Stocks Vs Real Estate, Winning Investment Strategies

by Silicon Valley Blogger on 2007-04-2125

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.

Copyright © 2007 The Digerati Life. All Rights Reserved.

{ 16 comments… read them below or add one }

Golbguru April 21, 2007 at 11:15 pm

That 3:2 in favor of stocks.
But I guess there is a lot of extra weight for the #6 “Efforts”.
If real estate was so easy to deal with…there would have been more real estate traders than stock market traders.
It’s the fluidity of the stock transactions that is attractive for the common man. I can do it without even leaving my home, online. Returns are low?…there is always a price for convenience.

I don’t know how to put a price on the effort you put in acquiring, maintaining, and then selling off real estate.

The Digerati Life April 22, 2007 at 11:17 am

There will always be people who swear by one investment or another. I say each to his own. You can do very well either way: it’s how well you lay out your investment plan and execute it, that pave the way to your success.

traineeinvestor April 26, 2007 at 6:05 pm

Great post!

Both are good. People have made and lost fortunes in real estate and people have made and lost fortunes in equities. My longer term plan is to have about an equal mix of real estate and equities.

A point about the average returns. While there is a reasonable basis for using the return on an index as a proxy for the long term return on equities, using a national average return for real estate is questionable. The nearest valid index would be an index of listed REITs (and even the validity of that is highly questionable). As a matter of practice, most property investors invest in a small number of properties in specific markets (often only their home town). This means that both local market conditions (which can be highly variable even within a single town), the timing of each purchase and the specifics of the individual property are highly relevant to the returns and will be much more important than any national average. (There are other issues here as well.)

Put differently, it is reasonable to look to stock market indicies as a measure of return on investment in equities but national property averages are largely irrelevant to an individual’s return on an investment in property.

pesli April 29, 2007 at 10:22 pm

My personal view is that stocks has a faster return but higher risk while real estate has a slower return but lower risk.
An advice to all, invest early in stocks!

The Parcus Personal Financial Group actually has a program to analysis real estate and evaluate stocks. Might help with this topic. Check parcusgroup.com.

ingenieure May 3, 2007 at 7:51 pm

hi! very useful summaries here. i am doing some research on stocks and real estate when i bumped into this article.

i am a landlady right now, and i really have to say it’s so much of a hassle maintaining real estate property. i’d go for stocks, but i’m still building capital for that. meanwhile, i try to make the most out of my landlady experience. though i’d rather give it up and sell it to the highest bidder.

kamal May 4, 2007 at 10:40 pm

Circa 1999: The term ‘Indian real estate’ was a scary one. As a matter of fact, investing in real estate for capital appreciation and income was unheard of……….

i found useful informations about indian stock market at theindiastreet.com.

Wealth Building Lessons May 21, 2007 at 9:44 am

Most of the people I know who invest in the stock market lose money the first few years.

so on the surface it looks like its easier get sucked into the stock market without doing sufficient due diligence and lose moneey.

No investing is easy. The popular media and slew of investing books that came out every year create the false impression that its easy to make money in the stock market. The liquidity and transparency and ease of execution just make it easier to lose money!

I have made an awful lot of money investing in real estate. however, after avoiding the stock market for a few years I’m back in it with pretty decent results. There’s an investment for every season. Curently the season doesn’t favor real estate, but it doesn’t mean you should favor one over another.

Jeff Brown June 30, 2007 at 4:42 pm

This so-called debate is the result of a combination of truly successful stock experts and their bias, plus the ignorance of those who simply don’t understand the physics of investment principles.

Can you get wealthy in the stock market? Of course. Can you do it in real estate? Of course.

But I challenge you to take any 20 year period and beat real estate while investing only in the stock market. It’s a bar bet.

Effort? Real estate, over the long haul leaves stocks in the dust. To deny that self-evident truth is to limit your potential wealth.

Both are excellent vehicles for capital growth. Real estate however, blows stocks out of the water. It’s just not close.

http://www.bawldguy.com/stocks-vs-real-estate-a-debate-really/

Thanks for the thoughtful post.

Sue Taylor-Lane July 12, 2007 at 12:31 pm

I still prefer the tangible aspects of investing in real estate. Like any investment due diligence is key. The stocks or real estate you invest in determines the outcome of your ROI. I recommend investing passively in Real Estate. See renttoownabrandnewhome.com for such investing in RE. If you invest well, you’ll get passive, 30% plus annual returns, positive monthly cash flow and tax deferrable indefinitely with 1031 Exchg. Also tax wise my investments in these new homes is depreciated and I can claim all expenses against the rental income. Stocks don’t have these great features! I have made most of these new home investments in AZ and TX and I am making 30% or better ROI plus positive tax benefits. No rehab, fix & flip, buy & hold or wholesaleing here. Great for women investors!!! Sue

Editor: Please do your due diligence before embarking on any new investment. Always consider all risks before putting up your money anywhere. And don’t fall for pushy sales people. To Sue Taylor-Lane, I’d also be interested to know if you’re still making 30% returns today…. I wouldn’t be surprised if the tide has turned!

Marco September 5, 2007 at 11:53 am

I can say I’m for real estates, actually it really depends on what can of deal your into for both groups. =)

Marco

John September 24, 2007 at 9:19 am

I think when you throw in leverage, interest deductions, depreciation deductions, extra cash flow on top of the mortgage, and 1031 (tax free) exchange, you would have to favor real estate! I can see using stocks for IRA’s and 401′s because its hard to leverage those and you can’t take deductions.

Silicon Valley Blogger September 24, 2007 at 10:44 pm

One of the things we’re still debating is whether we should go into long term landlording. A part of me says it’s going to be tough and a lot of work. While the other side of me has been intrigued by this form of investing for a long time; just never gotten around to committing to the plan. Clearly, this is why we haven’t become landlords yet — we’re too concerned about how much work it’s going to be to become one. Right now, we are very comfortable as stock investors. It doesn’t take any time at all as we simply invest in indexes and so far, it’s as passive an approach to making money as it can get.

My question is, how “passive” is real estate”? With a property manager, I’m sure it can be much easier, but still… I’d be curious to know how much time is truly spent on being a landlord each month or year as you keep an eye on your holdings and your tenants.

dean grazios December 11, 2008 at 4:36 pm

It appears that prices from homes are on a downward trend. Always keep up to date with the housing market trends. Good article here!

lauren January 8, 2009 at 3:07 am

I think real estate is one of those investments that you either have to flip or go for the long haul and wait for the market to get better. I’ve just been on a property investment course and am seriously considering trying it as an extra source of income from the sale of my house as I moving in with my partner this year.

Scott Lovingood July 1, 2009 at 11:23 am

I wonder what the analysis would look like if we continued it until today? With the drop in stock market prices and real estate values, it would be interesting to see what the returns are today for a 20 or 30 year period.

A couple of points that didn’t appear to get mentioned.

Liquidity – Stocks are easier and quicker to get into and out of if you things going south.

Leverage – Using leverage for real estate means you make a greater return when prices are going up but can get wiped out in a falling market. Leverage is also available in stocks by using margin accounts or options as well. Both increase your returns but require paying more attention to it.

Cash Flow – Rental properties can generate significant cash flow while providing good tax breaks (not just the capital gains part). Most stocks do not generate any significant portion of cash flow unless you are selling covered calls, high dividends, etc. Rental real estate can generate significant cash flow if you buy it correctly.

You can also use a management group to manage the headaches if you have the right cash flow.

I invest in stocks and have one rental property. Both take work to be profitable.

For most people – focus on what you have an understanding of. If you don’t understand how either one works. Invest in yourself first. Get educated. Take a course on stock investing or real estate investing. It will be the best money you invest because it will pay off for years to come.

Grafton MA Real Estate September 6, 2009 at 1:42 pm

Excellent work with your article. What I get out of it is that it makes sense to have positions in both stocks and Real Estate. Over the short term either one could do better than the other. Over the long term they both should do well with real estate more than likely coming out on top.

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