Patrick says

You’ve heard this before: Stocks, over time, outperform real estate.

There are many schools of thought on this but one common statistic that gets tossed around shows equities over the past several decades have returned an average upwards of 10% a year, while real estate is in the 4% ballpark. ...

1. Much more liquidity

2. Lower transaction costs

3. Less work

4. More diversification

5. Ability to invest in products you love

6. Easier to protect your investment in a downturn

7. Fewer taxes and fees

https://www.marketwatch.com/story/7-reasons-stocks-are-better-than-real-estate-2018-04-24

In the real world, real estate owners owns all the stocks too.

Ken Fisher also wrote about this. He used as his example a house in San Mateo CA I believe.

My friends were sometimes bragging to me about their capital gains in their houses. I would say "My shares of Apple split 7:1; did your house grow seven bedrooms?"

Of course, houses don't also pay dividends. You can rent a house but it's a bit of trouble and work.

To get the capital appreciation out of your house you must either 1. sell it 2. reverse mortgage it.

The capital appreciation stocks is superior, they are not taxed while you own them, while you pay property tax on the house that you didn't sell yet. If your stock pays dividends, you are taxed on this income of course.

I can make 25 free stock trades at Vanguard, thereafter $2 per trade. The sale of a house costs 6% or so and takes a long time.

You can sell a few shares of stock to raise cash. You can't sell a room/

clambo says

You can't sell a room/

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

P N Dr Lo R says

clambo says

You can't sell a room/

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

If the stock market would fall I still have a lot of investments which pay dividends. Stock market fluctuations don't stop people from consuming and the dividends keep rolling in. The stock market could fall significantly but I'm sitting on 300% capital gains and would never need to sell all of my stocks in one year to survive. Therefore the drop would have little effect.

Stock capital gains are actually fueling the real estate bubble in places like Santa Cruz CA. People who work in high tech get stock options and this wealth is used to buy real estate. Of course this irony is lost on about all of the buyers. My friend who sells real estate in Santa Cruz realized it when I told her. "It's true, my house buyers are generally working in high tech and have a windfall for huge down payments."

Houses are fun. It feels like "my castle" and it of course provides a sense of security. It also provides bragging rights. What it is not is a great investment.

clambo says

Of course, houses don't also pay dividends. You can rent a house but it's a bit of trouble and work.

To get the capital appreciation out of your house you must either 1. sell it 2. reverse mortgage it.

The capital appreciation stocks is superior, they are not taxed while you own them, while you pay property tax on the house that you didn't sell yet. If your stock pays dividends, you are taxed on this income of course.

I can make 25 free stock trades at Vanguard, thereafter $2 per trade. The sale of a house costs 6% or so and takes a long time.

You can sell a few shares of stock to raise cash. You can't sell a room/

Investment real estate has much higher dividend yield in the form of rent cash flow.

Investment real estate has the tax advantage of depreciation. An off-setting tax advantage in paper securities trading is not in stocks but in futures contracts. BTW, I do both; "25 free trades" wouldn't last a day for me.

Investment real estate allows for greater leverage than typical broker would allow in an individual's stock portfolio, so can take greater advantage of a bull run. To match the type of leverage typically allowed in real estate, you'd have to trade futures contracts (with attendant risk of being margin-assessed daily if not by the minute, unlike you can hold onto underwater real estate for months or years while collecting rent; markets can be irrational at times). OTOH, paper securities trading allows going short; renting someone else' house is going short in real estate, but that's very limited in portfolio size.

If you are a buy-and-holder, investment real estate makes sense. Paper securities trading allows faster re-positioning during turbulent market conditions and down turns . . . if you know what you are doing.

Stocks allow participation from far away, whether it's on the other side of the continental US or somewhere else in the world. Doing that via real estate would be REITS but those tend to have much lower yield than direct holdings in investment real estate.

P N Dr Lo R says

But to be fair, if the market should crash, you can't live in your stocks. Ultimately, there just numbers in millions of brains.

To the degree that your stocks represent ownership in money-making enterprises, they are not just numbers, but a real claim on the earnings of those enterprises very much like a deed is a claim on the possession of land. The stock price doesn't matter much if the dividends keep rolling in.

The value of land can also fall to zero in certain cases. Detroit was extremely prosperous in the 1950's and land was valuable there. After the riots in the 1960's, values started falling and never recovered. Lots of it is worth even less than zero at this point because it is simply too dangerous to live there.

Reality, the cost of entry into the stock market is much lower. You can begin without borrowing capital to buy your stock investment. $1000 is a minimum for an excellent mutual fund company. Everyone I know who bought real estate borrowed money to do it. If you borrow capital to buy a rental property how is this making you a great yield?

If you assume that the initial investment into stocks and real estate is $500,000 cash sitting in a bank account somewhere, then the yield on real estate may be good.

If you look at only property in large cities, appreciation is closer to 5-6%. When you factor in the tax savings and ability to leverage it, without risk of losing it during a down turn (assuming you're still paying the mortgage). If you're buying with 5% down, that leverage and those returns can be massive.

Leverage means risk though. If you get too close to the edge (your incoming rents only barely cover your outgoing mortgage + maintenance etc) then you can easy be pushed into losing by a downturn.

That's why the banks used to demand a 20% downpayment. The price could decline 20% and it would still be all your loss and not the bank's. Gives the bank a 20% margin of safety.

clambo says

If you borrow capital to buy a rental property how is this making you a great yield?

If an apartment building's rental yield (after all expenses before depreciation) is 12%, borrowing cost is 4%, down payment 20% (5x leverage), the ROI is 8% x5 = 40%. If the building structure is worth 1M, it throws off another $37k/yr depreciation tax shelter, on a $200k initial investment! That's before counting property appreciation. There are no 40% or 20% dividend-yielding stocks (that are not about to go bankrupt and costing you the entire initial investment); stock brokerage accounts for individuals would typically only allow up to 2x leverage on overnight positions. Even if you get a portfolio-margin account (with $200k+ initial capital some brokers would allow PM) with higher margin allowance, you'd be facing margin check every night if not every minute in real time! If/when there is a flash crash or flash spike against you, you'd be screwed. That's very different from holding investment real estate and being able to sit out the temporary market irrationality so long as you pay tax and mortgage, which presumably is lower than rental income when occupancy rate is as low as 75%, which is really low.

For someone only having $1k, obviously buying investment real estate is not an option. I wouldn't recommend buying mutual fund either though at this point, after 9 years of bull market: someone putting in $1k now can easily lose $500 of that in the next 3 years. Save up at least $25-50k first, then decide whether you want to put that in investment real estate or in a trading account that won't lock you up after only 4 pairs of round-trip trades in a week. The primary advantage of security trading is high liquidity, so prepare to take advantage of the high liquidity and get out if your entry point is wrong.

You will not lose an investment in a mutual fund unless you panic and sell it at the wrong time.

Since your reason for buying the stock mutual fund is either 1. capital appreciation 2. dividend income 3. a combination of these, it makes no sense to consider selling the mutual fund in a down market period. You could systematically withdraw some of it after it has appreciated capital. A bond fund pays income.

Buying a stock mutual fund today is fine if you expect to live for 10 years or more. If you seek income, or a combination of them, there are funds which have dividend paying stocks. If the stock market dips people will still be consuming, producing profits and therefore dividends.

As capital appreciation investments, stocks are better than houses. As income investments, not so much.

I have my own personal "bull market" since I began investing in 1983. It's convinced me.

Reality says

Even if you get a portfolio-margin account (with $200k+ initial capital some brokers would allow PM) with higher margin allowance, you'd be facing margin check every night if not every minute in real time!

Agreed. But that's crony capitalism/socialism right there. Incredible leverage is given to real estate investors and a "tacit" notion that they will be bailed out if things go south, one way or the other. Leverage should be the same for any type of investment/speculation. The only reason real estate can be so lucrative is that it's even more politically protected than the general stock market (which carries a lot of 401Ks). This is a continuously yuge bubble concern and we're nearing one again.


Reality says

Save up at least $25-50k first, then decide whether you want to put that in investment real estate or in a trading account that won't lock you up after only 4 pairs of round-trip trades in a week. The primary advantage of security trading is high liquidity, so prepare to take advantage of the high liquidity and get out if your entry point is wrong.

I would not recommend real estate now, we're definitely reaching a blow-off top. Stocks only if you do good research on select long term bets or if you can trade long and short as short positions will become more lucrative again at some point. The liquidity is def. an advantage, but with real estate you can try one of the new 5% or less down scams again and just walk away if it goes south. Whenever you buy property put as little down as possible - unless it's a buyers market and you can get a huge discount for cash - and ride the leverage at the expense of the taxpayer in case it fails - it's the American way of the housing market ;)

Although your 7 reasons are fine, you must factor in rising rental markets if we are going to have a genuine conversation about real estate vs stock market.

Everyone has to live somewhere.

BayArea says

Although your 7 reasons are fine, you must factor in rising rental markets if we are going to have a genuine conversation about real estate vs stock market.

Everyone has to live somewhere.

Agreed. Also it's local, some markets will still be decent because people get pushed out of too expensive markets. Colorado (and Nevada some) has appreciated quite a bit since they are taking all the CA "refugees".