Stocks Beat Real Estate for Solid, Long-Term Investment Returns

That headline got your attention didn't it? And I'm sure I'll hear it from you real estate investors out there for writing it (and this post.) ;-)

But Ben Stein recently wrote such an interesting piece comparing investment returns in real estate versus returns in the stock market. He goes back and forth quite a bit and has several caveats (which he fully admits) yet comes to this conclusion:

I myself love houses, and own a lot of them. I get immense joy from them. But for long-term gains, broad indexes (also called indices) of stocks are where you want to be.

You can read the whole piece if you like to check out his reasoning.

Personally, I'm in 100% agreement with what he has to say. I agree that real estate is a good investment and that it also has utility (you can live in it) in addition to appreciation. It's also relatively insulated against big losses, much more so than stocks. Furthermore, I agree that owing your own home is one of the best money moves you can make.

That said, I also agree that stocks are the better place to be for long-term results. I personally prefer index funds.

Ok, let the debating begin. Who likes real estate better? Who likes stocks better?

Comments

[Enough Wealth]

I like both, but prefer stocks as they are less hassle to maintain. One thing to note is that you should look at risk-adjusted returns, not just raw ROI. Secondly, you have to take into account an appropriate level of gearing that you would use when comparing stock and real estate returns. For example, a geared stock portfolio would have a maximum LVR of around 60%, whereas you often see investors buy investment real estate with 5% of less deposit and an interest-only loan. So for real estate the LVR is often more like 95%. This difference in gearing can have a big impact on long term ROI on your invested capital. Also, look at what interest rate is applicable to real estate investment loans and stock margin loans. In my experience you can usually get a slightly lower interest rate on real estate backed investment loans.

Finally, you often invest in both real estate and stocks as asset classes in an efficient asset allocation, so it's not a case of either stocks or real estate, but a question of how big an asset allocation to make in each area.

Regards
http://enoughwealth.com

[Frank Morana]

This strikes me as, essentially, a play on numbers -- you can manipulate the data however you like. Personally, I abhor the notion of using one's own home as an investment vehicle, though this is precisely what many people do. The problems with real estate are (1) liquidity - it takes more than one click to dispose of it - (2) unstable price fluctuation - for many people, these are "emotional" trasactions, subject to wild swings between asking price and bid price, and (3) sales load - until something changes in our accultured way of doing things, there is a FAT COMMISSION associated with real estate transactions, a 6% load that is simply handed over to a sales brokerage that serves no ones interest but its own!

[Jesse]

I agree with the first poster's mention of hassle factor. Stocks are just so much easier to deal with. Especiall index fund stock investing.

I'm not opposed to using your home as an investment though. Where else can you find 250/500k tax-free captial gains? :)

[Lord]

For real estate, on average, I agree with this, but it is a big mistake to consider averages. For the country, leverage is negative and real estate is not an investment at all, for cities leverage is neutral, but for metropolises leverage is positive and can be made arbitrarily so. The returns can and do easily exceed that of stocks. Not that there aren't times to buy and times not to, but don't overlook one of the best investments you can make. There is a large penalty to pay for convenience.

[Jeremy Weiss]

I personally prefer real estate for two reasons, 1) it moves slower thus giving you more time to get in and out of situations 2) if I want to buy $100,000 in stock I have to spend $100,000. If I want to buy $100,000 house, depending on my credit I may not have to spend any of my money (unfortunately, in my case, I'd have to put about $30,000 down).

Of course these are generalities and there's always the exceptions to the rule. In the end I recommend utilizing both investment vehicles, but I also recommend starting with real estate.

[Matt]

There are certainly times when most stocks are a bad buy. But it takes an extraordinary amount of capital and a significant amount of actual work to maintain a portfolio in real estate that's even close to properly diversified, whereas any amateur with a few thousand dollars and a couple of books from the library can do it in the stock market. Liquidity is also a significant concern for a primary investment vehicle...the moment you most want or need to sell is very likely also to be the moment when it's most difficult.

This is, of course, not a slam on serious full-time real estate investors, and certainly not one on people who own real estate primarily for their own use. But as a general-purpose investment vehicle for amateurs, real estate doesn't have a lot to reccomend it, and has quite a few crippling drawbacks.

[Casey Serin]

Stocks are too risky. Real estate is a much better investment. You can find some sweet deals on the real estate market that will allow you to get passive income without lifting a finger. You don't even have to put any money down to invest in real estate, but you have to have money to invest in stocks.

[my wealth journey]

Real estate allows you to leavage other people's money. I think a balance of stocks and real estate is definitely good.