Houses or Stocks, Which Investment is Better?

Q: Gerald, I was watching one of those financial programs on TV the other day and one of the guests was saying that stocks have been proven to be a much better investment over time than real estate based on historical returns. Is that true?

A: That’s a great question, Andrew. And just like you, I’ve heard people say that before also. The thing is that most of these kinds of studies & statistics that you will hear about the returns on real estate versus stocks are very misleading; for starters, they look at averages and your life isn’t made up of a set of averages, it’s made up of a specific set of things that happen to you that you have to deal with. So, the real answer is, like most things, the devil is in the details, so it depends on what property and what stocks you buy. But I’ve seen many very misleading studies on this subject that don’t take into account many of the additional advantages of owning real estate, particularly rental property that you don’t get with other assets:
1) The first misleading aspect of these kinds of studies is that they assume that everyone pays cash for property—the truth is that most people don’t, so these studies often overlook the power of leverage-you can borrow most if not all of the purchase price for a property—this obviously amplifies your return: Even a full time real estate investor like me with no W2 income can normally borrow 60-75% of the purchase price of a residential property-either from a traditional lender or a private investor; You don’t have to worry about a margin call on residential real estate debt-A 30 year fixed interest rate loan will amplify your returns on rental property.
2) Real estate is an illiquid asset and people who know what they’re doing never pay anywhere near average market price for a property when they buy, whereas it’s much harder to find and purchase undervalued stocks
3) Most misleading arguments on stock versus real estate returns ignore the regular income and cash flow that real estate provides—you think might affect your overall return? There are dividend stocks, but for the most part, they don’t usually generate anywhere near the kind of regular income that a rental property will
4) Lastly, and probably most importantly, I’ll bet the host or guest on the financial show you were watching conveniently forgot to mention all the various tax benefits you receive in real estate that you do not get with stocks, I’m talking about deductions like mortgage interest, mortgage insurance, selling costs, real estate debt forgiveness & property taxes, just to name a few, not to mention the fact that by virtue of IRS section code 121 and 1031 a savvy real estate investor can defer taxes on gains indefinitely…
So, Andrew, when you add all these other benefits, historic returns for real estate are a hell of a lot better than these unrealistic real estate versus stock market average return analyses suggest—remember, for the most part, what you’re hearing is mainly wall street propaganda, and historically, more fortunes have been made in real estate than in anything else
Thanks for your question, Andrew. For more real estate tips and for information on my real estate coaching program, visit performanceproperty.com. I’m Gerald Lucas and I’ll see you again soon.