Author Bio: YFS is owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances. Join YFS’s mailing list for straight forward financial advice by clicking here
For decades, the battle between which is the better investment has been waged between real estate and the stock market. Opinions from a wide range of entrepreneurs have led to differing views, and until today many people are still confused as to which one really gives the best return on your investment.
Why People Would Think It’s Real Estate
If you ask any average Joe, which is the better investment stocks or real estate, most of the time the answer would surely lean towards the latter.
Some reasons for this inclination exist. First of all, real estate is a tangible investment. It’s something that you can see and feel, sell when you like, rent out if you like, and even pass it on to your children.
On the other hand, the stock market feels a little too out of your control. Plus, it has that reputation of being volatile, wiping out your hard earned money in a flash. While real estate conveniently gives you money every month, without you having to work every day for it.
Despite the obvious advantages of real property, is it really the better investment?
If we look at the facts for the short term, it would certainly look like real estate is taking the lead what with a 56% increase in sales prices beginning from 1999 to 2004 as recorded by the US Department of Housing and Urban Development. During the same time, the S&P 500, which is an index for the stock market didn’t experience any growth at all, in fact, it even took a dip of about 6%.
However, if we look at the whole picture for the long term, say 25 years, the outcome is radically different.
Gathering data from 1980 all the way to 2004, it appears that the S&P has actually crushed the real estate figures. During this time, prices of home sales have increased to a whopping 247%, but this figure doesn’t even cover half of what the S&P gained – a stellar 1,000%. As eye popping as those results you will not achieve them if you do not have a proper asset allocation.
The data for real estate was based on the OFHEO which records mortgage information from both Fannie Mae and Freddie Mac.
Why The Stock Market Is Actually Better
Getting into practical reasons, real estate can provide a roof above your head. Meaning, there are many investors who can use the property as a temporary home. This obviously means that your return on investment would be impaired because you’re utilizing your investment for personal use.
Stocks on the other hand, won’t be able to give the same benefit, but they also don’t need any repairs or cost money in association dues. One clear benefit of stocks is that these are normally very liquid. The moment you decide to sell is the moment you get your profit – as long as the market is open of course.
With real estate, selling isn’t always so easy. Some investors have to wait months, even years to finally cash out on their biggest investment. Not to mention having to continually slash their prices just to entice a buyer into entering into a quick sale.
But then again, real estate will always have its advantages. For one thing, the largest decline in real estate price has been recorded to be only at a mere 5%, while a decrease in stock price could go as low as 20%.
Clearly the data comparison using the S&P and the OFHEO in the span of 25 years shows just how much the stock market can outperform the real estate market. But then again, most investors are still wary about the volatility of stocks, which encourages them to seek for a more stable and tangible investment – real estate.
Knowing how the stock market can outperform real estate, which investment would you rather bet your money on? Which type of investment do you currently prefer??