Home News Real Estate vs. Stock Market: Which One Will Make Me More Money?

Real Estate vs. Stock Market: Which One Will Make Me More Money?

by admin
0 comment

Real estate and equities are two different asset classes. Real Estate owns property, buildings, or homes, while Equity owns shares of publicly traded companies. Both types of assets can enhance the value of capital gains and both can be used to create cash flow.

Many factors determine which investment is right for you and how each will perform based on your own specific timing and goals.

Let’s look at those contrasts, along with the benefits and risks.

Which is more profitable, real estate or stocks?

Investing in real estate has historically yielded an average annual return of 3% to 4%. In contrast to investments in stock market indices, they have yielded returns of about 10% per year over the long term.[1]

The stock market has outperformed the real estate market on average by nearly tripling returns in the history of both asset classes, but there are certain factors to consider.

US real estate nominal returns have historically been based on rising inflation and home replacement values. (Nominal rate of return is the amount of money made by an investment before taking into account expenses such as taxes, investment fees, and inflation).

image source

Housing markets, like the stock market, can go through booms and busts caused by low interest rates, easy Federal Reserve policy, and speculation by investors. Real estate values ​​are also highly region dependent, rising based on supply and demand in a particular area as the local economy booms. When jobs are created, employees need a place to live, creating geographic demand. The supply of new homes from local builders also determines supply and pricing.

Buying your own home in a growing area or buying a rental or investment property in a high demand area can be a great investment. With properties in the right area at the right time, it is possible to outperform the stock market. However, both where you buy and when you buy in real estate have to be right. Real estate is also illiquid, has high transaction fees, and is not as straightforward as buying a mutual fund or index exchange traded fund (ETF).

Buying individual stocks in the right companies can give investors the best returns of any asset class. Because if you choose the right company and hold it for long enough, the stock can have upside from 100% for him to 1000% for him. Equities are going up more, but they are also riskier because they can go down 50% to 90%, which is very rare in real estate. Of course, stock index funds produce smoother returns over time.

In equities and real estate, you can choose your level of risk and potential return in both asset classes.

Four factors that determine whether stock real estate is more profitable for you:

  1. when you buy
  2. what you buy.
  3. how long do you hold it
  4. Your knowledge of what you are purchasing.

Real estate and stock returns are based on where in the market cycle you buy and when you sell to secure a profit. Buying at the end of a bubble in either market can lead to losses, while buying after a crash in either market can be very profitable. The key is to buy at reasonable fundamental values ​​during the trend.

The quality of what you buy is more important than the type of asset you buy. Price is what you pay and value is what you get. High value properties beat low value speculative stocks. Equity index funds can beat bad properties in bad geographic and economical neighborhoods.

If you buy and hold either asset class for a long period of time, such as 10 to 20 years, returns can begin to average out regardless of when the entry was purchased, with historical average returns diversifying everything else. can be expected to be equivalent to a stock portfolio that has properties.

Don’t invest in what you don’t understand. If you’re an expert in the field of buying real estate, you’ll do better than know nothing about it. Investors can also do better in the stock market if they study the stock market and know the companies behind the stocks they own. Research and competence take precedence over self-confidence in successful pursuits.

Which is richer, real estate or stocks?

Looking at the list of richest people in the world Most of them made their fortunes by starting companies, taking them public, and holding most of the shares to grow them into large corporations.

Looking at this list, we can see that owning shares in the best companies is the most common path to world-class wealth. Nothing creates a massive net worth like the leverage of building a publicly tradeable business. At the same time, investors can participate in this wealth building by owning stocks owned by billionaires or by copying the portfolios of legendary investors. You can start small and grow your own portfolio.

Surprisingly, no one made it into the top 20 list through real estate investing, as real estate investing does not generate the same level of scale, leverage, compounding and growth opportunities that equities can generate. Owning the earnings value of a blue chip company through equity provides far more future cash flow value than a piece of real estate.

Steve Balmer is the only employee on this list, as he was able to use his position as Microsoft employee #30 and CEO to acquire a significant stake early in Microsoft’s growth cycle.

Other members of this list were founders or children of founders of major corporations, with the exception of Warren Buffett, who acquired Berkshire Hathaway and turned it into an insurance holding company and corporate conglomerate.

We all have the opportunity to invest in and trade shares in publicly traded companies that these capitalists have founded and grown to generate significant net worth of their own.

Everyone’s risk tolerance and return goals are different, so you should choose an asset class that’s right for you. Real estate millionaires abound, but more are using stock ownership to build their wealth.

real estate and stock market
Image created by Holly Barnes

You may also like