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Real Estate vs. Stocks: Which Has Higher Returns?

"Working with a competent Financial Advisor is the most important decision you can make when investing in either real estate or stocks." - IGRE

Understanding both strategies' advantages and disadvantages can help you make the most informed investment decision based on your goals and risk tolerance.(GETTY IMAGES)

By Alani Asis Edited by Jordan Schultz

While there are tradeoffs, both assets offer investment opportunities to suit different goals.

Investors frequently compare real estate and stock investing in terms of their returns. According to a Gallup poll published in May, 34% of Americans believe that real estate is the best long-term investment, while only 18% say that stocks or mutual funds are the best long-term investment strategy.

The truth is that both tactics have their merits and drawbacks. Stocks, for example, offer greater liquidity and higher profit margins over a shorter time horizon. Purchasing real estate may be more suitable if you want consistent returns and tax advantages.

Understanding both strategies' advantages and disadvantages can help you make the most informed investment decision based on your goals and risk tolerance.

Here are some points to keep in mind:

  • Investing in real estate.

  • Investing in stocks.

  • Comparing real estate and stocks.

  • Other factors to consider.

  • The takeaway.

Investing in Real Estate

You can generate income by purchasing residential or commercial properties to rent or flip. However, this approach generally requires a large upfront investment.

Real estate investment trusts, or REITs, are an alternative form of real estate investing that don't require financing or managing properties yourself. REITs allow you to own a share and profit from a pool of income-generating properties. Like a mutual fund, you can easily buy and sell REITs on stock exchanges and benefit from their diversification and liquidity.

Investing in Stocks

Investing in a stock makes you a shareholder in a company. As a result, you can turn a profit by selling shares when the company's stock value rises or holding it while it pays dividends. You can purchase stocks individually, through mutual funds or via exchange-traded funds.

Individual stock investments mean you profit or incur losses based on the performance of the company's stock. On the other hand, mutual funds and ETFs allow you to diversify your portfolio by investing in multiple stocks at once.

Comparing Real Estate and Stocks

Many investors buy real estate and stocks to build wealth over time. While both provide the potential for substantial profits, they differ in rates of return, risk, liquidity and accessibility.

Returns. Historically, stocks have offered better returns than real estate investments. "Stocks have returned, on average, about 8% to 12% per year while real estate has generated returns of 2% to 4% per year," says Peter Earle, an economist at the American Institute for Economic Research. However, other variables like economic conditions and emotional purchasing decisions can result in subpar investments and lower returns.

While real estate investors may see lower returns than stock investors in aggregate, those with rental properties can expect a relatively steady income stream from their tenants. "It is much easier to find cash flow in real estate than in the stock or bond market," says Shaun M. Jones, president of Jones Fiduciary Wealth Management.

The value of real estate properties tends to appreciate over time. With homeowner tax benefits such as mortgage interest, property taxes and property depreciation deductions, real estate investors may see lofty returns over the long haul.

Practically speaking, it's also important to remember that many real estate investors use a high degree of leverage to purchase property, which can dramatically magnify their return on equity. This adds some nuance to the stocks vs. real estate debate. For example, if an investor purchases a $100,000 property with a 20% down payment and the property appreciates by 3% in one year, they're sitting on paper gains of 15% on their initial investment of $20,000.

Costs. Fees, commissions, account maintenance costs and other expenses can reduce your returns in either asset class. However, investing in stocks generally requires a smaller initial investment. "Some people engage in such programs as DRIPS (dividend reinvestment programs) or purchase fractional shares, which permit very small upfront expenditures," says Earle.

On the other hand, investing in real estate by managing rental properties isn't an insignificant financial feat. As a real estate investor, you're responsible for the property's down payment, closing fees, mortgage and recurring maintenance costs.

Diversification. Investing in both real estate and stocks can help you diversify your portfolio. Real estate investments are excellent for diversification due to their low correlation with other asset classes like stocks and bonds.

On the other hand, suppose an investor puts all their money in a single equity or a small number of equities. The lack of exposure limits growth and leaves them susceptible to losses of that one company or industry. Investing in a diversified portfolio of equities and real estate – along with other asset classes – can help you optimize your returns while minimizing risk.

Accessibility. Investors with varying experience levels can partake in the stock market with relative ease. "Publicly traded firms file statements with regulators pertaining to their financial health and corporate actions, they report earnings, and information is widely available. There are cable networks that follow the markets and a lot of social 'infrastructure' supporting equity investors," says Earle.

Conversely, real estate investing has a higher barrier to entry than stock investing. "Real estate can be complicated. There are tax implications, improvements can be required and there isn't a lot of centralized, readily available information in some cases. Incidentally, if improvements are made to generate more income, such as a house to be rented, a whole set of new trade-offs are incurred," says Earle.

Liquidity. Stock investing offers more liquidity than real estate investing, meaning you can easily buy and sell stocks in minutes or seconds. But as a real estate investor, you must find a buyer and meet legal and administrative requirements to sell, which can take weeks or months. Real estate illiquidity makes it challenging to exchange assets for cash immediately, which can be a disadvantage for investors, depending on their investment goals.

Jones argues that illiquidity is the price to pay in exchange for lucrative, long-term returns. "There is absolutely a premium to be earned on investments that lack complete liquidity. Logically, this makes sense because nobody would give up liquidity for a return that is the same or worse than liquid investments."

Other Factors to Consider

While trend analysis can provide valuable insight into market behavior, conditions change rapidly in response to economic and political developments. Therefore, you should consider other factors outside of historical trends to determine the efficacy of an investment strategy.

Market conditions. The economy can influence real estate or stock investment returns. "Stock prices are more volatile than real estate prices – and while stocks tend to perform well in the early stages of an inflationary updraft, under high inflation, real estate may perform better," says Earle.

Ever-changing market dynamics can also pose challenges for real estate and stock investors in different ways. "Public U.S. equities, as proxied by the S&P 500, are climbing the proverbial wall of worry as they trade above historical valuation levels despite earnings softness and the Federal Reserve's inflation flight," says Rob Young, senior investment analyst at Telemus. Young also notes that consumer spending is decreasing, affecting earnings, gross domestic product growth and the labor environment.

On the other hand, real estate assets can generally be a hedge against inflation. For instance, rising inflation may lead to rent increases, which boosts cash flow for investors. If the economy sours too much, however, a recession can decrease demand for real estate, causing property values and rent rates to plummet.

Financial goals and time horizon. You should take your financial objectives into account when choosing an investment strategy. Stock investing may be a more effective approach for those wanting higher returns over a shorter period. Real estate may be ideal for those who want a stable flow of income who can wait to see a return on their investment.

Risk tolerance. Stock and real estate investing carry various levels of risk. For instance, investing in the stock market tends to be more volatile than real estate. However, purchasing a rental property requires a significant upfront investment and may be subject to unforeseen costs.


May 30, 2023, at 1:55 p.m.

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