Stocks vs. Real Estate |
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May’s Money Magazine tries to answer the Stocks vs. Real Estate question (see page 94). I had thought that real estate was going to come out the big winner. I know that real estate has been really popular of late, but I had it as the favorite due to the value of leverage.
Money Magazine declared stocks the winner, but I think they glossed over the leverage factor. For one they took a 2 year time-line for the real estate and then deducted a lot of one-time costs. That didn’t seem to be a particularly fair shake to me. So to the left you’ll see my attempt at the running the numbers in Excel. In the example, I assume the investor has $40K to put to work. For stocks, I assume a 10% (for better or worse) gain. I also took a cue from my early physics classes and ignored friction - in this case it’s the cost of buying stocks. The Real Estate column assumes the investor puts 20% down allowing them to buy a $200K home and pays 10K in closing costs (closing costs from the article). The Real Estate AC (after costs) factors in a 6% sales commission (though I believe this can be less), paying off of the mortgage, $3,600 in preparing the house for the sale (gleaned from Money Magazine), plus the original 40K investment.
I’m not 100% that my chart is accurate. I’ve edited it a few different times realizing a couple of errors. However, each of the charts showed the same trend. Real estate seems to out perform in the short term, but at some point in the 25-30 year mark the 10% return of stocks takes over the leverage of real estate. However, if one were to lock in the gains of real estate at year 8 (around $125K), the person could use the gains to buy three more $200K homes getting more an more leverage. Leverage can be a dangerous thing as a loss can spiral just as much in the negative direction. It still makes me think that there are a lot of gains to be had in real estate in general.
If you are planning to execute on this plan, remember that it’s not a get rich quick scheme. In today’s real estate market, I believe you should be prepared to hold onto a home for a minimum of 6 years (while being prepared to hold for 10 years). Trying to fix up and flip a home within a year opens you up to short term price pressures and fixed costs. You should also be aware of other factors mentioned in the Money Magazine article apply. One such important one to remember is that a home is not a very diverse investment. Another one is that real estate investing takes a lot of work, while investing in stocks is relatively quick and easy.
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October 3rd, 2007 at 8:21 pm
The best thing about a real estate marketing script, whether it’s targeting FSBOs, expireds, or whatever you choose, is that they’ll help you save you time while making money.
June 21st, 2007 at 7:43 am
Main Line Real Estate - Mutual Funds and Index Funds are included in the my definition of stocks here… I’d say that real estate is more difficult because you can’t diversify unless you go with REITs. REITs are more like stocks, you don’t seem to get the 5-1 leverage that you do with a typical mortgage.
June 21st, 2007 at 6:40 am
To me real estate is by far the better investment. Stocks, well you have to know exactly which ones to buy and exactly when to sale.
May 15th, 2007 at 6:21 pm
If we are comparing stocks vs. real estate and leverage, real estate clearly wins this battle. There are so many more variables to answer the stocks vs real estate question though like short term vs long term investment, costs, taxes, effort, volatility, diversification and so on. The sad news for all you real estate investors is stocks win most of these battles (stocks are easily diversified, less effort and subsequent issues and less cost). If you are looking for the long term investment and we look at historical data, stocks crush real estate in performance. If we compare short term performance, real estate far outperforms stocks.
April 22nd, 2007 at 6:31 pm
[...] would offer a better return between stocks and real estates, after Lazy Man at Lazy Man and Money takes on the issue. Without getting into details of the arguments made in the original, my feeling is over the [...]
April 22nd, 2007 at 8:35 am
[...] Both Digerati Life and Lazy Man have interesting comparisons of investing in stock vs investing in real estate. [...]
April 22nd, 2007 at 3:06 am
[...] Stocks vs. Real Estate by Lazy @ Lazy Man and Money. Lazy gets into the numerical mode and churns out some numbers to compare returns from stocks with those from real estate investments. According to him, real estate investment has an edge over stocks. Personally, I have always felt that real estate stuff is not for the common man. The whole process of buying, maintaining, and then selling a house is just too intimidating to indulge in regularly…for someone like me. Stocks? I can pick some in my lunch break. [...]
April 21st, 2007 at 8:17 am
[...] caught my eye this week. It’s by Lazy Man and Money, who provided an analysis and comparisons between stocks and real estate and how they perform against each other. He critiqued a CNN Money article that arrived at the [...]