Real estate or stocks? Stocks or real estate? That is the question so many of us want to know in order to get rich. Historically, both real estate and stocks have been great investments. Hence, the decision may depend on your goals, risk tolerance, and level of understanding of each asset class.
As an investor of both asset classes for over 20 years, the answer comes down to your financial means, risk tolerance, personality, and ongoing returns. Your preference for real estate or stocks will also be highly dependent on where you are in life as well.
We’ve got real estate tycoons and we’ve got stock market tycoons. We’ve even got wealthy bond investors such as Bill Gross who pulled in over $100 million a year when he led PIMCO. Therefore, obviously, you can get rich in real estate, stocks, and bonds.
It’s important to realize there are no renter or cash tycoons. The return on rent is always -100% every single month. You do not build equity renting. You simply get shelter for your rent, which is absolutely fine. However, with inflation running high, renters are getting negatively impacted by inflation rather than riding inflation. To get rich, you must take calculated risks.
Even though I worked in equities (stocks) for 13 years, for the average person, I still prefer real estate over stocks. Perhaps it’s because I had a front row seat watching so much carnage during the 2000 dotcom bubble and the 2008-2009 financial crisis that has me jaded. The wipe out in tech and growth stock valuations in 2022 hasn’t helped either.
That said, I firmly believe everyone striving for financial independence should own both stocks and real estate. The percentage weighting of each asset class as part of your portfolio will then be up to you to decide.
Real Estate Or Stocks? Why Real Estate Is Better
In the debate between real estate or stocks, let me first make the arguments as to why real estate is a better way to build wealth than stocks.
1) You are more in control with real estate.
Every physical real estate investment you make puts you in charge as CEO. As CEO, you are able to make improvements, cut costs (refinance your mortgage now that rates are back down to all-time lows), raise rents, find better tenants, and market accordingly.
If you have the personality that likes to take charge of situations, you probably prefer owning real estate over stocks. Just be careful thinking you know too much for your own good.
Of course you are still at the mercy of the economic cycle, but overall you have much more leeway in making wealth-optimizing decisions. When you invest in a public or private company, you are a minority investor who puts his or her faith in management.
Sometimes managers commit fraud or blow their companies to smithereens through unwise acquisitions. Nobody cares more about your investment than you.
2) Leverage other people’s money in real estate to get rich.
Leverage in a rising market is a wonderful thing. Even if real estate only tracks inflation over the long run, a 3% increase on a property where you put 20% down is a 15% cash-on-cash return.
In five years you will have more than doubled your equity at this rate. Stocks, on the other hand, generate roughly 10% a year including dividends. Leverage also kills on the way down, so remember to always run the worst case numbers before purchase.
The lower interest rates go, the more attractive it is to take on leverage and vice versa. In my opinion, we are going to be in a low-interest rate environment for the rest of our lives. We can have temporary increases in inflation and interest rates, like we saw in 2022. But over the long run, the trend is down.
3) More tax advantageous with real estate.
Not only can you deduct the interest on up to $750,000 in mortgage indebtedness on your primary home as of 2020, you can also sell your primary home for tax free profits up to $250,000 for singles and $500,000 for married couples if you live in the home for the last two of a five year period.
Once you get into the 24% federal income tax bracket, you should really start to consider owning real estate. At the 32% federal income tax bracket, owning your primary residence is a must.
All expenses associated with managing your rental properties are also deductible towards your income. Income limits do apply however, so make sure you don’t make much more than ~$175,000 a year total.
4) Real estate is a tangible asset, stocks are not.
Real estate is something you can see, feel, and utilize. Life is about living, and real estate can provide a higher quality of life. Given we’re all spending much more time in our homes due to the pandemic, the intrinsic value of real estate has gone way up.
Stocks aren’t event pieces of paper anymore, but ticker symbols and numbers on a screen. The only way stocks can provide utility is if you sell and use the proceeds. With real estate, it’s like getting a two-for-one special.
When the world comes to an end, you can seek shelter in your property. Real estate is one of the three pillars for survival, the other two being food and shelter.
During the March 2020 stock market meltdown, real estate significantly outperformed. If you held stocks then, you may have panic-sold. With real estate, you likely held on and continued collecting rent.
Now that we’re in a full-blown recovery, real estate prices and rents are up tremendous as well. Therefore, real estate might almost be a heads I win, tails you lose situation.
5) Real estate is easier to analyze and quantify.
If you can calculate realistic expenses and rental income that’s all you really need when it comes down to valuing a piece of property. If you can borrow at 3% and rent out for a 6%+ yield, you’ve likely found yourself a winner. Real estate is immediately exploitable if you have the financial means to invest.
There’s not only the cash flow component but the underlying equity component that helps investors build wealth. Stocks require you to trust what the company reports.
There are countless ways for companies to massage their numbers to make things look better than they really are e.g. adjusting accounts receivables, adding one off gains, and using various amortization or depreciation strategies to name a few.
Take a look at Redfin for the latest estimates, comparables, and sales history. It’s so easy to do research on real estate compared with researching stocks.
6) Real estate has less visible volatility than stocks.
Your house value could be tanking and you would never know it since there isn’t a daily ticker symbol. During bad times, the utility of your home really helps soften the blow as you enjoy your home and create great memories.
During the 2008-2009 downturn, I still got to enjoy my vacation property in Lake Tahoe 15-20 days a year even though its value was plunging. Meanwhile, looking at the TV or computer screen just made me mad. When your investment is less volatile, it’s much easier to stay the course and not sell at the bottom.
During the March 2020 stock market meltdown, real estate outperformed tremendously. Money rotated out of stocks and into tangible, less volatile assets that produced income. As of November 2020, real estate prices continue to be soaring across the nation as a whole.
Take a look at this investment performance chart by Fundrise, my favorite real estate crowdfunding platform. Notice how steady the Fundrise platform portfolio has performed since 2013.
You can sign up with Fundrise for free to explore. Fundrise is the creator of the diversified eREIT. Retail investors can now invest in properties that were once reserved for institutional investors and ultra high net with individuals.
7) Real estate provides a greater source of pride and satisfaction.
Making money for money’s sake is a pretty empty feeling after a while. There’s not as much pride or satisfaction when you check your stock portfolio to see that it’s up.
Conversely, every time I drive by my rental properties I feel proud to have made the purchases years ago. In fact, I often take a route so I can purposefully drive by my rental properties because they make me feel happy.
I know that my money is working as hard as possible so I don’t have to. Real estate is a constant reminder that taking calculated risks over time pays off. There is an indescribable feeling nobody tells you once you’ve closed on your property.
Even though the bank probably owns most of it in the beginning, you literally feel like the King or Queen of your castle. When you die, you can pass on your pride to your children or closest companions to let them create their own memories.
Further, there is a “step-up” function where your heirs inherit the property based on the value of the property at the time of passing so that the cost basis is higher, which helps lower tax liability if the property is ever sold.
8) Real estate is more insulated from exogenous variables.
Real estate is local. If you’ve made a good decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy. Spain blowing up is likely not going to affect the rent you can charge. Brexit actually helped drive mortgage rates lower as foreign investors bought safe US Treasury bonds.
With COVID-19, more people are looking to buy homes because more people are spending more time at home. The longer we live, the more bad stuff we will experience.
In fact, the worse the things that happen, the lower mortgage rates tend to go as investors seek the safety of bonds. Therefore, not only does real estate provide comfort during uncertainty, real estate also becomes more affordable. As affordability increases due to a decline in mortgage rates, demand increases and pushes prices up further.
You Can Always Refinance To Lower Real Estate Costs
You can check the latest mortgage rates online for free. The more real quotes you can get, the greater chance of you getting a lower mortgage rate.
Of course, industries in your area could suddenly disappear and leave you broken as well. As a result, it’s a good idea to diversify into lower cost regions of the country with higher yields.
I do this through real estate crowdfunding and focus on real estate investments in Texas, Nebraska, Utah, and Tennessee. I believe there’s a long term demographic shift away from expensive coastal cities.
9) The government is on the real estate investor’s side.
Not only do you get generous mortgage interest tax deductions and tax free profits, you get bailouts if you can’t pay your mortgage. The government also aggressively went after banks to force them to extend loan modifications to bad and good creditors.
For example, during the 2008 – 2009 financial crisis, I got a free loan modification from 5.875% to 4.25% on a 30-year fixed mortgage. The government went after Bank of America and Bank of America was forced to given many of its customers a mortgage rate break for free.
There are plenty of non-recourse states such as California and Nevada which don’t go after your other assets if you decide to stop paying your mortgage and squat for months. When was the last time the government bailed individual investors out of their stock investments?
During the pandemic, the government forced banks to provide mortgage relief for homeowners. Although it is unclear whether there will be mortgage forgiveness down the road.
10) Real estate is less risky than stocks
Real estate is inherently less risky than stocks because it is a tangible asset that provides utility. You won’t wake up one month and find your real estate worth 32% less like stocks were in March 2020.
Given real estate is less risky, ironically, real estate investors can make more money because investors are more willing to buy with debt. Debt magnifies returns (and losses). But over the long run, real estate tends to increase in value by at least 1% over the Consumer Price Index.
If you don’t like volatility, real estate is superior than stocks. Just look at how so many growth stocks got wiped out in 2022. If you’re a retiree, you’d much rather have conservative returns through real estate. Maintaining your cash flow to maintain your lifestyle is what it’s all about.
Real Estate Or Stocks: Reasons Why Stocks Are Better
Now that I’ve made an argument for why real estate is my preferred asset class, let me now argue why stocks are better for building wealth.
1) Stocks historically have a higher rate of return.
Stocks have historically returned ~10% a year compared to ~4% for real estate over the past 60 years. That said, real estate prices have been climbing in the double digits recently. If you put 20% down on a property, the average annual cash-on-cash return is closer to 20%.
You can also go on margin to boost your stock returns, however, I don’t recommend this strategy long-term. If you get caught in a sell-off on margin, your brokerage account may force you to liquidate holdings to come up with cash when things go the other way. You could lose everything.
Conversely, your bank can’t force you to come up with cash to pay off mortgage debt quicker or move out so long as you are paying your mortgage.
2) Stocks are much more liquid.
If you don’t like a stock or need immediate cash, you can easily sell your stock holdings and receive cash in three days. If you need to cash out of real estate you could potentially take out a home equity line of credit (HELOC). However, HELOCs cost money and it could take at least a month to set up. Selling a home could take as shot as 14 days or as long as never if mis-priced.
The only problem with liquidity is that it is more easy to panic-sell during extreme uncertainty. We humans are emotional. When you see your stocks go down 30% in one month, it’s only natural to try and protect your capital by selling.
Unfortunately, panic-selling has proven to be a historically bad move. Personally, I believe the need for liquidity is overrated.
3) Stocks have much lower transaction costs.
Online transaction costs are now free no matter how small the transaction. The real estate industry is still an oligopoly and still charges a 3.5% – 6% commission to sell. The cost to sell a home is egregious now that the internet has lowered costs for every industry. If you don’t have to sell your house, don’t. Hold onto your home for as long as possible.
You would think the invention of Zillow would lower transaction costs, but unfortunately they’ve done very little to help lower expenses. Thankfully, Redfin has helped lower transaction costs, which is one of the reasons why I’m a shareholder.
4) Owning stocks requires way less work.
Real estate takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. I have a love hate relationship with being a landlord. Something always comes up. Stocks can literally be left alone forever and pay out dividends to investors.
Without real estate maintenance headaches, you’re able to focus your attention elsewhere such as spending time with family, your business, or traveling the world. 100% passive income is why I’ve gravitated towards investing in private real estate funds. It offers the best of both worlds.
If you don’t feel like managing your stock portfolio, you could hire a traditional financial advisor or go with a digital wealth advisor like Betterment or a digital/hybrid advisor like Personal Capital for much less.
Personal Capital is actually doing a free investment portfolio review with a financial advisor if you sign up and link at least $100,000 worth of assets.
5) Stocks offer more variety.
Unless you are super rich, you can’t own properties in Honolulu, San Francisco, Rio, Amsterdam and all the other great cities of the world at the same time. The best you can do is invest in diversified real estate funds and REITs, in which case, you’re investing like a stock investor.
With stocks, you can invest in different companies, sectors, and countries with ease. Your stock investment options are so much more vast. It can be overwhelming.
6) Stocks make it easier for you to invest in what you use.
One of the most fun aspects about the stock market is that you can invest in what you use. Let’s say you are a huge fan of Apple products, McDonald’s cheeseburgers, and Lululemon yoga pants. You can simply buy AAPL, MCD, and LULU. If you did over the past 10 years, you’ve done phenomenal! And, you’ve gotten to enjoy the products as well.
You can also invest in companies that rejected you. Back in 2011 – 2012, when I was thinking of leaving the finance world, I sent resumes to many of the tech companies like Google, Facebook, and Apple. I didn’t hear back from any of them. As a result, I decided to buy shares in each company to benefit from their success.
It’s a great feeling to not only use the products you invest in, but make money off your investments.
7) Stocks also are taxed favorably compared to income.
Long-term capital gains and dividend income are taxed at lower rates (15% and 20%) than the top four W2 income rates (32%, 35%, 37%. If you can build your financial nut large enough so that the majority of your income comes from dividends, you could lower your marginal tax rate by as much as 20%, depending on the current legislation.
To get to the 20% maximum marginal tax differential, you would need to replace your W2 income of between ~$200,001 – $425,800 with dividend income or long-term capital gains.
8) Easier to hedge with stocks than with real estate.
You can protect your real estate investments through insurance. However, if disaster strikes, it’s often a pain to get your insurance company to pay for damages because the burden is on you to prove your claim.
You can also put on a hedge by shorting real estate and real estate-related stocks. However, given real estate is local, it’s hard to precisely hedge you real estate exposure.
With stocks, you can easily and precisely short stocks or buy inverse ETFs to protect your portfolio from downside risk.
9) Less ongoing taxes and fees with stocks.
Holding property requires paying property taxes usually equal to 1-3% of the value of the property each year. Then there’s maintenance costs, insurance costs, and property management costs. You can build your own portfolio of individual stocks and bonds for just $5 a trade.
If you hold individual stocks, there are no ongoing fees. There are only the risks of bad management, competitive pressures, and more. ETF fees are marginal. It’s only when you invest in actively run portfolios do you start seeing management fees sometimes creep up to 1%.
Of course, if you invest in a hedge fund, the fund might charge you up to a 2% management fee and 20% of profits.
I personally do like investing in private funds for diversification and peace of mind purposes. Unlike with stocks, you don’t see the daily value of a private fund. You just contribute capital calls over time and wait until the fund starts distributing capital over a 5-10-year period.
In fact, I just had a surprise $122,000 private real estate distribution in July 2022. It’s always a surprise to get distributions because you never know exactly when they will come. And the capital you invested years ago is already long forgotten.
Below is my real estate crowdfunding dashboard showing $624,000 in distributions since 2017 on $810,000 in investments.
Personal Characteristics Most Suitable For Real Estate And Stocks
Hopefully I’ve provided you a balanced perspective on real estate or stocks. You can clearly get rich off both assets. Now I want to touch upon what type of personality traits are most suitable for real estate or stock investors.
Real Estate Is More Suitable For The Following People
- Believe wealth is made up of real assets not paper.
- Know where you want to live for at least the next five years.
- Do not do well in volatile environments.
- Easily spooked by downturns. March 2020 most recently.
- Tend to buy and sell too often. High transaction costs ironically keep you from trading too often and blowing yourself up.
- Enjoy interacting with people.
- Takes pride in ownership.
- Likes to feel more in control, or at least enjoys the illusion of control.
Stocks Are More Suitable For The Following People
- Happy to give up control to those who should know better.
- Can better stomach volatility.
- Have tremendous discipline not to chase rallies and sell when things are imploding.
- Likes to trade.
- Enjoys studying economics, politics, and researching stocks.
- Don’t want to be tied down.
- Have a limited amount of capital to invest.
Real Estate Or Stocks Post Pandemic
Both real estate and stocks performed well in 2020 and 2021. But in 2022, the S&P 500 declined by about 20% while the median home price in America climbed by 7%. This 27% outperformance is massive, and indicative of how well real estate can perform in a bear market.
Stocks gave us all a fright in March 2020 when the S&P 500 collapsed by ~32%. During this time, real estate continued to chug along and actually pick up steam as mortgage rates collapsed.
Therefore, my nod is for real estate as a better investment during times of uncertainty. Real estate has outperformed stocks in a less volatile way. Further, real estate provides security and comfort, which is most appreciated during times of death and uncertainty.
If you have children, the preference towards real estate is even stronger. As a parent, your main priority is to provide for your children. If you can work from home, then the value of your home is even greater as well.
Every day I wake up thankful I have a forever home that is providing shelter for my family. Yet, I don’t think about stocks every day. But when I do, I tend to think what else could go wrong that will give stocks a beating.
No Bad Choice Between Stocks And Real Estate In The Long Run
The choice between investing in real estate or stocks is like choosing between eating a chocolate cake or a hot fudge sundae. Both are good provided that you don’t eat too much.
When you are younger, investing in stocks is easier since you have less money and are more mobile. If you have enough money to buy a rental property when you are younger, you’ll have more enthusiasm and energy to deal with the work required to own such an asset.
As you get older you probably want to set some roots. Therefore, owning at least your primary residence is beneficial. It feels great to settle down and enjoy an asset that will probably appreciate over time. An older you may also want to simplify life more due to lower energy and more family responsibilities.
With stocks, it’s terrific to see portfolios go up. The 100% passive nature of owning stocks and collecting dividends is much appreciated if you’re extremely busy.
But after a while, it becomes less satisfying to see more money accumulate in your brokerage account. Money needs to be spent on something, otherwise, what’s the point of saving and investing? The older and wealthier you get, the more you’ll find yourself asking this question.
Whatever you do, don’t own nothing. Inflation will rob you of your financial happiness when you are older and less willing or able to work. Own assets that rise with inflation such as stocks and real estate. Build your passive income portfolio. There is no reason why you can’t invest in both real estate and stocks.
Wealth Building Suggestions
1) Invest in real estate. If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco, but over 10% in the Midwest and South if you’re looking for strictly investing income returns.
I’ve personally invested $810,000 in real estate crowdfunding to diversify my holdings and earn income passively. Crowdstreet is a great real estate platform for accredited investors. They focus on individual deals in 18-hour cities where valuations are cheaper and growth rates tend to be faster.
2) Manage Your Finances In One Place. The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
Real Estate Or Stocks is a Financial Samurai original post. Financial Samurai began in 2009 and is one of the largest independently owned personal finance sites in the world with over 1 million visitors a month.