Real Estate vs. Stocks

[arebelspy]

BiggerPockets had a decent article comparing the returns of real estate versus stocks.

Naturally there are always things one can nitpick/argue about in scenarios like these, but I thought this article did a decent (fairly balanced) job.

http://www.biggerpockets.com/renewsblog/2013/07/17/real-estate-vs-stocks/

[easyrider]

They lightly touched on it but with real estate most of the profit is from the rent as opposed to property appreciation.  The rent is taxed every year which is unfortunate.  I think it also counts as regular income which doesn't help.

With stocks, for the most part the profit is in capital appreciation and a smaller amount from dividends.  So the larger capital appreciation element you can hold off being taxed on and then there may be tax discounts to it being a capital gain.

This was lightly touched on in the article but yet it is not a small issue.  It can easily swing the math.

All that being said, the stock market is expensive right now.  If you can find a rental that is cash-flow positive I would probably take it over stocks.

[arebelspy]

They lightly touched on it but with real estate most of the profit is from the rent as opposed to property appreciation. 

Lightly touched on?  That was the whole point of the 2nd and 3rd graphs, which showed the rents put in and came to the conclusion you need to have at least 6% cash on cash return for real estate to match stocks (then hopefully more if you want to be paid for your time.)

I do think leverage is better with real estate than stocks, which he talks about at the end and says the opposite - while margin is easier to get, a long term fixed real estate loan isn't going to get called just because the asset price is down.

[brandino29]

Thanks for sharing.  I suppose I'll need to be frequenting the Landlording thread more often now as we just recently went into contract on a small 2 bedroom 1.5 bath as a rental.  It practically fell into our lap as a friend had been transferred to a new city a while back and their renter of several years got married and moved out so they were just looking to get rid of it quickly (they had it paid off already and had been renting it for many years). 

Sale price of 65k, the appraisal will be completed this week but I expect it to be in the mid 80s based on comparable houses in the same neighborhood.  Fetches $800/month in rent in a good location, good school district, close to downtown.  We hope to have it pay itself off in ~8 years time. 

Even if it takes the full term of the mortgage, I feel pretty good about a $15,500 initial investment (20% down plus closing costs) turning into $85k equity and monthly payments of $800 in 15 years.   

[honobob]

What a silly comparison.  Stocks are a national market.  Real estate is a local market.  Compare stocks to a real estate market that has seen 40+ years of 10% appreciation and 7% annual rent increases and you'll see that stocks are BIG losers. 

Stocks AND real estate have a place in investing.  There does NOT have to be either/or.

[grantmeaname]

I don't think anyone was setting it up as a dichotomy.

[honobob]

I don't think anyone was setting it up as a dichotomy.

What other purpose?

[aclarridge]

What a silly comparison.  Stocks are a national market.  Real estate is a local market.  Compare stocks to a real estate market that has seen 40+ years of 10% appreciation and 7% annual rent increases and you'll see that stocks are BIG losers. 

Stocks AND real estate have a place in investing.  There does NOT have to be either/or.

I don't think it's a terribly silly comparison. Some people are lucky/skilled enough to invest in the "right" areas, and their investments do really well, just like some people are lucky/skilled enough to invest in the "right" stocks, and they do really well too.
So if you are going to make a comparison between the two markets then comparing broad indices seems like a reasonable idea.

[Kazimieras]

Stocks AND real estate have a place in investing.  There does NOT have to be either/or.

+1
It is always worth diversifying your investments so that they can counteract each other so that you minimize your risk.

[honobob]

What a silly comparison.  Stocks are a national market.  Real estate is a local market.  Compare stocks to a real estate market that has seen 40+ years of 10% appreciation and 7% annual rent increases and you'll see that stocks are BIG losers. 

Stocks AND real estate have a place in investing.  There does NOT have to be either/or.

I don't think it's a terribly silly comparison. Some people are lucky/skilled enough to invest in the "right" areas, and their investments do really well, just like some people are lucky/skilled enough to invest in the "right" stocks, and they do really well too.
So if you are going to make a comparison between the two markets then comparing broad indices seems like a reasonable idea.

But what markets are you comparing?  The S&P 500 vs. all local markets in the United States.  How is that comparable?  Take a look at the top 500 real estate markets and you'll see vastly different results.