Why Real Estate is a Better Investment than Stocks
I often hear people say that “historically, the stock market returns 10% whereas real estate returns 6%. So why should I consider investing in real estate?”
Let me start with the extremely simple answer to this question. The reason I prefer a 6% return over a 10% return is that with real estate I am leveraged. In other words, with real estate I leverage my investment position by using someone else’s money (the bank). The beauty of this is that I have a small up-front investment, yet I get to keep all the appreciation!
Let’s see how this works with a real life example. Let’s say I purchase a $100,000 condo. I put 10% down, plus say $3k for closing costs, for a total of $13k up-front investment. Then I rent out the condo for $0 cash-flow (in other words my rental income each month exactly offsets my mortgage payment, taxes, insurance, etc). At the end of one year we assume my condo has appreciated in value to $106,000. I have just made $6k on a $13k investment….a 46% return on investment!
Now, obviously this is a very simple example, but you see the idea here. Even if the condo had appreciated only 2%, that’s still a 15% return on investment. Certainly there are a multitude of other things to consider, not the least of which are…
1) Being a landlord is hands-on, whereas investing in stocks is very hands-off. So one has to evaluate whether they have the time and patience to deal with real estate.
2) Being a landlord is risky. Tenants can destroy your property (and your sanity!). This is a risk we try to minimize but certainly bad things happen to the best of us.
3) People point to the “Great Recession” and say that real estate doesn’t always appreciate 6%. I agree, but keep in mind that stocks don’t always appreciate 10%. If anything I would say that real estate is much less volatile than the stock market. There have only been a few periods in history where real estate prices went down, whereas stocks have down years all the time. Lastly, in my example above I assumed $0 cash-flow, but a better strategy would be to have positive cash-flow so that you are never forced to sell. In other words if the market goes down you can simply keep on renting and wait the market out.
I could go on and on about this, but the point of this article was to provide my math-backed logic on why investing in real estate can be better than investing in stocks. Please contact us if you have any questions!