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.
As an investor of both asset classes for decades now, 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 at above 7%, 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.
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 state 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 with other people’s money.
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. Even if the Fed hikes the Fed Funds rate three times, the 10-year bond yield might only go up by 0.5% at most given the yield curve is sufficiently steep.
3) Tax advantageous.
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) Tangible asset.
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) 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.
See: How To Correctly Analyze And Value Rental Property Investments
6) Less visible volatility.
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) A 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) 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 badder 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 Costs
Check out Credible, my favorite lending marketplace to get pre-qualified lenders competing for your business for free in under three minutes. Mortgage rates are back down to all-time lows. Take advantage. I got a new 7/1 ARM for 2.125% with no fees!
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 your 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.
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) Historically 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) 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) 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.
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) Less work.
Real estate takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. 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.
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) 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) 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) Tax benefits.
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) Hedging is easier.
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.
See: How To Make Lots Of Money During The Next Downturn
9) Less ongoing taxes and fees.
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.
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 During A Pandemic
Given we’re still in a pandemic, it’s worth touching upon real estate or stocks during this most unusual time.
Both real estate and stocks have performed extraordinarily well so far. The U.S. national median home price for existing homes is around $390,000 up about 18% in 2021. Real estate also didn’t decline in 2020
However, 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. Today, stocks are doing fantastic. But the ride was much more bumpy.
Therefore, my nod is for real estate as a better investment during a pandemic. 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. Here is my 2022 housing market forecast.
Every day I wake up thankful I have a house that is providing shelter for my baby daughter and young son. 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 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) Get a low mortgage rate. Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are down to all-time lows. When banks compete, you win.
3) 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.
Readers, which do you think is a better investment? Real estate or stocks? Which investment class do you prefer? Which investment class do you prefer going forward? Ultimately, I encourage everyone to invest in both real estate and stocks for greater long-term wealth.
Great post! I invest in both real estate and stocks.
It always amazes me how sensitive some people who rent get. If you are really happy renting, you wouldn’t be so angry at renting and trying to justify your choice like this Jack guy here.
Over the long run, renting is not good for wealth creation for the vast majority of people. There’s a reason why the average homeowner has 40 times more net worth than the average renter.
But for renters to think that homeowners don’t also invest in stocks is completely delusional. These people must be younger or single and just don’t have the same life experience.
This is a personal finance blog. My comments are strictly aimed at explaining why the analysis provided by the author is wrong.
“There’s a reason why the average homeowner has 40 times more net worth than the average renter.”
The reason homeowners have more worth than renters is because they have higher income, not because of choosing to own their primary residence.
“But for renters do think that homeowners don’t also invest in stocks is completely delusional.”
Have you ever taken microeconomics 101? Correct, homeowners also invest in stocks. And so do I! The question is: should I invest a down payment in my primary residence, and take on repair expenses, taxes etc., or should I invest that down payment elsewhere?
I have taken the down payment money and invested it in a REIG. That’s real estate, genius. It just happens to be real estate I do not live in. My returns are 10-15% annually, passive returns, and it’s geographically diversified. There is absolutely no way I’d be doing better by buying my primary residence, which is in a 24-hour city where price to rent ratios are enormous – and that’s a calculation that’s easy to make considering lost money on rent, property taxes, HOA fees, etc.
It’s amazing that you are so defensive when simply googling “rent vs. buy calculator” reveals basically every other personal finance site has an explanation of what I’m saying. It’s not always financially advantageous to buy your primary residence.
You must have never been a high income individual and accredited investor, young, with 7 figures of assets and a high level of education to be able to make these choices.
Seriously, I suggest you get an education.
My net worth is between $18-23 million and I’m 45. Depends on how you value my company.
If you invest in real estate, why are you arguing so much?
Let me guess, you’re a single guy with no family? If so, the reason is obvious why you haven’t found anybody. You’re very unpleasant and combative.
Money is pointless if you don’t have someone to share it with. If you ever find someone, you’ll understand.
The conversation was about why renting is “dumb” because “return on rents are $0” and I explained in great detail that there are a variety of other financial considerations to whether one should rent or buy.
I’m sorry you cannot handle that basic financial knowledge and chose to turn the conversation into a personal attack.
I’m single and really happy.
Since you mentioned personal lives, let’s turn the tables: let me guess, you’re over 40 or even 50, flabby and and nobody would look twice at your wife, right?
See how immature that sounds? Next time keep the conversation focused on finance.
Good luck with your 2022 weight loss goals hahaha.
“Single and really happy” OK Jack. If you say so.
The return on rent is zero. So you have to invest elsewhere to get a return. Renting is not an investment.
Who said renting is dumb? Why are you so insecure with renting?
It is really sad that you care so much about your status as a renter. Trying to convince people you rent it while the housing market went way up makes you look foolish.
If you really are this rich, you wouldn’t bother to argue with strangers on the Internet.
Money isn’t everything. The sooner you realize this, the happier you’ll be.
Your condescension and personal attacks reveal your own arrogance and insecurities. I did not make this conversation personal, you did. But now you have, so enjoy the rest of the chat.
I do not care about my status as a renter. Are you aware this is a personal finance blog and we are in the comments section? The purpose is to discuss the financial questions at hand. If you read my posts, you’ll see that. Maybe you have reading comprehension issues, it’s certainly possible.
Money is not everything, I couldn’t agree more. I live a wonderful lifestyle because I know money isn’t everything. So, we agree on that.
“The return on rent is zero. So you have to invest elsewhere to get a return. Renting is not an investment.”
I totally agree. I have said that many times in my comments. Renting is not an investment. The question at hand was, is renting always a bad idea because renting is not an investment? And the answer is: no. Are you getting it now?
Have you ever wondered why financial advisors say that buying your primary residence shouldn’t be considered an sound investment? Think about that one for a while. Do some reading.
Again, good luck with your weight loss goals. Given your advanced age and the pandemic, I’ll wish the best for your health.
I’m sorry you are hurting right now. Being single is no fun. And feeling the need to lie about your wealth is also very sad.
Get some help. You’re only lying to yourself.
I find your blog pretty interesting, but wow, these quotes seem pretty silly to me.
“The return on rent is always -100% every single month.”
The calculation of rent vs. buy is pretty straightforward, and there are multiple calculators available. If you’re one of the many young, working Americans who live in a bustling metropolis, renting almost always makes more sense.
Beyond the rent vs. buy calculator, remember that when you rent, you may feel comfortable renting a sub-standard place. If you’re reading this blog, that’s not unlikely. But how about buying such a place? Maybe not.
“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.”
I think you may have missed the housing crisis of 2008? I don’t disagree that stocks are much more volatile than real estate. But your word choice is pretty poor.
In your opinion, what is the return on rent every month?
You are free to rent if you wish. Don’t let me stop you. However, just like shorting the stock market is not a good idea long-term, shorting the real estate market by renting long-term is generally not a good idea.
But short term, renting is totally fine. What is your situation?
The people who lost money in the 2008 financial crisis were those had too little of a down payment or borrowed too much. That’s why I recommend everyone follow by 30/30/3 rule for homebuying.
Again, feel free to invest and live how you wish. Don’t let anybody, including me, tell you otherwise.
Thanks for your reply.
“In your opinion, what is the return on rent every month?” –> This is a straightforward question, but it’s the wrong question. Honestly, I’m surprised you do not understand this basic question and have such a dogmatic and simplistic view that “all rent is wasted money.” That’s typically something I hear from less financially savvy individuals. No offense intended, but it’s disappointing as someone who has read your blog sporadically for several years.
The fundamental question is: should I rent or buy the place I live in? To answer that question, you need to consider not only the rent you spend each month (yes, you do not get a return on that rent, 0%), but also several other variables: price to buy a comparable space, expected growth in property value, property tax rates, repair costs, HOA fees, transaction costs and how often you intend to move, mortgage rates and loan term, alternative investments and their expected returns, and other variables.
As a single person living in major US cities, it’s almost always financially advantageous to rent your studio apartment or 1-bedroom space, and invest your capital that would be used for a down payment into an alternate investment such as an index fund, real estate in a smaller market, etc. This is because price to rent ratios are very high in major US cities.
Notice that major US cities are purple in this map, which doesn’t even consider many costs of ownership: property taxes, repairs, transaction costs and opportunity cost on your down payment:
Consider my situation in NYC, where I lived for several years. My rent was $2750. To buy the space would be about $1M PLUS monthly HOA fees of $600 or more and property taxes on top of that. It’s easy to see that the gross price to rent was enormously inflated. This is typical in NYC, SF, and LA.
Not only that, but I am a highly mobile person. I lived in NYC a few years, and then I moved. Those 3-6% transaction costs have a much bigger impact if you move frequently. This is demonstrated clearly in the calculator I linked above.
Instead of investing my potential down payment capital into buying a property in NYC, I put that same capital in an index fund and used some of it to buy real estate in a smaller market with lower price to rent ratios.
This begs the question: why does anyone invest in real estate in NYC? Those who purchase homes in NYC are predominantly 1) very wealthy, so money isn’t the driving factor 2) not financially savvy, so they don’t understand the choice they are making, 3) investors who do not demand cash flow from their investment, and are instead betting on NYC property values to rise by a great deal. I’m sure there are others who buy in NYC, SF, LA and Seattle, but for the average person or small family, buying in those big cities doesn’t make financial sense.
Thanks for your thoughts. However, you zeroed in on my statement “the return on rent is always negative 100%.” So I just wanted to get your answer to what you think the return on rent is. It is a straightforward question and answer.
Whether to buy or rent is a different question that has been discussed in other posts posts. Here are a couple of them:
Your Return On Rent
Two Ways To Live In Your House For Free: Cash Flow And Appreciation
People should do what’s best for them as everybody is in a different situation with different goals. If you are happy renting, that’s GREAT! Absolutely save and invest the difference. Everybody should do so. That’s what I did in NYC and the first couple of years after arriving in SF.
Personally, I’m happy owning my primary residence, owning physical rental properties for cash flow and my children, investing in private real estate deals, and owning stocks. I want to benefit from inflation as much as possible, while sheltering my family. We have different responsibilities.
Here is my latest passive investment income breakdown if you’re curious.
What exactly is your point of saying the return on rent is -100% when that alone doesn’t actually inform whether to rent vs. buy?
Why do you state that renting long-term means someone is short the housing market – when they could simply be pursuing the rent arbitrage strategy laid out in your other post?
The question of rent vs. buy is straightforward. You have managed to turn it into long and confusing blog posts, and you are misleading by reiterating that the return on rent is always 0%. Again, it’s a true statement, but too narrow in its scope as to be useful, so what is your point?
If I had to sum up your attitude and perspective, it’s “Do what you wish, but renting long-term is a poor financial choice so you’re stupid” which is both arrogant and wrong.
Congrats on your financial success. I also make 6 figures on my investments, in the 10-15% range, totally 100% passive except for delivering documents to my accountant to file my taxes. Stating our own financial situation doesn’t validate the analysis.
Congrats to you. And again, no argument at all. I’m not sure how many times I can say that renting is absolutely fine if that’s what you wanna do.
Renting is short the real estate market because you are a price taker that must absorb rising rents vs benefiting. But if you can make more from your investments, then great.
PS, links are automatically removed by my comment system due to spam.
I’m so impressed you spend time addressing people who are just looking for a fight.
Jack missed the boat. He’s trying so hard to justify his decision to rent when the real estate market has surged higher over the years.
Hey Jack! If you were really happy with your decision, you wouldn’t be arguing and trying to pick fights.
You missed out. And lying how you are doing well is really sad. Just learn from your mistakes and move on!
I didn’t miss the boat genius. I have 30% of my portfolio in residential real estate. Because I rent, I was able to split that investment into 10 properties in 5 states through a REIG.
Amazing how you go from hating on real estate, to admitting that you invest in real estate. Sam is a master at persuasion.
Sounds like you are following the BURL real estate investing strategy: https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
Let’s be honest. The reason why you won’t answer the question: What is the return on rent? is because you know the answer.
Rent does not build equity. It goes to pay for shelter. Not a big deal. The return is getting shelter, but so is owning. But with owning, you at least build equity and have a chance to see massive capital appreciation.
It is really strange that people who rent are so hot and bothered about the facts. But people who own are not hot and bothered by people owning stocks or renting.
It’s actually not strange. It’s because renters help landlords build wealth. So renters are highly welcome. You’ll realize this as you get older.
Unfortunately you don’t seem to understand the rent vs. buy calculation and the fundamental economic concept of opportunity cost. Correct, by renting you are not investing in your residence, you are instead taking your down payment and investing it elsewhere. Even a high schooler can understand this, so I don’t know why you said “when you get older.”
There is such thing as a rent tycoon, his name is Elon Musk! I’m surprised you forgot him so easily.
Ah, because Elon didn’t get rich by renting. He got rich by being an entrepreneur!
I’ve been long and strong Tesla since early 2018 after meeting him at a wedding. Go Tesla! Let’s go to $1,000/share!
If you look at the Forbes 2021 list of billionaires, real estate was #7 behind food and beverages. The most common way to amass a fortune this decade is by focusing on finance/investments, then technology … and guess what many of those folks did while building their empire (they paid rent).
Sounds good. Didn’t realize these folks were mostly renters.
Every wealthy person I know has been unable to get rich renting given the return in rent is negative 100% every month. Instead, they have built healthy real estate portfolios
I honestly still don’t understand how people can make a return on their rent. I understand making money in finance (my past profession) and making money as an investor or entrepreneur, what I also do. But I haven’t figured out how to make money from rent I’ve paid.
How old are you and do you rent? What is your occupation? It will help me understand where you’re coming from. New perspectives are always welcome.
This post might help: https://www.financialsamurai.com/return-on-rent-is-always-negative-100-percent-how-to-live-forfree/
Thanks!
Sam, im always impressed with your patience in explaining things to investors.
Guys like Dan would drive me a little nuts given he isn’t able to differentiate making money through real estate and making money from a business.
Thank you for taking the time to explain things so clearly.
Getting wealthy is about weighing opportunity costs. Renting allows you to put fewest resources into where you live and enables you to invest the rest of your capital to get higher returns (like in the stock market or your own business/career).
Real estate is a non-productive asset, just like cash or gold. It doesn’t produce anything over time, it sits there and requires upkeep, taxes, etc … Accumulating non productive assets in not an efficient way to build wealth, it’s a mechanism used for already rich people to maintain their wealth.
Is the return on rent really negative? When you purchase a property you are “renting” the capital from a bank and pay them interest to do so, why would a bank lend you money if the return was negative for them? Also, there’s a lot of profit made by subleasing and rent arbitrage. Not sure I agree with the “return on rent is negative 100%” mantra.
Got it. I guess we will just have to agree to disagree. Personally, my real estate portfolio generates over $150,000 a year in passive income. It’s productive as it enables our family to no have to work.
Further, capital values have also appreciated as demand for real estate and real assets have soars during the pandemic.
Check out the post on the return on rent for more of my thoughts. As a renter, you are short the real estate market, which is difficult and then inflationary environment.
Can you share something about your background so I know where you’re coming from? I won’t judge you if you’re a renter or still on your path to financial independence. Everybody is at a different stage with different perspectives.
At the end of the day, we just invest according to what we prefer. And if we don’t prefer some thing, we change. So if you rent and make money a different way, then great.
I just prefer to make money in real estate and in business. They aren’t mutually exclusive. And you’re free to invest the way you want too.
*****
On April 1, 2020, I found this comment you wrote in my post: Real Estate Outperformance Examples During The Pandemic
“ This article is insane! We aren’t in a typical recession; this is a full blown economic depression. Real estate prices are set to follow Japan in the early 1990’s as the US is now caught in a liquidity trap. Large cities like NY and SF are becoming a public health nuisance; landlords have no idea if they will collect rent from tenants. Unemployment is projected to reach 30% within a quarter; don’t try and catch a falling knife or you’ll get stabbed.”
Just curious, are you still bearish on real estate now? Did you end up selling your risk assets back then? Just trying to understand more as your perspectives are intriguing. Thanks
Dan, did you really sell all your stocks and real estate, if any, in April 2020? If so, I can understand why you are so bearish after such a massive rally.
Better luck next time. Learn from it and invest better.
I sold my stock in 2019 as I saw a correction coming, Since then I’ve been in cash and renting. Primary investment is my career. In May of 2020 my net worth broke 7 figures (I’m a millennial so I think that’s well above average) the job market is the best place to make money for people with skills. Most of my gains are from bonuses, earnings, and stock options. It’s extremely boring to read about, but its anti-fragile and I don’t have to worry about being below $300,000 in yearly earnings.
Glad you’re making $300,0000+ a year. A millennial is a pretty wide range. I’m assuming sub 35.
Eventually, you’ll get tired of working. Best to invest for the long term as well.
Timing the market is hard.
Don’t worry “Stan the Man” I’m not going to get tired of working, I love what I do, and am highly respected as an expert in my field. I think early retirement is for burnouts and losers who aren’t happy with their occupation or their work life.
That’s an excellent point Dan! It’s extremely uncommon for talent such as Doctors, lawyers, professors, musicians, and actors to retire early; unless there’s a health or family issue that forces them. Why would someone well respected and skilled in their craft want to give up? Even Warren Buffet (90) and Charlie Munger are still working (97).
Over the long-run an investment in the S&P 500 has averaged a 6-7% annual return after taxes and inflation, an investment in a home you live in 3-4%, a rental property 2-3%, an investment in bonds 1-2%. If you are saving for a retirement 10, 20, 30 years from now, there is no better investment than an index fund. The key is to have enough cash and job security so you don’t have to liquidate in a down market.
Sure, just make sure you don’t short the real estate market by renting over too long of a period. Shorting real estate or stocks over a 10+-year period generally doesn’t work out.
Please NEVER invest in index funds for the long term, they are a guarantee to average. Use them tactically if you have the knowledge and time to stare at screens, but you have absolutely zero chance to outperform the market if you are Index Linked. Everyone quotes Market annualized returns of 9-10% (long term) or 6-7% (last 20 years), but your money doesn’t grow @ 7% each year, there are ups and downs in the market, and the climb back up from a down year is not factored into an annualized return. The proper calculation is to use a Compound Annual Growth Rate (CAGR), of which SPY achieved about 4.6% over the last 20years, NOT 7%.
Hi Sam,
You asked for topics that interests us readers in your newsletter. So I’d like to suggest A few topics of interest. Look forward to a few articles on these topics. Thanks! :
– ETF and real estate funds (types that balances risk and return, from DIA PGX, to GOF, SRET type of funds) for longer term investments
– real estate is one of your topic of interest. So maybe stocks on health care real estate, offices, malls, etc. SbRA, BXP, BRA… On short term capital gain vs long term dividend return for passive income.
Healthcare industry like those invented vaccine or not (GXK JNJ)… On short term capital gain vs long term dividend return
– investing in bonds and ETF Witt margin or borrowed money?
– hobby classes for kids (since you do talk about your kids)… financially to parents which make sense, m maybe link how they help kids future career soft skills (musical instruments, academic on math or reading, sports like gymnastics ball games ballet, group activities like drama)
Hi Sam,
I had an overly long reply to your last column detailing all the reasons why stock beats real estate (for those of us that aren’t workaholics, at least), but finally canned the whole thing. You did a great job though, of describing almost all of my main points here.
REITs are a lot like owning stock. I think we should also mention that, even assuming you are able to keep the place rented pretty constantly, unless you have a quite a few properties, a single bad renter can destroy your whole year and more. Especially with a pandemic eviction lock in place.
In the case of stocks, I am heavily invested, but I don’t buy many stocks myself (less than 15% of our portfolio, usually), and I always buy them intending to hold them long enough for long term capital gains to replace income tax (short term capital gains).
Instead, I invest in mutual fund managers. I find this to be far less labor intensive than trying to do all the market watching and research myself, which could easily be a full-time job. I pick only established managers that have been through at least one crash/recession/correction etc. so I can see how they did. Mu mutual funds (both in retirement and non-retirement accounts) have managed a 12.7% for me for the past ten years+ while my stock picks, strictly in non-retirement brokerage accounts, have averaged over 20% in the same period.
You say owning real estate makes you like the CEO, but I would point out that managing my own investments is a similar sort of thing, and gives me a lot more control.
People that put all their money in the hands of some nice investment “expert” with a nice smile, a firm hand shake, and a reassuring tone of voice, are doing the wrong thing unless they really are completely inept, and choose to remain that way at any cost.
Ditto for people that get their taxes done by a temp working at a walk-in office in a strip mall, or even a clever software program. To really understand what is going on, and what you can do, going forward, to ease your tax load, you need to do them yourself and really learn what drives them.
For bonus points, look at how President-elect Biden’s changes to income taxes, capital gains taxes, estate taxes, corporate taxes, and retirement plan contributions are going to affect you personally, and start revising all of your financial planning. This would be an extremely good subject for an article, Sam.
Hi Sam, you stated the #1 reason why stocks are better vs real estate to be:
Stocks have historically returned 8-10% a year compared to 2-4% for real estate over the past 60 years.
My personal experience of investing in passive syndications is a 14-16% annual return. Basically it’s allowed us to double our money every 5-6 years which I’ve NOT been able to get in the market.
Note: We have mainly index funds (Vanguard) for our practice’s retirement accounts.
P.S: I hope CA didn’t shut down tennis courts too and that you’ve been able to play this year.
Sam
Am a long-time reader, first-time commenter
I really enjoy, benefit and learn a lot from your content so thank you for sharing the lessons you’ve on your life journey, on many levels but especially financial lessons
Can I ask you to explain your philosophy or positioning as it relates to the different real estate crowdfunding platforms please?
CrowdStreet, Fundrise and RealtyMogul are all ones that you have written about and invest in, I think
I am a 41 year old with no debt (outside of mortgage), just shy of $2 million invested in the stock market and would like to diversify into real estate
I don’t think that I can create bandwidth or the time to manage a residential rental property so crowdfunding seems to be the clearest path to invest in real estate; I am certainly interested in the passive income possibilities that exist there
So again, I am just trying to better understand the criteria and/or philosophy that you have used in utilizing the different options that exist
Welcome your thoughts and thank you again for all of your help and words of wisdom
Hi Brent,
I share everything I know about CrowdStreet, Fundrise, and RealtyMogul in my Real Estate Crowdfunding Learning Center and the links within the page. Please spend time reading all the articles in that page.
In general, Fundrise is the easiest avenue because you invest in one of their diversified funds. The volatility is lower and you get broader access. It’s also available for non-accredited investors.
If you are an accredited investors, which you seem to be, then CrowdStreet enables you to invest in individual investments. CrowdStreet is focused on opportunities in 18-hour cities, where valuations are lower, rental yields are higher, and beneficiaries of migration trends.
I like to allocate ~10% of my net worth to alternative investments, which these are considered. But they can also be bucked as part of your real estate allocation too. I bucket REC into alternatives and commercial real estate.
Regards,
Sam
Great post Sam, love the analogy of cake vs. sundae, both good options. Given that the stock market has rallied and is sky high right now and housing prices are super high due to low rates, is this the time to enter these investments? I agree with your thesis, but the prices right now are near record highs so seems time to convert funny money (stocks) into real assets (cash, houses, etc.). With the Fed printing money, I expect inflation so these could both of course climb higher in coming years.
Valuations for stocks are no doubt expensive, which is why I’m hunting for rental properties in big cities which have seen a softening of rents in certain segments and areas. In fact, several of my extremely wealthy friends are buying up properties in SF and NYC now.
The coronavirus positivity rates in the heartland are concerning. There could very well be a big boom back to big city living in 2021. I do believe this will happen and I’m buying another rental too.
I’m still contributing the maximum to my Solo 401k and SEP IRA. I think there will be gridlock and another round of stimulus. Therefore, I think the S&P 500 will be up in 2021.
Residential real estate ownership/leasing in California has become a misery since the implementation of knee-jerk reactionary and onerous “emergency” guidelines that prevent most evictions, all rent increases, and set up an environment in which tenants who can pay won’t pay, and those who currently can’t will likely never pay – and then, how on earth can I sell the property if I can’t show it due to tenant fears of COVID, and/or it’s occupied by non-paying tenants who cannot be evicted? I’m seriously rethinking this style of real estate ownership (in favor of purely REITs).
I have been an avid reader of your blog & we have been in REI for over 50 years. It has been a very profitable experience that has allowed us to enjoy early retirement & being debt free early in life.
My BIL has always touted equities but at 65 he still cannot afford to retire ???
So I sent him my favorite real estate investment joke….
Larry Branch is on his deathbed and knows the end is near.
His nurse, his wife, his daughter and sons are with him…
He asks for 2 witnesses to be present and a camcorder be in place to record his last wishes, and when all is ready he begins to speak:
“My eldest son, I want you to take all the Mayfair houses.”
“My daughter, I want you to take all the apartments over in the east end.”
“My youngest son, I want you to take all the offices over in the City Center.”
“To my dear wife, you get all the residential buildings on the banks of the river.”
The nurse and witnesses are blown away as they did not realize his extensive holdings, and as Larry passed away, the nurse says, “Mrs. Branch, your husband must have been such a hard-working man to have accumulated all this property.”
The wife replied, “Property?…the idiot had a paper route!”
I believe in owning both. We have ~$1.4M of equity in our primary home and another ~$600K in REIT ETFs and Private Equity, both domestic and international. This is about 20% of our net worth. The rest is mostly invested in Mutual Funds and some other Alternative Investments. I’ve thought about dabbling in rentals but I don’t have much knowledge or experience in this area.
Our daughter graduates from college this year and I have toyed with the idea of partnering and helping her purchase her first condo and then renting it out when she moves on. Maybe I just follow along with her career and do this a few times until she settles somewhere more permanently or gets married? I don’t know if I will actually do this but it is something I am considering.
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.
——
I haven’t looked into how those numbers ($250K / $500K) have changed over the years. If we are planning to sell our home in 10-15 years, should I expect those to increase? That’s important to know if we are to compare the long-term performance of stocks vs. real estate.
I have a “fun” account. I can use this money for buying anything I want, within reason. No yachts. This account has 6 stocks. It took two years of reading before I settled on these six stocks. They are important to me. Through good and bad we have stayed together.
I agree, money should be enjoyed. I spent money when I bought these stocks. These stocks make more money than my day job. These stocks have caused me pain and brought me joy.
The point is owning these stocks is “fun.”
I think spending money on stocks is a wise use of money. Owning the right stocks, in and of themselves, is a “fun” use of money. To me, owning Amazon is more fun than spending the money on something else.
Great post Sam. I keep oscillating between the two. As you know I am now bearish on real estate because I am not a fan of government interference. Plus as I wrote in my blog post the probability of outperformance is lowered.
But as you said, can’t go wrong with either.
I’m a believer in both stocks and real estate. I love the tangibility of real estate and the set it and forget it optionality that ETFs can buy. What I don’t like is the ongoing maintenance of physical real estate and the unpredictable volatility of the stock market. So I invest in both!
Totally agree Sam. Took us many years to finally buy rental real estate. The income from real estate let’s us hit financial freedom in a few months, stocks would’ve taken 8 more years and we still would not have as much cashflow thru stocks as we receive from RE. It’s a huge difference! I’ve only invested $200k and make $36k from net rent; with 4% rule that would’ve only been $8k from stocks.
I don’t really see any tax benefits associated with buying a home… With rates being at the floor, the itemized deductions associated with $750K of debt is marginal for a married couple relative to the elevated standard deduction. Perhaps, I am missing something, but you are talking about a few thousand dollars tops. Also, I am not sure the government will always be on your side. In a world where they will be hungry for revenue, why not just keep raising prop taxes particularly in some of these blue states where you need revenue. Thanks for all of your help and insightful articles as always!
Hi Sam –
Very interesting comparison,
I would also argue Equities are much easier to understand.
The required knowledge can essentially be acquired in a few days (assuming you find the right sources and are not influenced by media / brokers and other market participants that have an incentive for you to trade frequently)
Real Estate requires more homework especially if you go outside the Residential space
Commercial Real Estate has a lot of advantages you listed but you need to get familiar with the market dynamics whereas Equities can be bought using a follower approach (Bogleheads philosophy through World ETFs)
Cheers,
BoW
Sam great article as usual. Can you speak to using cost segregation to accelerate depreciation? This adds to the benefit of owning real estate