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.

Contents hide
1. Real estate vs stocks investment
1.1. Liquidity
1.2. Real estate vs stocks returns
1.3. Risks
1.4. Min. to start investing
1.5. Pricing and evaluation
1.6. Transaction cost
1.7. Diversification
1.8. Your time
1.9. Taxes
2. In conclusion
real estate vs stock market

Real estate vs stocks investment

Liquidity

That is difference number one. I know it like no one else. In 2008 my family owned commercial and residential real estate of a total worth 16 million USD.  We had a lot of loans at that time also. We could get over 10 million after paying all credits. But, all of a sudden, crisis… To make a long story short, we lost it all. And it was such a terrible feeling because we couldn’t do anything. We tried to sell, decreased prices, but no one wanted to buy. That was a turning point in my life. I understood that liquidity is first of all when it comes to investing. So, I started trading stocks and futures.
 
If fundamental situation changes or you need immediate cash, you can easily sell your stock by pressing a button. This is it – a few seconds and you are back with cash. If you need to cash out of real estate you have to find a buyer. When a market is booming, it is easy. But when something happens with the economy, it is almost impossible. You could theoretically take out a home equity line of credit, but it’s a long process; it is costly and needs getting approval. Moreover, during crisis periods, it is almost impossible.

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.

real estate vs stock market graph

Real estate vs stock market graph

Chart interpretation

This chart plots both the S&P 500 and the Case-Shiller Home Price Index. Over the long term the S&P 500 clearly outperforms residential property and is more volatile. The housing bubble and subsequent stock market crash are clearly visible in the chart.

Real Estate vs Stocks Data Sources

Risks

It is considered that the stock market is riskier. In fact, a lot depends on your investing style. Growth investing is really risky. I don’t recommend investing more than 10% of your portfolio into growth stocks.
 
Everyone wants high returns. But first, ask yourself how much are you ready to lose. I bet growth investing is not suitable for 80% of investors. They are not ready for that risks. They just didn’t realize it yet. With value investing, you can get way better results in the long run without sleepless nights and stressful days. I believe it is always better to start conservatively. You are the boss and you can always adjust your approach.
 
The safety of your initial investments is another important factor. How do you protect your money in a downtrend? If you have stocks you can easily sell it or hedge with futures and collect dividends. But if the real estate floor gives way, there will be no offers as it happened with me.

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.

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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.

Transaction cost

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. 

Diversification

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.

real estate vs stocks investing benefits

Your time

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.

Taxes

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.

In conclusion

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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