Buying Stocks vs Real Estate Investing -- Which is Better?

We all know that putting some of our assets in real estate is good for diversification, but what about returns? Which asset class has produced better returns over long periods of time -- real estate or stocks?

0:18 - Real estate vs stocks
2:51 - Mistakes from the 2008 financial crisis
3:36 - How financial leverage impacts real estate investing returns
5:06 - The tax benefits of buying a house
5:29 - REIT investing and its tax advantages
7:14 - Real estate investing risks

First, it’s important to note that stocks tend to increase in value quicker than real estate.

Over long periods of time, an S&P 500 index fund has historically produced total returns in the 9–10% range. Meanwhile, real estate prices tend to outpace inflation, but not by much.

Since 1940, the median home value in the United States has increased at an annualized rate of 5.5%. However, this is misleading for several reasons.

Consider this, homes are significantly larger today, on average, than they were back then. The average home in 1940 was 1,246 square feet, roughly half of the 2,430 average of 2010. So if you adjust for home size, the annualized increase on a per-square-foot basis drops to 4.6%. And after accounting for inflation, the average home value has risen by just 1.5% per year.

Now let's compare this to stock returns.

Stocks have generated roughly 7% per year over the long run after accounting for inflation. In other words, the stock market has generated returns at more than four times the rate of real estate appreciation. If you’ve ever heard someone tell you that “your home isn’t an investment,” this is probably why.

Real estate as an investment has much stronger return potential
Real estate values tend to barely outpace inflation. However, there are a few reasons why real estate investments tend to do better.

Unlike stocks, where it’s irresponsible to invest with borrowed money, you can use significant amounts of financing for real estate investments without adding a ton of risk.

If you use debt responsibly, it's a healthy part of a real estate investing strategy. Just don't forget about the core metric of any property -- it’s ability to generate cash flow -- when you’re thinking about real estate investments.

The second reason why investment real estate can produce strong returns is that investment properties can be rented out to generate income. You can also rent out a part of a house and live in the rest, a move called house hacking.

Real estate investors enjoy tax advantages that stock investors don’t. For example, when you buy an investment property, you get to write off the purchase price over a certain number of years -- a tax deduction known as depreciation. It would be awesome if you could write off your stock investments in a similar manner, but that isn’t the case.

Even if you don’t own a property, real estate can offer tax advantages that the average equity investment can’t. Real estate investment trusts or REITs, get an extra tax benefit in that they avoid corporate taxes by paying out most of their income as dividends.

These are easy for investors to buy in an IRA or other tax-advantaged retirement account, meaning they can avoid dividend and capital gains taxes altogether in the short-term.

Together, the combination of rental income, leverage, and tax benefits can combine to produce attractive long-term gains.

So how has investment real estate compared with stocks over time?

Let's compare the total returns of the S&P 500 stock index and the Vanguard Real Estate mutual fund, a good benchmark index of equity REITs. The difference isn't too significant over the first few years but by 20 years out, the Vanguard ETF crushed the S&P 500.

If you look at the longest time period, you’ll notice that the performance is comparable but with a significant edge to real estate. This is an imperfect conclusion, as there are other ways to invest in real estate besides REITs and they have different investment dynamics. But it does illustrate the long-term return potential of real estate investments.

Now there are some downsides to real estate investing…

Actually buying real estate is a time-consuming investment.

Also, real estate is an illiquid investment. You can sell stocks with a couple clicks in no time at all. Conversely, it can take months to sell an investment property unless you want to accept a highly discounted price.

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[matturner]

I think it's time to make it more appealing for potential buyers. Real estate can be quite the rollercoaster! the stress and uncertainty are getting to me. I think I'll cut rents to attract potential buyers and exit the market, but i'm at crossroads if to allocate the entire $680k liquidity value to my stock portfolio?

[thuylamson-zt]

I think investors should always put their cash to work, especially In 2024, we'll start to see more market diversification. I'm hoping to invest about $350k of my savings in stocks against next year. Hope to make millions in 2024

[freedomisEexpensive-]

I started stacking to SAVE wealth. I've always been the type of person to spend my entire paycheck. I hate having money just sit in the bank. I am under pressure to grow my reserve of $950k. before I turn 60, I would appreciate any advice on potential investments.

[wildtill]

OMG - I thought I was gong to get a sales pitch on why I should buy stock from them. Instead a well thought out explanation of the benefits of owning both. Good stuff - thanks

[sanglee]

Just buy both and diversify your Portfolio..

[EmersonFranklin]

Great video though I think you were more biased towards Real Estates! Personally, I think stocks are "better". Major con however is that it needs your time, which is easily countered by working with/through an expert. Made my first million earlier this year through one. Have dabbled into Real Estates more than a few times, won't say I've been so lucky.
Another advantage is that you need relatively lesser capital to go into stocks than real estate.
Lastly, can you do the job of a Landlord? Can stocks call you by 12am about a broken pipe?

[omni]

i love Real estate but i hate having to manage it and worrying about vacancy

[albacusBC]

The recent housing crash is so bad that I read about someone who had to rent half of her bed with someone just to afford rent. foresaw the housing crisis and sold my property. I then put it in the market. That was late February. I've lost more than 40% of my portfolio's value. It makes me really sad. How can I turn this situation around?

[frenchyalicea]

I use stock profits to buy properties = convert my digital gains into tangible assets that provide stable reliable passive income on a permanent basis so long as I own them and use that income to further invest in stocks to continue the cycle.

[mohammedmoqbel]

The table in 6:30 is missed up. S&P 500 is the one performed 619.7% from 500ish points in 1996 to 3000ish. The inception date of May 13, 1996 is referred to VGSIX which was 10 back in 1996 now is 30 (213.1%)

[j]

It’s Stocks and REITs all the way for me.

[sku]

A rental in a good area is a money maker, up keep of the property, taxes, insurance, keeping good tenants .Stocks should always be be part of the pie

[PW]

Even if you lived in a house that you bought as your primary residence, it saves you the market rental value of that house AND you don't get taxed on money saved.

[nkatekoshibambu]

I've gone through many vids...this is one of the best by far. You given facts not bias and you left to decide. Excellent!

[johnmoore]

Totally correct about real estate being highly localized, in my area property taxes are tax deductible were 2.5% put a big drag on cash flow and gains like stocks are subject to capital gains plus depreciation I enjoyed was recaptured in summary in my area property taxes made real estate investments difficult

[jp]

I compared vanguard real state etf with s&p500, my results was different. The plot shows s&p was much more
profitable. I used yahoo for the data, and VNQ, VGSLX, and VGSIX for mutual fund. Any ideas? And yes.... I do believe in investing in real state and stock market

[blueblur]

The best financial decision we made was buying a multi unit as our first home. Your ability to save, grow a business, etc is enhanced when your housing is paid for by your neighbors (neighbors you get to pick as a bonus).

[luxushauseragency]

Excellent video. Our clients prefer real estate despite the fact that it is not as liquid as stocks and you need significantly more funds to get started. However, some properties are like regenerative income producing assets with the added bonus of capital appreciation. All the investor needs to do is choose wisely.

[contentmarketinginstitute]

Compounding stocks and ETFs for over 2 years before I could hit six figures in the market, Investing is interesting especially when the ROi is high. I do better at stocks

[alexlam]

Thanks so so much for information and research!!!!