5 Million in Rentals or 5 million in stocks
If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.
Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.
Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?
If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.
Is this true?
More or less, it is true. If the 250k is your profit (after interest, prop tax, maintenance, utility bills, PM fees, etc), you would be a lot better off owning RE assuming you or your PM can manage it properly. Note that the depreciation will eventually get taxed when you sell. Let's say you bought a property for $1M and now it is depreciated to 0 since you held for more than 27.5 years. On the sale, you will pay uncle sam back $25k of that so it is a very long tax deferral.
As a RE investor myself, I pay very little taxes because on paper, it is very hard to make money w/ the many expenses of RE ;)
@Mark Weins
It all depends on your goal and personal situation. Using $5M as your example, there are clear paths to chose in my opinion.
If I was single, retiring, I would go with stocks. It's a no brainer.
If I was single and had other wealth aspirations, I would likely still go with stocks.
HOWEVER, depending on personal goals and situations, I would go with real estate.
Family, kids, generational wealth building, etc... go with real estate.
The reasoning is very basic and we should all know them by now. There is more to real estate investing than just cash flow, appreciation and taxes.
If you were to tell me $1M or less, that's a different story. All roads would lead to real estate... initially.

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The stock market can be very unpredictable. Some people's portfolio is currently 30% down from where it was.
I can buy distressed properties from motivated sellers and make way more than 10% COC returns.
Then these properties minus some repairs here and there, taxes and insurance leaves a lot of cash flow.
I could also put that 5 million into tax liens. I can get around 10% interest on one's that get redeemed, but my returns are through the roof on the houses that don't get redeemed and get the deed to the house.
I could make way more money with that 5 million dollars in RE than the stick market knowing what I know.

I can't answer this in a two-paragraph response and you wouldn't know if my answer were correct anyway. You can do the research online or read a few books to see how real estate out-performs the stock market.
If you have $5 million cash, you can invest in $5 million worth of stock. If the stock increases 10% in value, you gain a 10% increase on your $5 million, or $500,000 profit.
If you invest $5 million in real estate by putting down 25%, you'll be invested in $20 million in real estate. If the real estate gains 10% value, you'll earn $2 million profit.
That's just one example of how real estate can out-perform stocks.

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Putting all your money in any one investment type is not a good idea-ever. My wife and I are retired we live on the cash flow from rentals plus social security. Cash is returning great interest these days and we also have some stocks and index funds which are OK but my least favorite due to 'management' costs. The rentals are providing by far the best returns and we are REI pros so paying very little income tax.
What I like best about LL'ing is we don't have to 'sell' anything to get paid and have cash. We get that every month when the rent gets paid. Yes, it takes a little work but we are retired and we do not do any heavy lifting. Whatever you decide diversify, stuff happens!

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Be the bank is an alternative to both.. no tax bene's though but if done right consistent high rate of interest returns.

Quote from @Nathan Gesner:Not a fair comparison. You're bringing leverage into one of the equations. Take what you did and change it to a loss and he loses $2M in real estate vs $500K in stocks.
If you have $5 million cash, you can invest in $5 million worth of stock. If the stock increases 10% in value, you gain a 10% increase on your $5 million, or $500,000 profit.
If you invest $5 million in real estate by putting down 25%, you'll be invested in $20 million in real estate. If the real estate gains 10% value, you'll earn $2 million profit.
That's just one example of how real estate can out-perform stocks.
As for the original question, there is no such thing as all or nothing. If you want hands off returns, but you like RE, you can buy RE stocks (REITs, builders, hotels, PM companies, baskets of commercial properties mixed up or industry specific, etc). You don't have to be a landlord to be invested in RE.

@Jay Hinrichs
This
Financial numbers aside, one has to take into account that owning rental properties is not a passive investment. On-going effort is required for repairs/maintenance and tenant issues. Even if you hire a property management company, you still have to manage the manager. Property management companies can go up and down in service quality. You need to keep an eye on it.
Real estate properties are also less liquid than stocks. When you buy, sell or refinance, it will take time, and there will be legwork and various financial costs.
Not trying to sway you either way, just pointing out some characteristics of rental property investments.
For investing in stocks, I would use good diversification, and not put all my eggs in one basket.
Best of luck!
Paul

Depends what your end game goal is.....if I had $5million I am looking at enjoyment of life vs. trying to get more money. Given that, I would probably go with rental properties at good values in destinations I like.
We manage vacation rentals for people that have $5million worth of rentals and this is their reasoning.

Quote from @Mark Weins:
If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.
Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.
Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?
If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.
Is this true?
One thing you're terribly miscalculated is with stock index such as SPY,:
- the dividend yield is only 1.5%
- in the long run, index never appreciates faster than money printing rate, since the money printing game by Fed is slower now , having stock averaging 10% per year for next 10 year is almost impossible, it's almost similar like home appreciation in 2005-2007 is also impossible to be repeated.
- the last 8% average of S&P is only possible due to Quntitative Easing
- Also with stock, you CAN not enjoy the money unless you sell (or you borrow your portfolio), even if you have $500M, you can't enjoy one dollar of profit of it until you sell it again and buy, but you have to buy at the same price. If today SPY is close at $414; tomorrow you by at $414 again. In real estate you could alway sell at $1 mil in CA and buy $100k in dayton Ohio LOL.
- now the difference with real estate is, you can always buy-sell or buy-rent-sell or even buy-neversell and still get the money while having refi/HELOC. In stock you could do this only by borrowing from your portfolio (usually 1/3 of it).
- Since house value almost can't go down considerably, in stock you could go down a lot, esp. in bear market ; thus if you have leverage you will hit margin call, we dont have that in real estate as it's fixed rate for 30 years.
- from inflation perspective, investing in real estate win because we pay with cheaper money for 30 years. With stock , you can't borrow to buy stock with 30 years loan.

However, if you compare between Stock Index and Commercial Real Estate ; I agree investing in stock index has better reward/risk scenario than Commercial, especially if you invest at bad CRE sector like hotel/retail/office. The chance your 5 mil becoming 0 with CRE is 10-15%. With stock index it's like 0.01% chance at very least.
A safer alternative, is to diversify asset, so some goes to equity, some goes to stock index, some goes to life insurance, and also debt investment such as HML/specialty financing.
@Paul S.
Well said.
This was my point. Depending on your end goal, situation, marital status or kids, etc.
When people ask this question and use the word "retire", I associate it with not working any longer. RE requires work, no matter how you run it. Comparatively, Stock market is almost no work.
Putting $5M into a diversified portfolio or a set of aristocratic stocks with good dividends will pay you a health living stipend.
Navigating $5M into RE will likely net you more in the long run... but you are NOT retired.
In the end, if you are single, what did the additional 10, 20, 50, or 100M in RE do for you when you are dead? Unless that is your personal goal. $5M in stocks at 4% or more returns is a nice worry free lifestyle that will likely increase if you are single and do not need to spend more than 100K/year.
Quote from @Jay Hinrichs:
Be the bank is an alternative to both.. no tax bene's though but if done right consistent high rate of interest returns.
I look at the interest being front-loaded on 30-year mortgages and agree with Jay. I want to know how to get onto that side of the business to diversify!
Whether stocks or real estate, it depends on what you know, your interest, and your priorities. Do what you understand and have a sustained interest in learning and managing. If you like both, do both. It does not have to be one or the other.
I appreciate the control real estate provides. We have no control over the decisions made that impact stocks (unless we have controlling shares) on Wall Street. With real estate, we are the CEOs, Win or lose, we have a personal responsibility to stay informed and we have control over the decisions we make.
With real estate, Uncle Sam allows $250K single or $500K couple tax-free with section 121; capital gains deferrals with 1031 exchange (into properties for more growth and income; Prop 19 allows your tax basis to be transferred three times when 55 or older on a primary residence; with Roth's, you can be a lender for real estate and get the monies tax-free, etc, etc.
Real estate is often leveraged: Put down 20% of the value, but control 100% of the property. With rentals, the loan pay downs are made by someone else. When equity happens, a little has been put down, but the return can be substantial (especially with long-term holds). The return is on the full value of the property with little or no money down.
However, not everything is about money. Real estate allows us to be housing providers with many tax advantages because the government can not afford to house all the people.
We can invest in communities where we live and want to improve.
Utilize Sec 121 and daisy chain your primary residence to harvest tax-free appreciation so you can live in different parts of our beautiful country (especially when you are in retirement). Owning real estate also stabilizes our ability to live where we want to live and makes that possible for our children and our extended families. The benefits can extend beyond the monetary benefits and be passed on beyond our time on the planet.
Property management has given me the opportunity to meet so many nice people. I've had one difficult tenant in all my years, but overall, tenants have been respectful to the property and communicative.
It is true that even with all the tax write-offs with depreciation when sold, there is depreciation recapture for properties depreciated. Rental properties kept for a long and then sold without doing a 1031 exchange can eat substantially into gross profits (even to the point where you owe when sold). You need to invest with your exit plan in mind and work with a good real estate tax professional.
I love real estate. There are monetary and non-monetary benefits and so much flexibility on what you can do and how you can do it. There is much to learn, many opportunities to try new things, and many positive people in real estate.
Although I own stocks and mutual funds, hands down, if I had to choose one, it would be real estate. :-)

Great responses here about issues that matter like level of effort involved, marital status and legacy, use of leverage, your own personal goals and what retirement looks like and what you want to do, etc. All of those factors are critical and that’s why you get different responses to your hypothetical. From a tax standpoint I would want to know where the money is in the first place - taxable account, tax deferred account or tax-free account. I assume taxable but that impacts my answer. I think if I had to truly play the game of “would you rather” and only go with one or the other I would go with the stock market (equities and fixed income), but that does not mean play SPY or VOO only. I personally like the idea of clicking the mouse in retirement and being that easy to liquidate and call it the day. Think of Will Ferrell in the opening scene of Get Hard when he shows up to the office! I enjoy the stock market overall because it’s a game and resets everyday. That will be my “work” when I’m done but still want to keep somewhat active and do something (besides spending time with family or volunteering).

Quote from @Greg M.:
Not a fair comparison. You're bringing leverage into one of the equations. Take what you did and change it to a loss and he loses $2M in real estate vs $500K in stocks.
Stocks can't be leveraged, therefore we can't consider that benefit? That's ridiculous!
The loss only matters when you cash in your chips. You wouldn't hold stocks until they lose 10% and then sell, just like you shouldn't wait for real estate to lose 10% and then sell. You sell when you are ahead, so it only matters to look at the gains.
I have a relative that's been investing in stocks since the 80s and he is now 86 years old. His net worth was $2 million in 2020 and he was receiving dividends of about $45,000 per year. I started investing in real estate in 2016, my net worth is better than his, and every year I bring home 3x what he does.
Real estate has some benefits that the stock market doesn't. If you use those benefits to your advantage, you will outperform the stock market easily. Again there are plenty of websites and books discussing the advantages in detail.
If you're not sure, invest in both and see what happens.

Quote from @Nathan Gesner:I think you missed my point. You said that "If you have $5 million cash, you can invest in $5 million worth of stock." and then said "If you invest $5 million in real estate by putting down 25%, you'll be invested in $20 million in real estate."The loss only matters when you cash in your chips. You wouldn't hold stocks until they lose 10% and then sell, just like you shouldn't wait for real estate to lose 10% and then sell. You sell when you are ahead, so it only matters to look at the gains.
Real estate has some benefits that the stock market doesn't. If you use those benefits to your advantage, you will outperform the stock market easily. Again there are plenty of websites and books discussing the advantages in detail.
If you're not sure, invest in both and see what happens.
Why are you assuming that the OP will leverage the RE and not the stocks? When you put leverage into only one side of the equation, you get meaningless results. It'd be like me saying, with $5M you can buy $5M worth of RE or you can leverage that money and buy $10M worth of stocks. If they both move up 10%, you've made $500K with RE but $1M with stocks. See how stocks are the better investment!
Also, if you're going to bring leverage into it, you need to bring the cost of that leverage into it. Leverage isn't free. You also need to bring in the additional risk of that leverage.
And if losses only matter when you cash in your chips, then gains only matter when you cash in your chips. The reality is that they both matter when they occur.

Totally agree with @Nathan Gesner. It's all about the leverage with real estate, having a tangible asset, and the TAX ADVANTAGES. Plus, the stock market is volatile and out of your control. My husband's 401k lost 25%....right before retirement. Not to mention so many stocks are way overvalued because investing fundamentals are out the window. No thanks. Not for me. But you do you.

This is a great question @Mark Weins and something alot of people struggle with understanding.
First off...
I am not a financial advisor and I am not giving financial advise :)
But here are somethings to consider and run by your financial team.
1). You can't buy stock at a discount. If Microsoft is selling at $100 you need to pay $100. You can however buy real estate at a discount. For example, you can buy a property that is valued at $100K for $80K which instantly creates $20K in return.
2). You need to understanding returns and how they are calculated. Historically we can say the stock market has performed at "x". This is usually on the portfolio value and is only realized when sold so you can't really gain access to that "return" unless you sell it. This would force you to buy dividend paying stocks that might not perform at the same "x" you mentioned in the question. If they did return "x" you will need to make sure that the companies can perform in the future as it is my opinion that investing in the stock market is an active strategy if you want to protect your wealth. What I mean by this is that you constantly need to be evaluating your portfolio manager and / or the index you are investing in to make sure it still has the underlying fundementals that had you invest in the first place.
3). Real estate produces 4 types of returns. This includes cash flow, appreciation, depreciation, and ammortization (your tenant is paying down your mortgage). If you add all of these up it is really hard to find a stock that can outperform real estate on a risk adjusted basis. You can also gain access to the increase in equity in real estate and might not be able to do that in equities depending on the volatility of the underlying stock. Most people don't understand risk adjusted return and only look at the "return" aspect when investing in stocks. Understand what could happen on the downside of investing in stocks / indexes / etc and the ask yourself if you can handle that.
4). It is my experience that if real estate goes down in value so will equities. However, if equities go down in value that doesn't mean real estate will. This is an important factor to understand when analyzing risk.
I have bought and sold businesses and invested in a lot of different asset classes and I can tell you that I haven't seen anything that can outperform real estate on a risk adjusted basis.
And if I had $5M I would invest the vast majority of it in real estate and then use a small portion of it to buy a business or businesses to make active income as this is what we currently do.
We make our money in business and store our money in real estate which creates wealth while we are making money. Few people understand that you need a source of active income and passive income as they grow at different rates. It is much easier to scale a business to $1M a year than it is to make $1M a year in rentals
I hope I have you asking yourself some great questions and am here if you need anything.
Have a wonderful day!
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Quote from @Greg M.:
Why are you assuming that the OP will leverage the RE and not the stocks?
Because I don't think it's possible?
Please explain how I can purchase $20 million in stock with just $5 million of my own money.

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Quote from @Mark Weins:
If I was retiring with 5 million dollars in the bank, and I could only invest all my money into either stocks or a real estate portfolio, I fail to see how one would decide to invest the money into real estate. The S&P 500 index can average 10% returns per year on average with 0 work involved, while owning real estate/rentals is an active business.
Owning 5 million dollars of real estate from what i've researched, you can make 250k a year from rental income, unless you get 5% appreciation on property value per year (assuming you have 20% equity and a 25 million dollar portfolio) then you would earn 1.5 mill in yearly property value increase + 250k rentals.
Assuming I am retired and the RE rentals are my only source of income would the 4% yearly depreciation (1 mill for 25 mill portfolio) mean that I avoid getting taxed entirely if my rental earnings + selling properties is equal to under 1million dollars?
If this scenario is true then investing in stocks I would make 500k per year, but with real estate I would make 250k a year through rental income, 1.5 million each year in property appreciation, and have untaxed income for anything under 1 million dollars a year.
Is this true?
First, I invest in both the stock market and real estate. And in my opinion, each has its pros and cons and neither one is 100% superior to the other in every way. And so, I believe a well-diversified portfolio should have both asset classes.
To answer your question: it's a very different thing to say:
"The stock market has performed about 10% over the last 10 years"
versus:
"The stock market *will* perform about 10% over the *next* 10 years"
(or 20 years or whatever period).
The first is a fact. The second is highly speculative and no one really knows for sure (and anyone who says they do know is just guessing).
As an example, if you invested in the start market in February of 2009 then after 10 years you would have a -3% return. And the stock market has historically been much more volatile than real estate (with many more down periods).
A few years ago, a group of economists decided to take on the huge task of measuring the historical returns of all the asset classes over a much longer period. So they examined records back to 1870 (i.e. for about 150 years). And they called this study "The Rate of Return on Everything".
And they found that equities (meaning the stock market) and housing ( meaning residential real estate) performed about the same. And that was about 7%.
https://www.frbsf.org/wp-conte...
Note this didn't take into account the tax benefits of real estate which are usually much better then the stock market (and would thus make equivalent returns tilt toward real estate).
But that also doesn't make real-estate "better".
Because they also saw that returns on different asset classes have changed over time as the structure of the economy changed. This is something that many investors miss (who often assume the factors that caused past performance to occur will stay the same forever).
So who knows what will happen to the U.S economy in the next 150 years. But we can safely say that it's virtually guaranteed to be a lot different than the last 150. And as just one example: if certain trends continue, the US won't even be the largest economy in just 20 years (nor the leading economic power). If this happens, it will almost be guaranteed to have an effect on U.S stock market and real-estate returns (and cause them to change from the past).
So in my opinion it's a mistake to look back at past market returns and assume that guarantees future results of a certain amount (and then make plans as if the #s are guaranteed). And since no one can really predict for sure what will happen, I believe it's better to reduce the risk of guessing wrong by diversifying into multiple asset classes.

Quote from @Ian Ippolito:
Quote from @Mark Weins:So in my opinion it's a mistake to look back at past market returns and assume that guarantees future results of a certain amount (and then make plans as if the #s are guaranteed). And since no one can really predict for sure what will happen, I believe it's better to reduce the risk of guessing wrong by diversifying into multiple asset classes.
Yes this is what I see why this kind of comparison is bit dangerous.
One matter of fact in today's economy is there're lot of disconnection between actual real economy (which is technically pretty bearish except for unemployment), while stock market has been rallying. But the fact that stock market is rallying, if we examine it closely, it happened only because one sector is rebound very quickly, which is tech economy. Since half of S^P500 index is heavily influenced by three stock only MSFT/AAPL/AMZN/GOOGL this gives illusion that stock market is doing well, while performance between tech heavy index and small cap index is varying in great deal.
Real estate is however, can be divided into multiple sub-investment. Is it direct rental/OO, is it cash flow market ? is it appreciation ? is it commercial syndication like multifamily,hotel,self-storage,industrial or NNN ?
They are all an animal in its own world, even we can't say "the return of real estate is 7%" because even if we have to use previous historical fact, the return is very different from one asset class to another asset class.
If one invest in the hotel syndication in last three years for example, there's 25% chance that all your investment is wiped out to ZERO.
Which terribly speaking, making "stock index investment" is way better than "real estate".
But, if one is comparing to direct home ownereship in "California/Hawaii/Colorado" in the last 10 years, then we could say confidently that real estate would be midly better than stock index investing.

@Nathan Gesner and @Greg M. as a point of clarification only. With stocks Reg T margin could be used to leverage so you could theoretically have $10 million worth of equities from the start. I’m not endorsing this, but just going along with hypothetical. You can obviously get burned if your equity allocation went against you and run the risk of margin calls. The flip side is also true where you can make out well. The equity option, if you had to choose only one, is more vulnerable and susceptible to volatility as you know.

Quote from @Jeff Nash:
@Nathan Gesner and @Greg M. as a point of clarification only. With stocks Reg T margin could be used to leverage so you could theoretically have $10 million worth of equities from the start. I’m not endorsing this, but just going along with hypothetical. You can obviously get burned if your equity allocation went against you and run the risk of margin calls. The flip side is also true where you can make out well. The equity option, if you had to choose only one, is more vulnerable and susceptible to volatility as you know.
The good thing about this if we could just follow JP Morgan Collar trade where they're actively collarized their portfolio so even if the stock is crashing they're only losing money a bit, JPM trade has collar of 5% margin to downsid and 5-10% to upside. By collarizing/deulta neutral the portfolio one would not lose money at all (or lose a bit) if there's crash. In the meantime they could gain money from dividend redistribution if there're any.
One very not smart thing to do for investor if they just put all their money into one index and never learn about hedging.
This one aspect of hedging that makes me confident to invest in stock index as well, and way way way has higher reward/risk compare if I give money to a syndication that build a ground up hotel somewhere in North Dakota LOL