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.

@Jack B. 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. 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. 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. 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. 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.

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

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!

@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.

@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.

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 :)

As someone who has owned real estate, stocks and businesses, all I can say is that the analogy used in the original post is flawed, and therefore all subsequent discussions referring back to that analogy are flawed. Owning a non-controlling share of a company (i.e., typical stock ownership) is not analogous to real estate investing. It's analogous to owning a REIT or a property purchased at market value. I'd be willing to bet that nobody on this forum purchases publicly listed stocks at anything but market value -- if you do, you have a competitive advantage that isn't applicable to this thread. Likewise, I assume that nobody on this forum purchases investment real estate at market value (without some other income producing benefits). So again, the analogy of stock ownership to investing in real estate doesn't hold. The correct analogy to investing in real estate is building your own company, where you have a controlling stock interest. You make decisions on what to do with your asset (property or business), you make decisions on how best to grow the value of your asset (property or business), you make decisions on if/when to sell your asset (property or business), etc. I have historically earned nearly 20% (IRR) on my real estate investments. I have historically earned more than that on my business investments -- but that's because I had a controlling stock interest in those businesses -- I didn't just purchase a non-controlling interest in a business at market value. Just like I didn't purchase a non-controlling interest in those properties at market value. So, if you want to compare buying publicly listed stocks at market value with buying publicly listed real estate at market value, that's a fair comparison. And if you do that, I agree with the OP that stocks win, hands-down! But, again, that's not what people on this forum tend to do. I would purchase real estate (at below market and with a controlling interest) over publicly listed stock any day of any week of any month of any year. Hands down. That said, if you want to compare real estate investing with owning stock in a business that you control, I'd probably again go with the stock ownership...though for many people (given their business acumen), I'd probably still argue real estate is the better investment.

@Jack B. It's ironic that you say other posters are making emotional arguments. I suspect that since you are a math guy, you will see the fundamentals of this sooner than later.

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.

Stocks beat real estate over time?

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

10y

I think something someone retired might consider with comparing one vs the other...is one can click a button, click another button years later and end up with a healthy return. During that period they were 100% off. When total time is factored this part might become as valuable as any return could be. It is not really an either or question but what fits best perhaps. I know retired guys taking out multi million loans to continue their REI investments via NNN, I am pretty sure they wish that was not part of their retirement plans. They are not complaining but just saying.

Stocks beat real estate over time?

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