario. One bad tenant can make your gains disappear. One LAWSUIT can make your gains and your savings disappear.

Can you buy stocks for 25% below market value? Many investors do. Add that into your ROI equation and you will see some remarkable returns. Stocks have a place in an investment portfolio in many instances...agreed. Real estate does as well. I have enough now to live off the rental income and never "work" another day. My stocks could not do that for me. If I wanted to sell the same dollar amount of stock as i get income from my rentals, the stocks would be depleted. The real estate never runs out of money and will pay me till I die.

Originally posted by @John Thedford :

Can you buy stocks for 25% below market value? Many investors do. Add that into your ROI equation and you will see some remarkable returns. Stocks have a place in an investment portfolio in many instances...agreed. Real estate does as well. I have enough now to live off the rental income and never "work" another day. My stocks could not do that for me. If I wanted to sell the same dollar amount of stock as i get income from my rentals, the stocks would be depleted. The real estate never runs out of money and will pay me till I die.

Yes, but as the numbers above pointed out, over the long run, the benefit of real estate is not as good as stocks. Stocks would provide a higher net worth and a higher income in retirement than real estate would. Real estate wins in the short term but in the long term, it doesn't, which is what my point was. Also, I think real estate is a good strategy to use for short term, and switch primarily to stocks for long term. For example. I'd keep one rental, and my primary residence, primarily for tax benefits. But I'd cash out most of my money and put it in stocks. I'd still be able to live off that now, but in the future, not only will I have a net worth several times higher than my real estate would provide, but just the dividends alone, not even withdrawing principal would KILL income from real estate.

The numbers above point out the logical truth. Thus far I've seen a lot of emotional arguments about how I'm missing key points or what not, but the reality is that these people have not even provided a cogent argument or any facts, and are actually the ones that missed key points in my post. Just emotional arguments based on bias don't compare to the facts. Only one person has realized that the numbers above don't lie. The FACT of the matter is stocks do out perform RE in the long run, both in net worth, and in income from dividends or withdrawals.

the number one reason:

    Banks and other people will loan me money to buy real estate

    I never have to pay back the loans

The investments are free to me.

Banks will not loan me money to buy stocks. If they did, I would have to pay back the loans.

Keep in mind stock volatility. It's easy to say in hindsight, a scenario where you had 100k in an index fund. If you put 100% of your allotted investment in one asset class, where is the diversification your risk? At least with real estate, a big multi can diversify your risk and spread it out over the doors you have. Everyone needs a place to stay, and RE isn't going anywhere.

RE and paper assets are great. It's pretty foolish not to diversify your risk and not hedge your bets, and put it all in one asset class.

@Jack B. Correct, this is not really a debatable fact historically speaking  for sfh averages nationally. Individual results may vary but even Schiller says rent and invest in stocks. This is a rei forum so you can get some individual rei results. Perhaps post the same message on a stock forum for all the reasons how and why stocks beat rei averages and there are many. The difference is not huge but enough to make the most money motivated folks prefer stocks over rei for the long haul.

@Jack B.

Thus far I've seen a lot of emotional arguments about how I'm missing key points or what not, but the reality is that these people have not even provided a cogent argument or any facts,

No one has been emotional and you have received some very rational explanations of the holes in you argument. If you didn't want to hear why real estate is a better investment you shouldn't have asked the question. 

Actually I did factor it in, you do realize stocks pay dividends as well?

Yes it was figure into the 10% return of the mutual fund. That 10% return includes both capital gains and dividends. I am sure you are well away that most investors do not actually achieve that kind of return.

Tenants pay for them in a best case scenario. One bad tenant can make your gains disappear.

When I said that real estate would cash flow 10% net I meant Net. That means including vacancies, turnover cost, repairs management and even capital expenses. That is not a best case, that is the norm. That also pays for mortgage pay down so in addition to appreciation I am gaining equity through amortization of the loan.

but just the dividends alone, not even withdrawing principal would KILL income from real estate.

How did you come to that conclusion.  A quick Google search says the last 6 decades S&P 500 averages about 3.26% yield. That is only 1/3 to 1/4 of what I would expect from real estate cash flow. 

Real estate wins in the short term but in the long term, it doesn't,

I think you have it backwards the tremendous transaction cost of real estate generally makes it a poor short term investment.

Real estate is not for everybody. It appears it is not for you.

Originally posted by @Jack B. :

(...) If I buy a 100K house that appreciates 3% over the long run (per study by famed economist who called the last crash, Robert Shiller), in 30 years I have ($) 242,726.25 

Jack - 

In this example, you are picking a period that includes many market fluctuations - ie a few recessions, etc. (Not to mention a house in a perfectly aggregate area that matches the Case Shiller overall index). If you move the goalposts a little on either end, your 3% can easily double or triple - or halve. Point being, it's easy (too easy?) to manipulate statistics to conform to any general given hypothesis. To get a realistic apples-to-apples comparison - and to see how very difficult this hindsight exercise is in real life - compare a 30 year stock basket to your RE example. Yes, that's a great question you're about to ask - which group of stocks shall we include? 

you wrote: 100K invested in an index fund that earns 10% a year

10%, year after year, for 30 years? Sign me up!

Srsly, pm me that fund!

Best regards!

Originally posted by @Doug M.:
Originally posted by @Jack B.:

(...) If I buy a 100K house that appreciates 3% over the long run (per study by famed economist who called the last crash, Robert Shiller), in 30 years I have ($) 242,726.25 


10%, year after year, for 30 years? Sign me up!

Srsly, pm me that fund!

Best regards!

 I am with Doug here, which fund has managed a 10% annual return for a 30 year period? You're going to have to back that up with some data, I've never heard of such a thing.

I'm with most people on this one. Nowadays, it doesn't make sense to evaluate your ROI with real estate based solely on inflation. Back in the days, people could buy just any property (even the worst ones) and double their investment within 10 years. Now, this is not the reality in most markets of the USA and Canada. People have to make calculated purchases to get good returns on their money and cannot count on inflation only if they want to succeed.

The beauty of investing in RE is that you can buy below market value, thus making an immediate profit, and you have the possibility to decrease expenses while increasing revenues in order to increase value significantly. This cannot be done with stocks, or can it? Furthermore, as many mentioned, if you've made a great purchase, tenants will pay for your mortgage as long as you hold on to your asset. Nothing better than that!

Real estate will most likely be more active than passive though, as compared to stocks, but the long term gains can be way higher if proper strategies are being used.

I am with Jack B. In this topic :)))
Yes, You could buy stocks with a huge discount during the market crash :)))
If you will be an active trader you could make 30% per year, but this means being active/ having a job, as an active landlord cutting all possible expenses and increasing ROI into RE
Yes, I am convinced to buy the index fund performing in average 10% during the last 30 years :))) what do you recommend Jack B. ?

@Jack B.

In my opinion there are other factors you are not including.  Even though they are both "investments" they are not easily compared.  Apples and oranges are both fruits, but very different.  RE has many different avenues to invest in, buy and hold, fix and flip, single family, multi family, wholesaling (what is your return on this?!), private lending, etc. etc. 

In your example you took a $100k house at face value.  As an investor, why would you pay market value for this?  Was the home actually worth $175K and the owners needed to sell so you took it over?  If so, then you missed the other $75K. 

You also spoke about  leverage in your post but did not apply that in your formula.  I may have only put down $10K-$15K on that $100K house, so my investment in the house is not $100K but $10K. 

As others have pointed out, you forgot the rental income, the tax advantage you have gained with depreciation, and the fact someone else (your tenants) is paying this off for you.

With the stock market you look at long term averages, invest your money and over time, if the business does well, it grows.  With stocks you can be very passive. 

In the stock market you have no control over the day to day operations in the companies you are investing in. What was the 20 year return on Washington Mutual Stock?  Enron?  You have no control over the price of the stock. If I buy xyz stock from a broker in Boston, Seattle, or LA the price is the same.

With RE investing you don't put your money in and wait.  You do have to be more active in your business.  You invest in properties that you can increase in value in a very short timeline.  Distressed homes, lease options, distressed sellers, tired landlords, probates, etc.  We solve problems and earn a return for this.  This increases your yield exponentially.  In RE if I buy a 3 bedroom 1 bath home from a person who doesn't want the property, I can buy it 25% less than the exact home next door.  Doesn't that give me an immediate 25% return?  I can't do that in stocks without insider trading.  If I do a fix and flip and turn it in 4 months I can do this 3 times a year all on borrowed "hard money".  I have no money in the investments.  What is the return on that?  Infinite return, I had no money in it. What did the hard money lender make?  $250K loan, 4 points and 12% ($20,000 per flip x3) $60,000 return on $250,000 loans in one year  that is 24% in one year.

To summarize, I feel you need to compare a true real estate investment to the stock market to get a fair comparison.  When you compare cars, a Ferrari and a Ford Pinto both will get you from point A to B.  But one is definitely more fun.  Real estate has never gone to zero value, Detroit may be close, but people need shelter, there will always be tenants.  You can't say that about some companies.

Purely my opinion...

How does RE do vs. Wall Street over time?

Who cares? - that's gambling: speculation.

For me, the point of real estate is primarily income. The value comes from its ability to produce income. How well it does that is what determines its value.

Think about it as if there were no distinction between residential and commercial real estate - that's a financing paradigm when you're considering real estate as an income producer.

Large multi-family properties are valued based on the income they produce in excess of their expenses. So do smaller multi's and SFRs, but with greater vacancy impact.

A property which doesn't produce income can be reduced in value based on how hard/easy it is to fill that vacancy. Easy to fill = less reduction in value and vice-versa.

Another point to consider is that when you hold stock in a company and that company goes under, your stock certificates are only good for lighting the fireplace - you have nothing against which you can foreclose or otherwise recover even a portion of their former value. To my mind, THAT makes Wall Street VASTLY more risky than real property.

Again, purely my opinion - your mileage may vary widely.

@Ned Carey

@Jack 

is this Real Estate Investing?

I take money out of my self directed Roth IRA and lend it to rehabber for 10% and get paid back the 10% in three months and do it again.

If the rehabber doesn't pay me I foreclose.

Can you do that in Stocks?

Mr. Merrill Lynch or Mrs. Charles Schwab gives no guarantees

@Jack B.

@Jack B.

I literally started with nothing, wrote a book about my experiences.  I bought my first house with no money 100% financed, see Bigger Pockets Podcast #82 for the story.

Then I bought the next 10 properties, 100% financed.

Then I started buying distressed properties.  Bought a property worth $600,000 with a title problem for $4,500.

Then bought a 12 year old house worth $330,000 for $30,000 and first tenant paid $2,050 a month in rent.

All of the above can't be done in the stock market.

1.  You can't buy stock with no money.

2.  You can't repeat that 10 more times buying stock for no money.

3.  You can't buy $600,000 worth of stock for $4,500

4.  You can't buy $330,000 of stock for $30,000 and have a monthly dividend of $2,050.

Sure you can lose money in real estate, no every deal with be a walk off home run in the World Series (That's only been done twice, once in Pittsburgh).  and you can lose money in the stock market.

A friend of mine quit his job to day trade stock.  He had ben doing "pretend" for years had it all figured out and felt that he could replace his total income DTing.  Somehow when he started using real money and real trades, things didn't have the same result.  After 2 years and losing everything, he quit DTing.  Real estate investors can have bad experiences also.  Another friend of mine declared bankruptcy and lost 32 rental properties, and lost his desire to ever buy another property. 

Did I miss the part where it says that we can't do both?

Dividend income gleaned from the stock exchange is nothing to sneeze at. Yes, I know, taxes.

Liquidity is another reason to diversify into stocks. One can liquidate a multi-million dollar portfolio in seconds without detecting a blip in the market. Real estate transactions are measured in geologic time by comparison. If you need liquidity, you'll be calling a trusty BP affiliate and agreeing to sell them your property for nickels on the dollar.

This is 'Murica people, we can do both!

Ill settle this with one simple statement.

Walk into the bank.

In one hand, say I have 5000 Stock in *insert mainstream company here*

In the other hand, say I have a free and clear title to a RE property.

Id like to get a loan. Which one would you prefer as collateral?

10/10, Bank chooses RE.

In all reality, even the banks know, RE is worth more.

A Company can wash out in a heart beat. Become obsolete in a heart beat, get sued, get shut down, get shut out, fail.

A property can have a bad tenant, yes. And you can evict them. You cant evict a CEO thats a jackass. HPs Old CEO was proof of that. She was an idiot. Damn near crashed the stock, and damn near ruined the company. It took an act of God for the Board to replace her. 

I can evict a tenant with 30 days notice, because my leases are written on my terms. HPs Stock rules and restrictions are written on theirs.

The difference is direct value, liquidity, Cash flow, and control.


HP stock is only valuable to me when I sell high, and buy low. Theres no guarantee a company will fluxuate in a positive shift.

My RE is going to increase in value, I can immediately leverage it, I get monthly Dividends from it, and as long as I buy smart, I get great margin, far better than 10-14%, which is the average DOWJ or NASDAQ.

Wow, the comments here are certainly entertaining.  I love it how people's emotional attachments to real estate reallys come out.  

When I was building my client base years ago as a stock broker and futures trader i met some people who were in one camp or the other, real estate or the stock market.  It was black and white.  never, not once, did i meet someone who diversified and did both.  

Firstly, I would make the argument that you really cannot compare the two as most people do, which is in terms of risk and reward, because their fundamental structures are entirely different.  Taking a look at some of the most glaring inaccuracies i've read:

You can't buy stock with no money. yes, you can.  it's called the carry trade but only the wealthiest can play that game, and then return aren't spectacular

You can't repeat that 10 more times buying stock for no money.  see cary trade

You can't buy $600,000 worth of stock for $4,500.  you can't do that in any business.  you can CONTROL $600,000 worth or RE for $4,500...and yes, with $4,500 you can control a huge amount of stock thanks to options, futures, and options on futures.  in fact, $1,000 gives me control of 42,000 gallons of crude oil.  

You can't buy $330,000 of stock for $30,000 and have a monthly dividend of $2,050.  again, yes you can...but the stock's dividend would have to be so outrageously high that it would be fundamentally unstable, and not work in the long run.  so here, RE is the clear winner.  

There are dozens of others, but this is getting a little long.  

One massive difference between these two business models is something that only @Jeremy T. brought up...liquidity.  and with liquidity comes speeds.  the stock and futures market is the fastest way to build wealth, no question about it.  Anyone heard of high frequency trading?  these guys make millions each day trading in the milliseconds.  

However, with liquidity and speed comes a massive edge real estate has over stocks in that only with real estate is there a chance of finding a smoking deal no one has discovered yet.  

Plus, with real estate you have a lot more control over all aspects of your business.  for the most part, it's just managing risk/reward ratios when it comes to stocks since it's entirely about speculation.  there's no screening of tenants with stocks, nor is there the ability to negotiate...both of which RE allows for.

In the end, to say that one is better than the other because of "X" is just plain lunacy.  I know people who make a living playing poker.  they say it's better than any other investment out there.  do you think it is?  I don't, but i am in no position to answer having never played it for real money.  

But there's one massive major advantage stock and futures trading has over everything else (all businesses and investments): you can make money when the market is going down.  

Nowhere in real estate can you say to someone, "i will sell you this property today for $750,000 (which i don't even own), and i'll buy it back at some point in the future once prices fall."  

Selling something you don't even own and profiting from the investment's decline in value is something only stock, options and futures traders can do.  Lots of people made a killing in 2007 - 2009 when real estate and the stock market were crashing.  were they invested in real estate? no.  they were shorting the banks, lending institutions, builders, REITs, etc.  in essence, they were traders.  

of course with this massive power comes massive risk.  after all, in theory your losses are unlimited.  at least with real estate the most you can lose is your initial investment. 

last but perhaps most important is real estate's trump card, scarcity.  As Lex Luthor put it so well in Superman, "it's the one thing they aren't making any more of."  

So as you can see, each investment or business has its advantages and disadvantages. 

in short, you cannot compare real estate vs. stock trading/investing. there are far too many vastly different independent variables. Better to find what you are better at and/or what you enjoy more and what suits your personality.

Do you need complete control or the need to physically "own" something? do real estate

Are you more statistically inclined? do stock and futures trading

Can you leave you money parked somewhere for a few months/years? do real estate

Do you need the biggest bang for your buck regardless of risk?   try roulette :) 

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