Real Estate vs Stock Market
Member since 2022 · 17 posts · 10 votes
Real Estate vs Stock Market
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Jacob St. MartinPro Member
Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votesHello Felix! I think there are many benefits of investing in real estate over stocks.
Normally real estate will get you higher returns. 20% in the stock market is actually quite good. Depending on the type of real estate you invest in you might be able to beat that in straight ROI or you might be slightly below. However, if you consider all of the way that real estate makes you money your return should be much higher. Let me break it down:
- Cash flow. With stocks you only make money when you sell (other than dividends but unless you have a huge amount invested this is probably not making you a lot). With real estate you are getting your returns regularly. With LTRs you might get 10-15% with STRs you can get more like 20-50% depending on the area and how good you are.
- Appreciation. This depends greatly on the area but typically ranges from 2-5% annually. However, this is not 2-5% of what you put in, this is 2-5% of the purchase price. Say you house hack and are able to put 3.5% down on a 1 million dollar property which is 35k. If that property appreciates 3% in one year, your value goes up 30k which is a 86% ROI just from appreciation. This is the power of leverage which is a tool you don't have access to in stocks.
- Tax Savings. You can claim depreciation on real estate investments. Take the value of the property (lets use the 1 mil property again), subtract the land cost ( we will say 250k), then divide by 27.5 (which is the number of years you can depreciate the asset over, then multiply by the income tax bracket you are in (let's say 30%). That means you can take 750,000/27.5*.3 or ~$8200 off of your taxable income every year for the next 27.5 years.
- You can re-leverage once you have built equity to keep your capital working hard for you, which you can't do with stocks.
- Stability. Rents almost never go down if you are in fundamentally solid markets. Stocks however, can be much more fickle and fluctuate based on global events.
- Tax deferment. In real estate you can do a 1031 exchange when you sell a property to defer paying capital gains tax. This means that when you reinvest the money you have a larger principal to work with and thus can buy a larger asset that should produce higher cash flow and appreciation vs with stocks you have to pay capital gains when you sell.
My last comment would be that if you meet the right people, you can get all of these benefits without using too much of your time. For instance, I am looking for a partner on a deal right now where the partner would likely get 20-30% ROI and get all of the other benefits I mentioned, while I do all of the work and you sit back, relax, and watch the cash come in. Reach out if you want to discuss further. I hope this was helpful!
27 Replies
- Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes3y
Quote from @Allan Smith:
Quote from @Robert Reynolds:
I definitely dabble in stocks, mostly index funds, but my main focus is on real estate. My main argument for real estate over stocks is that you can use leverage in buying real estate where you can't with stocks. Let's take an example of a person who is renting in LA. A one bedroom goes for about $2k where I live. You are spending $24k a year paying off someone else's mortgage. You can take $24k, an instead put that down on a condo for $500k, and rent out the extra bedroom. Appreciation has been well over 10% on average, but let's take 5% appreciation. That's $25k a year, and you can double your initial investment after year 1. That's not included principle pay down and money saved not paying rent. For investment properties obviously the numbers change and I'd love to talk with you about different strategies that work out here in SoCal.
I think a lot of folks in real estate don't realize there are a lot of ways to Leverage in the stock market. I have a buddy that borrows had 2% interest. I don't even know how it works, but there are definitely ways.
That is borrowing against stock holdings with a margin account. Interactive Brokers and Schwab are popular brokers that offer this.
- 3yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
@Felix Piper the longer I've been in real estate the less I like stocks. This will be the first year that my only stock investments are maxing out my Roth IRA which is all a target date fund.
Real estate has so many advantages, I'll even take passive investing in syndications over stocks any day and here's why:
1. Control - even if it's passive you can do better due diligence than you can with stocks
2. Higher returns over time. It's very common to see double digit returns where the average over decades in stocks is 7-8%.
3. Tax benefits. Many times the money made from real estate is wiped free from depreciation.
4. CASHFLOW!!! You get paid every month! I now hate stocks because I get paid some ridiculous dividend under 3% or I don't make money until I sell and then I'm heavily taxed.
I don't want anything to do with stocks anymore and was sold that asset class hard for a long, long time. I understand it can make you wealthy, but so can real estate and probably a lot faster with better dividends (cashlow) and tax treatment.
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