Real Estate vs. Stock Market: Which One Will Make Me More Money?

Real estate and stocks are two different asset classes. Real estate is ownership of property, buildings, or houses, while stocks are ownership of shares in a publicly traded company. Both types of assets can appreciate in value for capital gains and both can be used to create cash flow.

Many factors affect which investment might be right for you and how each might work based on your own specific timing and goals.

Let’s take a look at them for the contrasts along with the benefits and risks.

Is real estate or stocks more profitable?

Real estate investments have historically earned 3% to 4% per year on average; in contrast to stock index investments that earn about 10% per year over the long term.[1]

While the stock market outperforms the real estate market on average by nearly tripling returns over the history of both asset classes, there are specific factors to consider.

Historically, nominal real estate yields in the US have simply been based on rising inflation and the replacement value of homes. (The nominal rate of return is the amount of money generated by an investment before taking into account expenses such as taxes, investment fees, and inflation.)

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The housing market, like the stock market, can go through boom and bust periods caused by low interest rates, the easy money policy of the Federal Reserve, and investor speculation. Real estate values ​​are also highly location dependent, rising based on supply and demand in specific areas as the local economy grows. When jobs are created, employees need places to live and geographic demand is created. Builders’ supply of new homes in an area also determines supply and prices.

Buying your own home in a growing area or purchasing a rental or investment property in a high-demand area can be a great investment. It is possible to outperform the stock market with the right timing of property in the right area. However, both must be correct where you buy and when you buy real estate. Also, real estate is less liquid and has high transaction fees and is not as easy as buying a mutual fund or an exchange-traded index fund (ETF).

Buying individual shares in the right company can bring an investor the best returns of any asset class, as shares can have 100% to 1000% upsides when the right stocks are chosen and held long enough. The upside of stocks is higher, but the risks of stocks are higher as well, as they too can fall 50% to 90%, which real estate almost never does. Of course, stock index funds create a smoother return over time.

With stocks and real estate, you can choose your level of risk and the upside potential of returns in both asset classes.

Four things determine whether stock real estate will be more profitable for you:

  1. When you buy.
  2. What do you buy.
  3. How long do you hold it?
  4. Your knowledge of what you are buying.

Yields on real estate and stocks are based on the market cycle you buy and sell in to lock in profits. Buying at the end of a bubble in any of the markets will lead to losses and buying after a drop in either market can lead to outsized profits. The key is to buy at a reasonable fundamental value during a trend.

The quality of what you buy is more important than the type of asset you buy. Price is what you pay, value is what you get. A high value property will beat a low value speculative stock. A stock index fund can beat a terrible property in a bad geographic and economic area.

If you buy and hold either asset class for long periods of time, such as 10-20 years, returns can start to average regardless of purchase entry point and you can expect the average historical return to be the same with a diversified portfolio. of shares or property.

Don’t invest in things you don’t understand. If you are an expert in an area in which you buy property or in real estate in general, you will be better off than if you know nothing about it. Investors also do better in the stock market if they have studied it or know the company behind the stocks they own. Study and competition come before confidence in any successful pursuit.

Real estate or stocks, which will make you richer?

If we look at the list of richest people in the world most of them built their wealth by founding companies, taking them public, and holding onto a large chunk of the stock while turning them into large-cap companies.

Looking at this list shows that owning shares in the best companies is the most common path to world-class wealth. Nothing creates net worth on a larger scale than the leverage of building a business that can be taken public. At the same time, investors can participate in this wealth creation by owning the stocks owned by billionaires or by copying the portfolios of legendary investors. You can start small and grow your own portfolio.

Surprisingly, no one makes the top 20 list through real estate investing because it doesn’t create the same level of opportunity for scale, leverage, capitalization, and growth that stocks can. Owning the earnings value of a good company through stock has much more future cash flow value than real estate.

Steve Balmer is the only employee on this list, as he was able to use his position as Microsoft’s 30th employee and CEO to get a large share of Microsoft’s stock early in its growth cycle.

Other members of this list were founders or sons of founders of large corporations, excluding Warren Buffett, who took over Berkshire-Hathaway and turned it into an insurance company and corporate conglomerate.

We all have the opportunity to invest and trade the shares of the public companies that these capitalists founded and cultivated to create their own net worth.

Everyone has a different risk tolerance and return goals, so they should choose the asset class that fits them. There are plenty of real estate millionaires, but more billionaires used stock ownership to create their wealth.

Real Estate vs Stock Market
Image created by Holly Burns

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