Real Estate or the Stock Market? - 3 Things to Consider


In our recent blog article, we considered the differences between Active Vs. Passive real estate investing and how the strategies offered different options for investors. However, another question to ask; is investing in real estate better than investing in more traditional investments such as stocks, bonds, or mutual funds? While the answer to this question will differ for everyone based on their specific situation or investments goals, a recent news article based on a study by economists at the University of California-Davis, University of Bonn, and the Deutsche Bundesbank concluded that Housing was the world’s best investment over the last 150 years. Let’s examine 3 factors, which are instrumental in comparing the two.

Stocks will bring you highs, but periodically will seriously let you down. Treasury bonds will keep you safe, but they won’t make you rich. Housing? That’s the best of both worlds.

Rate of Return - For this recent study, economists compiled a dataset that compared the rate of return for different types of investments during the time period of 1870-2015 in 16 of the “now wealthy” countries throughout the world. What the study concluded is that after adjusting for inflation, housing on average had a rate of return that was just over 7%, while other equities such as stocks, bonds, etc. had a rate of return that was just below 7%. The returns on equities have enjoyed a bump in recent years; however, when adjusted for risk, housing still outperforms equities in 14 of the 16 “now wealthy” countries that were used in the sample.  So if the returns over time are within a few percentage points of each other, why has real estate been deemed the better investment? It all comes down to risk and stability, which well look at below.

Risk Profile – The stock market and real estate investments are both risky on some level but the types of risks they possess are different. Part of the reason for the risk-adjusted return being greater in housing is the volatility within the equity markets. The stock market is highly volatile due to sometimes irrational, emotional or speculative behavior of investors.  Their liquidity leaves equity markets susceptible to large swings in both directions in short periods of time, particularly now with the prevalence of algorithmic trading. On the contrary, an investment property is illiquid and more stable, therefore less susceptible to rapid fluctuations in value, but not immune to losing value just as a stock could. However, even in the worst case scenario land and buildings still have inherent value and can be cashed out for a loss that isn’t zero. To be clear, there are riskier real estate investments like raw land, opportunistic or speculative developments that have lost all investor money; however, strong operators managing income-producing properties tend to have a lower risk profile. 

Passive Investing - There is a quote by legendary investor Philip Fisher that says, “The stock market is filled with individuals who know the price of everything, but the value of nothing." Essentially what Fisher is surmising is that many beginners in the stock market solely look at the price of the stock but do not do the research to understand the underlying reasons or trends as to why the stock price the way it is. It is imperative to not only understand this but also understand the core business before making an investment in equities. Therefore most beginners in the stock market have the same odds at making money in the stock market as they do at the roulette table in Las Vegas. Unless you commit an extensive amount of time studying market trends, economics, P/E ratios and all of the other important components that are involved in stock trading, you are better off leaving it to the professional investors to invest your money as it aligns with your specific goals or investing in low-cost index funds that are lower risk but produce a smaller return. What is great about real estate is the fact that one does not have to invest actively in order to reap the benefits. For the same reasons an investor may use a wealth manager, passive investors in real estate can leverage the knowledge and experience of professionals to deploy their capital on real estate assets that align with their investment goals. Whether through REITs or a Syndication deal, passive investors can enjoy solid returns and tax incentives that can, in many instances, outpace the equity markets over time while having their money backed by a tangible asset with a lower risk profile.

Conclusion - In conclusion, investors should probably invest in both types and the degree to which they weigh one over the other should reflect whatever specific investment goals they have. Many investors shy away from real estate as they assume they have to invest actively to make money. However, in reality, investors can use real estate syndicators and REITs to invest in housing the same way they would use a wealth management firm to invest in stocks, funds, and bonds.  As the economist’s study concludes, housing tends to produce marginally higher returns over the long term than the equity markets while maintaining a more favorable risk profile.

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