Real estate vs stocks – which one is a better way to invest your hard-earned money? No guessing here. I have done deep research and used a lot of official data over the last 50 – 60 years to give you an answer.
Centuries ago gold and real estate were almost the only way to invest and grow wealth. For many people, it was just a dream that never came true. But as time goes everything changes, including investment vehicles. Still nowadays owning real estate is too expensive for many families. But hey, it is not the only way to invest and even not the best one. In this post, I explain why.
Real estate vs stocks investment
Real estate vs stocks returns
I agree crisis is a normal cycle in the economy. And, one day real estate will rise again. Yet, stocks will rise even more. Here are some numbers for you. Over the past 60 years, stocks have risen ~7-10% a year compared to 2-4% for real estate. Moreover, the world’s stock markets have grown 358% in 11 years, up from $25 trillion in 2009. The total value of the world’s stock markets at the start of 2021 is $89.5 trillion.
Central banks are doing their job. Massive asset purchasing is always here when there is a need to support the economy. Certainly, it has a positive impact on the real estate market also. But it is far from the benefits the stock market gets. Below is a chart based on official data from Federal Reserve. Do you see a massive difference? If you add inflation, the black line (Home Price Index) will be even lower.
Min. to start investing
Real estate is very expensive no matter what country you live in. It requires significant investments. Besides, there is the cost of maintenance and improvements. Unlike real estate, you don’t need to have a lot of available cash to begin trading or investing in the stock market.
Pricing and evaluation
In most cases, real estate has an adequate value. In other words, you can’t find an undervalued property to invest in and get a higher ROI. You can just buy expecting the real estate market to rise. The stocks and futures are different. There is a lot of tools you can use to identify undervalued stock or commodity.
A transaction fee in real estate is also expensive no matter where you live. At the same time, stocks and futures transaction costs are under $5 a trade. Moreover, some platforms offer 0 commission for stocks and ETFs. While the real estate industry is still an oligopoly that still fixes commissions at a ridiculously high level of 5.5% on average around the globe.
You have to be super rich to diversify your real estate investments. Or you simply can’t own properties in the USA, Germany, France, and other countries. For some reason, people ignore the fact that buying property is a highly concentrated bet, often with debt, in a single asset.
With stocks, you can invest in different companies, sectors of the economy, and even countries. A professionally diversified stock portfolio is usually less volatile than a property portfolio.
You will never relax with real estate. It takes constant managing due to maintenance, conflicts with neighbors, and tenant rotation. You always have to repair something etc.
With stock you can just take your laptop and travel around the world keeping full control over your funds. Yes, you have to do research and track your portfolio from time to time. If it is a boring activity for you, you can hire a professional trader to manage your account for you. Hey, even simple investing in an index fund is proven to give 2 or 3 times more returns each year.
It all depends on your country of residency. I have done research to get average numbers across the globe. Holding real estate requires paying property taxes usually equal to 0.5 – 2.5% of the value of the property each year. And here are just mind-blowing numbers. In 40 – 200 years, you’ll have paid for the full value of your property in taxes alone. That is a lot of money for nothing. Besides, as I mentioned there are maintenance costs, insurance costs, property management costs, and transaction costs to deal with. As result, you get a small net profit.
There is a capital gain tax in most countries. But still, the average net profit is significantly higher. Besides, in many countries, gains from swing trading and futures trades have a way lower tax rate compared to investing in stocks. You can use it too.
Warren Buffett is leaving proof investing in stocks has way more advantages vs real estate. There is no other type of investing giving you full control over your funds. Even if another trader manages your investments, you can track it 24/7 and get your cash back if you need it. Liquidity is what real estate will never give you.
Wishing you a great week!
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