The age-old argument of real estate versus the stock market… which is better? Which has the best long term performance numbers? While you may be looking for a simple “yes” or “no” answer, there’s truly too many variables to consider. Both can be great investments over the long term, and both can have extremely rocky periods of time where the returns lag and the mental burden is heavy. Without even considering investment returns, some love real estate and some favor the stock market. So let’s look at the pros and cons of each, some historical return figures, and come to a conclusion. Likely, it’s all personal preference!

The Stock Market

Investing in the stock market has been around for decades upon decades and has become extremely accessible over the past 10-15 years with the boom of technology and smart phones.

The pros

  • Liquidity – Nearly all ETFs and stocks and most mutual funds can be sold one day and in your bank account within 2-3 business days. This is an extremely favorable advantage knowing you can invest and seek returns while still maintaining almost 100% liquidity.
  • Diversification – With a single mutual fund or ETF, you can invest your money across hundreds of companies. Want to invest in companies that are seeking to make space travel possible? There’s an ETF for that. Want to invest in international clothing brands? There’s an ETF for that. Simple want to invest in the overall market across thousands of the biggest companies? There’s an ETF for that as well.
  • Tax advantages – Through individual retirement accounts and employer sponsored plans, you can get make tax deductible contributions into the stock market and potentially have 100% tax free gains depending on the type of account you contribute to.

The cons

  • Volatility – When the Coronavirus hit the United States in the Spring of 2020, the S&P 500 fell over 30% in a little over a month’s time. Now, within 6 months it had fully recovered and was making all-time highs again, but that’s still unsettling knowing how fast the market can move in a short time period.
  • Emotions – Given how liquid stock market investments are, that means the investments are susceptible to emotion-driven decisions. Had someone panicked during the Covid crash last March and sold everything, they would have completely missed out on the upside the market gave.
  • Taxes – If you sell a stock market investment in a regular taxable account, you’ll owe capital gains taxes on the gain. Now, if it’s been held longer than a year, you’ll get the favorable capital gains tax rate, but it’ll still be owed in the year in which you sold

Real Estate

There’s two broad categories of real estate: residential and commercial. A majority of households in the United States own personal residences (residential), and some choose to go down the path of commercial and buy rental properties.

The pros

  • Tax advantages – There’s too many deductions to count when you own an investment property: mortgage interest, repairs, depreciation, the list goes on. All of these can be deducted from your gross rent you receive. Plus, gains can sometimes be deferred through a 1031 exchange.
  • Understandability – Mutual funds and ETFs can sometimes be hairy to understand while the concept of a rental property is easy. Purchase a house, have people rent it from you, have the rent be higher than your mortgage payment, and that’s truly the basic principle.
  • Leverage – While you can invest in the stock market with leverage, it’s definitely riskier. Obtaining a loan to purchase real estate is extremely common. Using leverage to purchase real estate allows the potential for higher return on your dollar since someone else’s dollar is helping pay for a majority of the purchase of the real estate.

The cons

  • Illiquid – Without obtaining some sort of HELOC against the equity in real estate, it’s generally illiquid. If you came into a pinch, you couldn’t sell a piece of property and have the cash in hand for it in 3 days like you can the stock market.
  • Effort – While the stock market can generally be passive, having a rental property means dealing with people and upkeep of a home. You can always hire a property management, but there’s still more work involved than letting money sit in the stock market.
  • Transaction costs – While you can buy into the stock market for essentially $0 of transactions costs, real estate has high commissions and transaction fees for purchasing or selling.
  • Lack of diversification – If you’re just starting out with real estate and you buy one real estate, all your eggs are truly in one basket. If something bad happens to that one house, it hits your entire portfolio.

What’s the conclusion here? It totally depends on your appetite as an investor. Looking back as far as the data can be analyzed, real returns of the stock market and real estate come in close to 7% annualized. Looking back at more specific time periods, like the last 10 years, returns can lean one way or the other.

Both are great investments. We constantly remind clients to strike a balance. There’s many advantages of the stock market and there are many advantages of real estate. Invest based on your appetite for risk while considering the impact of your overall financial plan. As always, we’re here to walk through these decisions!

Any opinions are those of Carson Odom and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

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