The real estate vs. stock market debate is OVER. That’s right, after a conclusive study conducted by our own VP of Data and Analytics, Dave Meyer, we’ve found the real difference in returns between the stock market and real estate investing. And at first, you might think that these two types of investments end up being pretty close in terms of profit. For the most part, stock investors don’t care to venture into the active world of real estate, and vice versa. But what if we told you the difference was HUGE? We’re talking DOUBLE the returns in one over the other.
You might say, “Hey, isn’t this a real estate investing channel? We know your answer!” Think again. We’ve got the raw data pitting rental properties against the S&P 500, everyone’s favorite index fund, to see whether investing in the S&P, a rental property, or a primary residence comes out on top. Adding all the factors together, the winner could have you changing your investment strategy quite quickly.
Which investment would you choose? Are passive stocks more your thing, or are physical properties worth the active investment? Let us know in the comments below!
~~~~
Join BiggerPockets for FREE 👇
~~~~
Find an Investor-Friendly Agent in Your Area:
~~~~
Find Investor-Friendly Lenders:
~~~~
Listen to The “On The Market” Podcast Wherever You Listen to Podcasts:
Spotify:
Apple Podcasts:
BiggerPockets:
~~~~
Watch Dave on the “On The Market” YouTube Channel:
~~~~
Real Estate vs. Stocks: Which Makes MORE In a RECESSION?
~~~~
Real Estate Vs. Stocks: What 145 Years Of Returns Tells Us:
~~~~
With High Inflation, Should You Consider Passive Real Estate Investing Over Stocks and Bonds?
~~~~
4 Key Ways to Build Wealth in Real Estate:
~~~~
Connect with Dave on BiggerPockets:
~~~~
Follow Dave on Instagram:
@thedatadeli or
00:00 Real Estate vs. Stocks
00:32 Surprising New Calculations
06:23 Make 2x The Return!
10:12 2023 Update
10:58 The Big Winner…(read more)
LEARN ABOUT: Investing During Inflation
REVEALED: Best Investment During Inflation
HOW TO INVEST IN GOLD: Gold IRA Investing
HOW TO INVEST IN SILVER: Silver IRA Investing
The debate between investing in real estate or the stock market has raged on for decades. Each side has its loyalists who swear by the benefits of their preferred investment vehicle. However, recent data has provided clear evidence that the real estate vs. stock debate is over, and it’s not even close.
Real estate has long been touted as a safe and secure investment. It’s tangible, and there will always be a need for housing and commercial property. However, while real estate has historically been a reliable investment, it comes with significant drawbacks. One of the most significant disadvantages is the high cost of entry. Most people do not have the capital to purchase a property outright, meaning they must take out a mortgage. This creates a significant amount of debt, which carries risk.
Additionally, real estate is not very liquid. It takes time to sell a house or commercial property, and there are significant transaction costs associated with the sale. Furthermore, real estate investors typically incur higher management and maintenance costs than stock investors, which eats into their profits.
Stock investing, on the other hand, has long been considered a riskier, but potentially more profitable investment. Stocks are liquid and easy to buy and sell, making them a more flexible investment vehicle. Additionally, stocks have historically offered higher returns than real estate.
However, recent data has revealed that stock investing is not only more profitable than real estate, but it’s also less risky. A study by the finance department at Florida Atlantic University found that since 1926, the average annual return on the stock market has been 9.8%, compared to real estate’s 5.5%. Furthermore, stocks have had less volatility than real estate, with fewer instances of significant declines.
Perhaps the most compelling reason to choose stocks over real estate is the ease of diversification. It’s relatively simple to build a diversified stock portfolio that includes a mix of sectors and geographies, reducing overall risk. Diversification is much more challenging with real estate, which requires a significant amount of capital to invest in a variety of properties.
In conclusion, the debate over whether to invest in real estate or the stock market is over. Recent data has shown that stock investing is more profitable, less risky, and more flexible than real estate. While real estate may still have a place in some investors’ portfolios, the returns and diversification opportunities available through the stock market cannot be ignored.
If you measure risk as volatility the stock market is riskier, across the whole market real estate has lower in unlevered returns
The degree to which you lever the investment obviously changes returns.
Great data. According to The Motley Fool, NASDAQ's 30y real return is 565%. So it does matter quite a bit which index you chose to invest in.
This is a bit misleading. The first scenario pertaining to risk commits the mortal sin of a half-truth fallacy. There are a myriad of risks with every investment. Bitcoin has different risks than real estate, which is different from securities/stocks, etc. While your premise of "risk of loss in X years" is partly true, your conclusion that "real estate is safer" is false. The goal of any investor should be to diversify these various risks throughout a portfolio.
Also, you did not give enough information on your graph or in your commentary to double-check your work. However, your graph makes me doubt your computations. It sounds like you did not account for compounding, which means you did a simple arithmetic calculation. This will drastically tip the scales on total return.
I would suggest using online calculators for your investment return data. The IRR of real estate should be very different from calculating the IRR of a securities investment. You can't apply the same method.
Furthermore, are holding costs (acts of nature, insurance, taxes, etc) computed in this real estate example? In addition, what about the value of the investor's time? Real estate takes precious time, stocks do not.
Something is off here… The SP500 has a inflation adjusted return of 6-7% (6.33% since 1970) and this is showing (3+1)^(1/30)-1 ~ 4.7% return. At 6.5% annual return you should be showing about 500-600% (1.065^30-1) total return for stocks. Nevertheless, I appreciate the analysis.
Good video. I wouldn’t equate buying a house to only-for-appreciation. You still make mortgage pay-down gains and a reduced rate of housing cost growth. Those gains make a home about 75% as good as an investment, except there’s an asterix that you’ve decided to “consume” that as housing rather than using it for the income.
No matter what you "analyze, it is still a matter of timing at some point. For example; you can leave your money in the stock market for 30 yrs and then when you need to pull your money out the market is in the tank. Same for real estate. What a study like this doesn't take into acct is net revenue based on tax and costs. While this study is interesting, it is significantly oversimplified. One of the differences between the two is the "store of value" component. A home will ALWAYS have some value, a stock may not. If you look at the cost of interest over time plus all other costs associated with owning a home vs stocks, well it is interesting. Also, this study seems to cash on cash and ignores the leverage factor of real estate debt as well as stock market leverage via margin, options, shorts, futures etc. I'm 60 and have been investing in both since I was 25, bottom line? Pick your poison. There isn't an easy road in either, be smart, stay educated, and keep moving, and whether anyone including Warren Buffet likes to admit it or not, TIMING is most definitely an issue whether short or long. I cashed out EVERYTHING I own in both real esttate and stocks back in Nov. My cash is spread out and fully insured and earning 5.08% short term. Just sitting here on the sideline waiting for the dive and ready to start buying. Did the same 16 weeks before the GFC. Good luck everyone. :))
I LOOSE EVERY TIME I INVEST IN STOCKS OVER 20 YEARS 300.00 MONTH = 24000.00!!!!!!!!! 20 YEARS IN REALESTATE ==2 MILLION DOLLARS WORTH OF REALESTATE EQUITY!!!!!!!!!!!!!!
I think you forgot the maintenance expenses for both.
If you can, get a mix of both real estate and stocks, it’s not OR, it’s AND.
I’m a swing trader making about 700-1500 per day on a good day, but there’s risk and losing trades. It really depends who is doing it. BRRRR then throwing profits into SPY
Keep making the koolaid.
Less risky is a questionable statement. No one has been wrecked buying the S&P500, while many have been rekt buying real estate on leverage in the last 30 years. You only need a 25% (or less after fees) decline in real estate to wipe you out with 25% down.
This does not include any maintenance on the properties, assumes zero vacancy rate, doesn’t seem to include property taxes, transaction fees (agent commissions, transfer taxes, etc.) and omits tax differences between 30 years of rent vs. 30 years of dividends. And as others have pointed out, assumes 1:4 leverage for real estate and 100% cash purchased stocks. Not apples to apples. Not to mention the value of your time if you have another (particularly if it’s high income) job.
Do what you are good at. Real estate and stocks require different skills. If you are 7 foot tall you may be better off playing basketball than football. I like the analysis though.
I love the data but it needs to be presented in a way that is legible. The legends are barely readable even on a large screen. You should have the slides fill the whole screen if possible and remove the blue animated borders. Thank you for the info!!
haha awesome! Nerdy data stuff, but I love it!
Thanks Dave! This is valuable information!
SnP is what I go with. I'm new to real estate I'm in the process of buying my first rental property. I'm nervous about having bad tenants. A lot of this is screening out bad tenents but things happen.
I'm a little confused on the growth estimate of S&P 500. Your analysis mentioned that the expected growth over 30 yrs at an avg 10%/yr return would be 300%. But if I plug in number to a compounded growth formula i.e. 1.1^30 it comes out to 17.4x or 1744%. What am I missing here?
Over a long holding period real estate will require large maintenence expenses such as new roof for example, will be good to see a followup analysis assuming this factor
The issue here could be the measured time horizon
Real estate is affordability bounded
We've just lived through a period of rapidly rising population, urbanization, falling interest rates in the last 40 years, and rising debt levels (mortgages are a historic anomaly)
All of those trends have either run out or are near running out so I'm not convinced the past equals the future
Great analysis, but the stock market is 100% passive where as Real Estate investing (land lording) is a full time job. So, another analysis should be done where some average salary/hourly rate is paid at some average pay scale ($25/hr. or $52K/yr). That pay should be subtracted from the FCF (YOY) where the opportunity cost (that money going into the stock market or HYSA) is also factored in. This may give a more realistic number.
Why are property taxes not included in this analysis?
Just look at which has produced the most wealth… real estate wins by far
Real estate leverage is like noting else even with covered calls creating consistent monthly income
which one is less of a headache lol!
Lots more risk in real estate for the average investor. Being a good individual “house picker” carries the same type of risk as being a good “stock picker”. And S&P 500 style real estate investing doesn’t exist with the same leverage advantages. Apples and oranges, unfortunately.
At 25% down payment this is effectively stock return vs 4x leverage as the loan allows for higher CoC return. Think the takeaway here is more “using debt to fund real estate investments is more profitable than using only cash in the stock market”
100k in stock market = 100k of stocks
100k at 25% down payment = 400k of real estate
Thanks for the video! Highlights the benefits of leverage
I love this analysis. I only wish I could see it a bit more clearly. Any way you can increase the sharpness for next time?
Sweet! I was the first Like and the first Comment.