Real estate versus stocks, the age-old question. It’s a conundrum many of us ponder when aiming for financial prosperity. Throughout history, both real estate and stocks have demonstrated their investment potential. As such, your decision might hinge on your objectives, risk threshold, and grasp of each asset class.
Drawing from over two decades as an investor in both realms, the answer ultimately hinges on your financial capacity, risk tolerance, temperament, and sustained returns. Your inclination toward real estate or stocks will also be strongly influenced by your life stage.
The landscape boasts real estate magnates and stock market moguls alike. Even wealthy bond investors such as Bill Gross, who earned over $100 million annually at PIMCO, have showcased the possibility of amassing riches through real estate, stocks, and bonds.
One certainty is that you can’t achieve wealth simply by renting. Renting provides no return, an absolute -100% month after month. It doesn’t contribute to equity building.
Sure, renting does offer shelter, which is perfectly reasonable. Renters even benefited during the pandemic as their housing use surged. Yet, with the rise in inflation, escalating rents have cast a shadow on renters. To attain wealth, calculated risks are imperative.
Despite my 13-year experience in equities, for the average individual, I still tend to favor real estate over stocks. My vantage point likely stems from witnessing the turmoil of the 2000 dotcom bubble and the 2008-2009 financial crisis. The 2022 decline in tech and growth stock valuations hasn’t aided the situation either.
However, I firmly believe that anyone striving for financial independence should hold both stocks and real estate. The allocation percentage for each asset class in your portfolio rests upon your discretion.
Real Estate vs. Stocks: Why Real Estate Holds the Edge
In the debate of real estate versus stocks, let’s first explore the reasons why real estate might be a superior route to amassing wealth compared to stocks.
1) Real estate provides more control.
Every physical real estate investment places you in the driver’s seat as CEO. This affords you the authority to enhance the property, trim expenses (like refinancing at today’s record low rates), hike rents, secure better tenants, and market effectively.
If you’re inclined to take the reins in situations, you likely lean toward real estate ownership. Just be cautious not to become overconfident.
Of course, economic cycles still exert influence, but you possess greater latitude in making wealth-optimized choices overall. In contrast, investing in a public or private company leaves you a minority investor reliant on management’s decisions.
2) Leverage for wealth through real estate.
Leverage is a boon in a rising market. Even if real estate merely keeps pace with inflation long-term, a 3% increase on a property with a 20% down payment yields a 15% cash-on-cash return.
Over five years, your equity more than doubles at this rate. In contrast, stocks typically generate around 10% annually, dividends included. Beware that leverage also bites on the downside, so calculating worst-case scenarios prior to purchase is wise.
The appeal of leverage rises as interest rates dip, a trend that seems set to continue long-term. While temporary inflation and interest rate spikes like in 2022 are possible, the overall trajectory appears downward.
3) Real estate enjoys tax advantages.
Deducting interest on up to $750,000 mortgage debt on your primary home (from 2020) and tax-free profits up to $250,000 for singles, $500,000 for couples when selling your primary home after living there two of five years are considerable perks.
Once your income enters the 24% federal tax bracket, real estate ownership becomes even more attractive. Beyond deductions, all rental property management expenses are deductible, with income limitations applying.
4) Real estate is tangible and reliable.
Real estate provides a tangible, useful asset. In a pandemic-defined world where homes gained newfound significance, real estate’s intrinsic worth surged.
Stocks are no longer paper, but rather symbols and numbers on screens. Stocks deliver utility only when sold. Real estate offers a dual benefit – shelter and an enduring asset.
During the March 2020 stock market slump, real estate notably outperformed. Stockholders may have panicked, but real estate owners collected rents through the ordeal. As recovery ensues, real estate values and rents soar. It’s a ‘heads I win, tails you lose’ situation.
5) Real estate analysis is straightforward.
Real estate valuation requires realistic expense and rental income calculations. If borrowing at 3% and renting for a 6%+ yield, you’ve likely found a winner. Real estate’s appeal is instantly actionable with sufficient financial resources.
It’s not just cash flow; the equity component contributes to wealth creation. Stocks demand trust in company disclosures, which can be manipulated. In contrast, real estate research is simpler.
6) Real estate’s volatility is less visible.
Home values may plummet, but since there’s no daily ticker, you remain largely unaware. Property utility cushions blows as you savor your dwelling and create memories.
In the 2008-2009 crisis, my Lake Tahoe vacation property’s value sank, but I still cherished my time there. Gazing at a screen was vexing. Lower volatility encourages steadfastness, precluding hasty selling.
Amid the March 2020 market turmoil, real estate triumphed. Money migrated from stocks to tangible, income-generating, less volatile assets. Post-2020, real estate values remain buoyant.
7) Real estate brings pride and contentment.
Merely accumulating money feels hollow. Checking your rising stock portfolio lacks the fulfillment of driving past properties acquired years ago. Real estate holds pride of ownership, reflective of calculated risk-taking.
Real estate underscores the payoff from risk taken over time. The sensation after property acquisition is inexplicable. Even if the bank initially owns most, you feel like your castle’s monarch. Passing this sentiment to offspring through a “step-up” basis eases their tax burden on eventual property sale.
8) Real estate is sheltered from external shocks.
Real estate is local. Choosing a strong economic region insulates you from national or global upheavals. Foreign crises may not dent local rentability. COVID-19 shifted focus to homes, thus boosting real estate demand. Longer life spans yield more challenges, making secure homes pivotal.
Adversities often drive mortgage rates lower, heightening affordability. Real estate provides solace during uncertainty and becomes more cost-effective. Rising affordability boosts demand and prices.
9) Government support aids real estate.
Real estate investors enjoy mortgage interest tax breaks, tax-free gains, and mortgage relief. The government compelled banks to aid good and bad creditors during the 2008 crisis. Real estate’s structure also safeguards against asset seizure in non-recourse states.
During the pandemic, mortgage relief was enforced. Potential forgiveness remains uncertain. Government intervention in stocks pales by comparison.
10) Real estate is less risky.
Tangible real estate is less volatile, evading the S&P’s 32% March 2020 nosedive. Less volatility correlates with higher risk tolerance, allowing for amplified returns through leverage. Over time, real estate appreciates over the Consumer Price Index, minimizing volatility.
Real estate suits risk-averse retirees craving stable returns. Stocks’ 2022 rout underscored this.
Matching Personal Traits to Investments
A balanced view of real estate versus stocks highlights that both paths lead to wealth. Now, the personalities most fitting for each avenue:
Real Estate Suits
Those Who:
Value tangible assets.
Expect to stay put for years.
Shy from volatility.
Struggle with downturns.
Frequently buy and sell.
Embrace human interaction.
Treasure ownership.
Relish control.
Stocks Suit Those Who:
Trust experts.
Navigate volatility.
Stay disciplined amid turbulence.
Enjoy economic and political analysis.
Seek mobility.
Possess limited capital.
Real Estate or Stocks: REITs Lead the Way
Post-pandemic, both real estate and stocks shone. However, in 2022, the S&P 500 fell 20% while US median home prices climbed 7%, indicating real estate’s resilience.
Real estate excelled during the 2020 market dip, showcasing its ability to outperform stocks amid uncertainty. This 27% differential underscores real estate’s potency.
Ultimately, your selection hinges on your life stage, financial situation, and temperament. Diversification across real estate and stocks ensures a robust portfolio, as both promise wealth accumulation.
