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The real estate vs. stock market debate is as old as time. Both asset classes hold importance in the financial portfolios of Americans. They’ve both paved the way to wealth for many investors, especially when it comes to long-term investment.
According to a recent Gallup poll, real estate investments are top of mind for nearly 34% of American investors. This compares to 18% of investors who favor stocks or mutual funds. With both strategies vying for attention, it’s crucial to analyze which of the two offers higher investment returns in the long run.
At LittleBigHomes, we break down and analyze the pros and cons of each to help you decide.
Real Estate vs. Stock Market: Which Performed Better in the Past?
When you compare the past few decades of real estate and stock performances, there’s a clear winner.
According to experts at the American Institute for Economic Research, stock investments have produced bigger and better returns, averaging at a rate of 8% to 12% annually.
Real estate returns are paler in comparison, with returns ranging from 2% to 4% per year. Here are some more statistics that indicate how the stock market has outperformed the real estate market over the years:
There are notable disparities between the stock and real estate markets’ indexed performances. The S&P 500 index saw gains of 12% to 14% on average for over 20 years, from 1980 to 2023 (higher for dividends).
- The real estate market experienced an average annualized growth rate of 8.6% during that same time.
- Between 1968 and 2009, the inflation rate in the U.S. was around 4.6%. Real estate investments didn’t see much boost during this time and had an annual appreciation rate of 5.4%.
- Lastly, the stock markets have shown overall gains of an astounding 155% throughout the 10 years from 2013 to 2023. With gains of about 37%, the Vanguard Real Estate Index, or VNQ, isn’t even close.
Of course, you need to account for variables such as the economic atmosphere that might have affected these investment returns during these years.
Even so, during most of the U.S.’ financial history, home values haven’t risen significantly more than the level of inflation. The stock market, despite its volatile nature, offered substantial returns.
Despite the better aggregate performance of stocks, real estate investments are better at providing a stable income. This is true if you’re an investor dabbling in the rental market. Unlike the stock market, rental income guarantees a consistent flow of cash.
This is why a more nuanced look at the stock market vs. real estate debate is necessary.
Differences Between Real Estate and Stock Investments
Here’s what you need to know about the key differences between real estate and stock investments.
Stock Investments
Acquiring stocks means owning a share in a publicly listed business. You can own shares of a single company. Or, you can invest in varying equities using mutual funds or exchange-traded funds (ETFs) to diversify your portfolio.
Either way, stocks promise you liquid security. This means they allow you to profit by selling shares during a stock rise or via periodic dividends. Alternatively, you can incur losses if the stock drops. Since they are a volatile investment, stocks promise higher returns at a higher risk.
Even though the stock market has historically produced strong long-term returns, you should consider volatility when making significant investments.
Another drawback of investing in the stock market is that you don’t have a tangible asset to hold on to, like a property. Trading on the stock market also requires years of experience, dedicated research, and some level of expertise.
The Enron scandal of 2001 is a prime example of the many risks involved in stock investments, especially if you lack concrete knowledge of the market and its participants.
Real Estate Investments
For the most part, real estate investments offer tangible assets. You can gain value from your property by selling or renting it. All this, of course, is based on the premise that you have a sizable upfront investment.
A passive form of real estate investing is REITs or real estate investment trusts. You can think of them as the real estate version of a mutual fund. By investing in REITs, you passively invest and share profits of various properties you don’t need to manage or finance.
Since REITs are available on stock exchanges, they’re more liquid than actual properties and offer more diversification.
Real estate investments are vulnerable to changes in the economy. Home values can quickly decline, leading to housing and mortgage crises like in 2008.
Owning physical property can also be taxing as you will have to expend a sizable amount for upkeep and repairs. These ongoing costs can cut into the profits you’ve incurred over the years.
Real Estate vs. Stocks: Cost Comparison
Both real estate and stocks appear to promise long-term returns. However, you’ll need to weigh the rate of return against the costs associated with these investments.
For real estate, we’re looking at expenses like:
- Property taxes.
- Maintenance and repair costs.
- Closing fees.
- Mortgage costs.
When investing in stocks, you’ll need to consider costs like:
- Commissions and fees.
- Account maintenance costs.
- Capital gains taxes on your high returns.
Factors Influencing Long-Term Investment Returns
Here are some key factors that can affect long-term investment returns.
Portfolio Diversification
The goal of investing should be to maximize returns and minimize risks. This is only possible when your investment portfolio is diverse.
Limited exposure can make your investments vulnerable to losses. Instead, a better idea would be to invest in a varying range of:
- Equities
- Real estate
- Other asset classes
Real estate investments can add diversity to your stock investments as both are distinct asset classes. Since they have little in common with bonds and stocks, changes in one won’t impact the other. This type of balanced asset allocation is more suitable for long-term investments because it is less vulnerable to risk.
Ease of Investing
Indeed, investing in stocks is easier and more accessible than investing in real estate. There is a great deal of transparency for stock and equity investors. Most publicly traded corporations publish their earnings and exchange pertinent financial data with authorities. Investors can obtain information via social media groups, channels, and media outlets that track the market.
This is not the case with real estate, which is more complex and unpredictable. Investors don’t have access to a consistent source of home pricing data. The high “buy-in” pricing makes it more difficult for small-scale investors to make investments.
Extent of Liquidity
Long-term real estate returns can be lucrative, but they are also illiquid. This implies that you are unable to sell them for cash overnight. To complete a sale, there are several legal and administrative requirements.
Because you can purchase or sell stocks with the touch of a button, they are more liquid than other investing options.
Stocks or Real Estate: Which Investment Is Better in the Long Run?
The answer to which investment is better in the long run depends on two factors:
- Risk tolerance
- Investment goals
If you’re averse to risk and don’t mind illiquidity, real estate is the better option for a long-term investment.
Stocks are typically superior long-term performers if you have risk tolerance. As economic ups and downs tend to adjust over time, stock investments might offer greater wealth creation in the long run.
A diverse portfolio catering to both asset classes is the best bet for balanced investment returns.
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