Real Estate vs Stock Market: Which Investment Offers the Bigger Return?

Real estate and the stock market are two very different forms of investment, each with its own advantages and disadvantages. While both investments have potential for high returns, real estate has more tangible benefits than the stock market. Here are my top 3 opinions on why real estate is a better investment than the stock market.?

The first reason why real estate is a better investment than the stock market is because of the income it can generate. When you invest in real estate you rent out the property to tenants which provides you with a steady (if you do it right!) stream of income. This income can be used to cover the property expenses, and then pay you out the difference. You can use this to replace traditional income streams or save for retirement. This makes it easier for investors to generate passive income while still having time to pursue other interests. Additionally, real estate investments can be more stable than the stock market. This can be particularly beneficial to those closer to retirement, or already in retirement. The rental income generated by your investment property is typically not as volatile as stock market returns. Well placed, screened, and qualified tenants in well cared for units rarely default on rent, meaning you can count on a consistent source of income regardless of economic conditions. If you are relying on the drawdown of funds in your stock portfolio and the market takes a hit, it can provide challenges to maintaining your current lifestyle and budget.? Furthermore, real estate investments are a great way to diversify your portfolio even if you maintain the majority of your savings in the stock market lending more income stability to your overall portfolio.

The second reason why real estate is a better investment than the stock market is because of the simultaneous appreciation AND loan paydown by others. Real estate prices increase (historically) over time due to inflation and other factors, creating opportunities for investors to make a profit. This type of investment is especially attractive for investors looking to build long-term wealth as they can take advantage of the appreciation of their property over a long period of time. Further, most real estate is leveraged (has a loan) and the loan is paid back by the tenants. Investors get to “double-dip”. In contrast, the stock market only gets to benefit from one aspect here - appreciation. And, you generally don’t get a bank loan to buy funds in your retirement. Last, most of the funds in a retirement account are held in managed mutual funds with high fees.?

The third reason why real estate is a better investment than the stock market is because of its tax advantages. Real estate investments typically offer several tax incentives that can help investors save money on their taxes. For example, the US government offers tax deductions for mortgage interest payments, property taxes, depreciation, and other expenses associated with owning real estate. These deductions can significantly reduce your taxable income and help you save money in the long run. Additionally, capital gains from the sale of real estate are taxed at a lower rate than gains from the sale of stocks and other investments, and can even be rolled into larger, future investment property tax free through 1031 exchanges.?

Let's compare an investment of $100,000 here in the Missoula, MT market over 10 years. (Breakdown below and spreadsheet attached)

• Real Estate: Duplex (3 bed 2 Bath, or 2 bed 1 Bath, or a combination thereof)?
• Financing: Using the $100,000 as a downpayment on a $500,000 duplex leaves a loan balance of $400,000. As of 12/16/2022, investment property loan rates are sitting around 7% for well qualified borrowers.?
• Rental Rates: $2,000/month unit average = $4,000/month total?
• Mortgage Payment (principle, interest, taxes, insurance): $3,261.21
• Rental Property Associated Expenses (repairs, capX, vacancy, lawn/snow, etc. Assumes self-management): $700
• Cashflow: $4,000 - $3,261.21 - $640 = $98.79/month.

Now, let’s be VERY conservative and assume rents never go up, rates never come down, and you are stuck with the finances exactly as is for 10 years.?

• Cashflow over 10 years = $11,854.8
• Average US historical home price appreciation of 3.2% gives a market value of $685,120.52 at year end 2032. That’s $185,120.52 in added value.
• Loan paydown (by your tenants) over the same period equates to $57,409.39
• Last, consider that you can roll every single penny, tax free under current regulations, into another real estate investment, and benefit from substantial tax benefits along the way (that’s a whole other discussion!).
• This leaves you with a total profit of: $254,384.71 over ten years CONSERVATIVELY. That’s an annualized rate of return of 25.4%.

Link to spreadsheet

The stock market comparison is much simpler. The previous 10-year return is between 14-15% depending on your source. But - the historical return is closer to 10-11%. And that's ignoring the costs and fees charged by mutual funds (0.5-2%) and advisors. So at best, you're looking at a net return of 9.5 to 10.5%. Over 10 years, at 10.5% that gives you a gain of $171,408.00. AT BEST - quite the difference.?

In conclusion, real estate has many advantages over the stock market when it comes to investing. The three main benefits are its ability to generate stable income, its potential for appreciation and loan paydown, and its various tax advantages. These benefits are appealing to investors looking to build wealth over the long term and make real estate an attractive investment option.