Best Way to Invest: Stocks vs Real Estate Historical Returns

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Written By Justin McGill

DealBloom aims to share the latest tips and strategies to help realtors, brokers, loan officers, and investors navigate the world of real estate.

When it comes to investing, there are many options available. But which is the better investment: stocks or real estate? To help make your decision, we’ve compiled a list of stocks vs real estate historical returns so you can compare their potential.

I remember when I was first trying to decide how to invest my money. I had some friends who were big into stocks and others who swore by real estate. I didn’t know which way to go! In the end, I decided to do a bit of research on the matter. And that’s when I found this article on stock vs real estate historical returns.

After reading through it, I realized that there wasn’t a clear winner between the two investments. It depends on what you’re looking for in an investment and what your goals are. If you’re willing to take more risk for potentially higher rewards, then stocks might be right for you. But if you prefer a steadier return with less volatility, then rental property could be a better option

Stocks vs Real Estate Historical Returns

There are many differences between stocks and real estate, but one of the most important is historical returns. Stocks have outperformed real estate by a wide margin over the long term.

In the past 100 years, stocks have returned an average of 10% per year, while real estate has returned an average of just 4%. This difference is even more pronounced when looking at the past 20 years.

From 2000-2019, stocks have returned an annualized 6.8%, while real estate has returned just 1.9%. This outperformance by stocks is due to several factors, including higher growth rates, higher dividends, and lower volatility.

How to Start Investing in Real Estate

When considering an investment, there are several factors to consider. First, you need to know who you are as an investor and how the market is operating.

Every type of investing comes with its own set of unique risks and rewards. As an individual investor, your risk tolerance depends on your individual situation.

Some investments are less volatile, like money market accounts, while others are more, like futures. Consider your personal circumstances to decide which investment is right for you.

If you’re feeling unsure about how to approach investing, remember that taking strategic risks can be a great way to grow your portfolio. If you need help getting started, try evaluating your emotions around money and see if your current strategy needs revision.

Diversifying your portfolio is an effective way to minimize your losses. By trading in different asset classes, you can spread your risks.

Understanding your real estate investment portfolio and your approach is critical to your success. By taking the time to build a comprehensive portfolio, you lay the groundwork for future success in the industry.

When considering your investment portfolio, you’ll want to assess the real estate market risk. Look at how volatile the market is when you’re ready to invest.

Timing your investments with the ebb and flow of the market is crucial. Also, it’s important to research the properties you invest in, even if it’s not directly.

Various traits can make a real property less valuable, such as its location or condition.

Analytic software and other tools can help you determine a property’s profit and risk.

Financing your investment property is just as important as finding one. However, it’s not the same as financing a primary residence.

Some ways to start your own investment projects or seek out investment opportunities are:

  • Crowdfunding: ask the public to help fund your real estate investment.
  • Take out multiple mortgages: ask the bank if you can take on more than one mortgage to help finance multiple properties.
  • Loans for flipping houses: seek private funding to help fund a flipping project.
  • Find opportunity zones: invest in a disadvantaged community to take advantage of tax benefits under the Tax Cuts and Jobs Act of 2017.

Monitor Your Investment Performance

As an investor, you should evaluate your investments as you go. There is a catalog of ratios and calculations you can use to evaluate your real estate progress.

Some methods work better than others depending on the property type. For example, some work well for residential properties, while others work best for commercial properties.

Examples of metrics you may need to include net operating income (NOI), internal rate of return (IRR), and operating expense ratio (OER).

The Real Estate Market vs. the Stock Market

While the median house price tends to increase by 5.5% annually, the returns on the stock market are much higher.

This number is still somewhat skewed because the average house size in 1940 was 1,246 sq. ft., while today it is 2,430.

The average home size has increased significantly over the past few decades, which means that although the overall return on investment for housing has decreased, the return per square foot has gone up. When accounting for inflation, this figure is still positive, albeit lower than it was in previous years.

When it comes to investing, the stock market has historically outperformed real estate by a wide margin. Over the past century, stocks have returned an average of 10 percent per year, while real estate has only returned an average of 3 percent.

This makes sense when you consider that investing in stocks is equivalent to buying a piece of a business and that a business will typically grow faster than a property’s value.

But, this doesn’t take into account that real estate is leveraged.

Who Should Invest in Real Estate and Stocks?

Both stock and real estate investing offer investors the opportunity to become wealthy. But which personality types are best suited for investing in them?

  • Those who believe that wealth is made up of real assets and not paper.
  • Those who know where they want to live in the next five years.
  • Those who do not do well in volatile environments.
  • Those who are easily spooked by downturns.
  • Those who tend to buy and sell too often.
  • Those who enjoy interacting with people.
  • Those who take pride in ownership.
  • Those who like to be in control.
  • Those who exhibit discipline in not chasing rallies and selling when things are imploding.
  • Those who like to trade.
  • Those who don’t want to be tied down.
  • Those who have a limited amount of capital to invest.

Should You Invest in Real Estate or Stocks During a Pandemic?

Even though we are still in the midst of a pandemic, it is worth discussing investing in either real estate or stocks. Both have performed well despite these unprecedented times.

The national median home price for existing homes is currently around $390,000, which is an increase of about 18% from last year. Additionally, real estate prices held steady throughout 2020, despite market volatility in other sectors.

When the stock market took a nosedive in March 2020, many people were worried about their investments. However, real estate actually picked up during this time as mortgage rates collapsed. This showed that real estate is a more stable investment than stocks, even during times of economic turmoil.

Today, stocks are doing fantastic. But the ride was much bumpier.

If you’re looking to invest during a pandemic, my vote is for real estate. Real estate has outperformed stocks in a less volatile way.

Real estate provides a sense of security and comfort during difficult and uncertain times.

If you have kids, the preference for investing in property is even more intense. As a parent, your number one priority is to take care of your kids.

If you can work from home, then the value of your home is even greater as well. My 2022 housing market forecast is about 8% median home price growth.

Every morning, I thank God for my house, which provides my family with a place to live. However, I don’t often think about the stock market.

But when I do, I tend to think what else could go wrong that will give stocks a beating.

No Bad Choice Between Real Estate and Stocks

The comparison between investing your money in real estate or the stock market is akin to the choice between chocolate or vanilla ice cream. Both are great, but too much of either one can be bad for you.

When you are young, it’s easier to invest in the stock market because you have less money to spend and are freer to move around.

If you have enough money to buy a rental property when you are younger, you’ll have more enthusiasm and energy to deal with the work required to own such an asset.

As you age, you might want to settle down. Owning a home of your own is beneficial to that.

It’s great to finally have a place to call your own and an investment that will likely appreciate over time. As you get older, you may want to simplify your life a bit due to having less energy and more family responsibilities.

It’s great to see your portfolio go up, especially when you don’t have to do any work for it. It’s even better when you can reinvest those dividends and let compound interest do its thing.

But after a while, seeing your balance just sitting there in your brokerage account becomes less and less gratifying.

Of course, money should be spent, or else, what is the point of saving money and investing? Real estate is a great way to invest your money and see it grow.

What question will you find yourself asking more as you age and accumulate wealth?

Own assets that increase in value with inflation such as stock and property. Build your passive income portfolio.

Invest in things that rise in value with inflation such as stock and property. Build a passive investment portfolio.

There is no reason why you can’t invest in both real estate and stocks.

Try Crowdsourcing Real Estate

If you don’t want to buy a property outright or you don’t want to tie your capital up in illiquid assets, consider looking into crowdfunding.

Crowdsourcing your real estate investments can help you get better returns by investing in areas beyond just where you live. This flexibility can be a great way to maximize your investment potential.

If you’re looking for strictly income returns, cap rates in the Midwest and South are over 10%, while they’re only around 3% in San Francisco.

Crowdstreet is a good real estate platform for investors. I have invested $810,000 through them and diversified my holdings. If you’re an accredited investor, I highly recommend checking them out!

They focus on individual deals in 18-hour cities where valuations are cheaper and growth rates tend to be faster.

Does Real Estate Return More Than Stocks?

There is no simple answer to this question as there are many factors to consider when comparing the two investment types. However, in general, real estate has the potential to offer higher returns than stocks, but it also comes with more risk.

For example, real estate is less liquid than stocks. It can take longer to sell and may be subject to market fluctuations. Additionally, real estate requires a larger upfront investment and typically has higher ongoing costs, such as property taxes and maintenance fees.

What is the Historical Rate of Return on Real Estate?

The historical rate of return on real estate varies depending on several factors, including the location, type of property, and period. However, some estimates suggest that the average annual return on investment for residential real estate over the past century has been around 4-5%.

Is it Better to Invest in Stocks or Real Estate?

Stocks tend to be more volatile than rental property and thus may provide greater potential for capital gains (or losses). On the other hand, rental property can provide a steadier stream of income, which may be more appealing to some investors. Ultimately, it is important to carefully consider all factors before making any investment decisions.

Conclusion

After doing some research, it’s clear that there is no clear winner between stocks vs real estate historical returns. It depends on your goals and what you’re looking for in an investment. If you’re willing to take more risk for potentially higher rewards, then stocks might be right for you. But if you prefer a steadier return with less volatility, then real estate could be a better option.

Justin McGill