Real Estate vs. Stocks? Stocks vs. Real Estate? That’s the question many of us want to answer to get rich. Historically, both real estate and stocks have been great investments, beating inflation by an average of 2% (real estate) and 8% (stocks) per year. So the decision may depend on your goals, risk tolerance, and level of understanding of each asset class.
Your preference for real estate or stocks will also depend heavily on where you are in life. The older and wealthier you are, the more likely you are to like dividend stocks and private equity funds for 100% passive income.
It’s important to understand that there are no renters or financial tycoons. Rental yields are always -100% every month. You are not creating wealth by renting out your home.
You are simply getting a place to rent, which is perfectly fine. And renters have benefited during the pandemic as their occupancy rates have increased. However, with higher inflation, renters are negatively impacted by rising rents. To get rich, you need to take calculated risks.
Shorting an index is like renting a house or apartment. Inflation and population growth are too powerful to overcome.
However, anyone who wants financial independence should own both stocks and real estate. The percentage weighting of each asset class in your portfolio will depend on you.
In the real estate vs. stocks debate, let me first lay out the arguments for why real estate is a better way to build wealth than stocks.
You have more control over real estate.
Every physical investment you make in real estate makes you accountable as a CEO. As a CEO, you can make improvements, cut expenses (refinance your mortgage now that rates are back to historic lows), raise rents, find better tenants, and market the company accordingly.
If you're a control freak, you'd probably rather own real estate than stocks. Just be careful about thinking you know too much for your own good.
In five years, your capital at that rate will more than double. Stocks, on the other hand, yield about 10% per year, including dividends. Leverage also kills on the downside, so remember to always calculate the worst-case numbers before buying.
The lower the interest rates, the more attractive it is to use leverage, and vice versa. In my opinion, we will be in a low interest rate environment for the rest of our lives. We may have temporary increases in inflation and interest rates. But in the long term, the trend will be downward.
Real estate is a tangible asset that is less volatile than stocks.
Real estate is something you can see, touch, and use. Life is life, and real estate can provide a higher quality of life. As we all spend much more time at home due to the pandemic, the intrinsic value of real estate has increased significantly.
If you can calculate realistic expenses and rental income, that’s all you really need when it comes to valuing a property. If you can borrow at 3% and rent it out at 6%+, you’ve probably found yourself on a winner. Real estate is immediately tradable if you have the financial wherewithal to invest.
There’s not just a cash flow component, but also a basic equity component that helps investors build wealth. Stocks require you to trust the company’s reports.
Companies have countless ways to fudge their numbers to make things look better than they actually are, such as adjusting accounts receivable, adding one-time gains, and using various depreciation or impairment strategies, to name a few.
Real estate has less apparent volatility than stocks.
Your home could go down in value and you’d never know it, since there’s no daily ticker. In bad times, the usefulness of your home really helps soften the blow as you enjoy your home and create great memories.
During the stock market crash of March 2024, real estate significantly outperformed expectations. Money moved out of stocks and into tangible, less volatile assets that generated income. As of November 2024, real estate prices continue to soar across the country.
Making money for the sake of making money becomes a rather empty feeling after a while. There is not much pride or satisfaction when you check your stock portfolio to see that it has grown.
Real estate is a constant reminder that taking calculated risks pays off over time. There is an indescribable feeling that no one tells you about when you close a deal on your real estate.
Even though the bank probably owns most of it at the beginning, you literally feel like the king or queen of your castle. You feel more satisfied as you climb the property ladder. When you die, you can pass on your pride to your children or closest friends so they can create their own memories.
In addition, there is a “stepping” function where your heirs inherit the property based on the value of the property at the time of transfer, so that the cost basis is higher, which helps reduce your tax liability if the property is ever sold.
Real estate is more insulated from exogenous variables.
Real estate is local. If you make the right decision to buy in an economically strong region, you will be more insulated from the national economy or the global economy. Spain blowing up will likely not affect the rent you can charge.
In fact, the worse things get, the lower mortgage rates tend to be as investors seek the safety of bonds. So, not only does real estate provide comfort during times of uncertainty, it also becomes more affordable when rates drop. As housing availability increases due to lower mortgage rates, demand increases and prices rise even more.
You can check the latest mortgage rates online for free. The more real quotes you get, the better your chances of getting a lower mortgage rate.
Of course, industries in your area could suddenly disappear, leaving you broke as well. As a result, it’s a good idea to diversify into cheaper parts of the country with higher yields.
The government is on the side of real estate investors.
Not only do you get generous mortgage interest deductions and tax-free profits, you also get financial assistance if you can’t pay your mortgage. The government has also been aggressively pursuing banks, forcing them to extend loan modifications for bad and good lenders.
Given that property is less risky, ironically, property investors can make more money because investors are more willing to buy with debt. Debt magnifies returns (and losses). But over the long term, property tends to increase in value by at least 1% compared to the Consumer Price Index.
If you don’t like volatility, property is better than stocks. Just look at how many growth stocks have been wiped out in 2024. If you’re a retiree, you’d rather have a conservative return on property. Maintaining your cash flow to support your lifestyle is what it’s all about.
