I’d like to highlight a financial story that caught my eye this week. It’s by Lazy Man and Money, who provided an analysis and comparisons between stocks and real estate and how they perform against each other. He critiqued a CNN Money article that arrived at the conclusion that the stock market turns out to be a better investment over real estate (perhaps for the general public), with several factors considered. Lazy offers some deeper views on this along with animated comments on his post that chimed in on the subject.
But let’s take a look at the details of what I assume is the original CNN Money article:
Stocks versus Real Estate
#1 Performance: Stocks Win
Based on performance and rate of return, stocks win. The long term mean return of real estate is 3% a year while that of stocks is 9% – 10%. Now given the specific time period of 1978 – 2004, paper investments have trounced the return of hard real estate with the S&P yielding 13.4% while housing delivering an annualized return of around 9%.
#2 Leverage: Real Estate Wins
Though you can use leverage or “other people’s money” to make money in stocks as well (which you’d do by going on margin or buying options), it is easier and potentially more financially rewarding to do so via real estate. Leverage via real estate is also much more commonplace as homeowners strive and stretch to buy their homes with what they can afford. Doing so has made fortunes for countless households across the nation.
#3 Costs: Stocks Win
In a nutshell, stocks trade for a transaction cost of $10 or less these days, and funds charge 1% or lower of your investment account. Real estate transactions can run you 10% of your home’s sale price with fees covering appraisals, inspections, processing, title insurance, credit report checks, transfer tax, agent costs, moving costs and the like.
#4 Taxes: Real Estate Wins
Stocks have a long term capital gain tax rate of 15%. You can also offset your stock gains by your losses. But check out real estate tax breaks: you can deduct mortgage interest and property taxes; you can claim the first $500,000 of profit from your home’s sale tax free, and there are also rental and commercial property tax breaks available such as deductions on maintenance and repair expenses on rentals, depreciation, property wear and tear. Note however that there are tax implications for unloading rental and commercial property.
#5 Transparency: A Draw
How well do you know your investment? How accessible, real and tangible are they to you? It appears that in the world of stocks and real estate, they each have their pros and cons. Ultimately, you’ll just have to trust the information available about that piece of property or that company’s offerings when you plunk out the money to make your purchases. Due diligence can tip the scales in your favor but doesn’t erase the risks inherent in any investment.
#6 Effort: Stocks Win
It’s clear that maintaining a stock market portfolio is far easier than running to and fro to your rental property making sure that repairs are being done. On top of that, with real estate you’ll have to deal with the human factor as well, where you’ll have to negotiate with tenants who may or may not give you a hard time. This is clearly one of the reasons I haven’t gotten into long term landlording as of yet.
So have you decided what kind of investment you’d like to get into? As for me, though I’m an experienced stock market investor, I haven’t yet seriously dabbled in true real estate investing. I have been a landlady in the distant past and I did not enjoy it. Still, we’ll see if rentals will end up being a part of our future as we study investment opportunities that arise.
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