Real estate vs other traditional investments – it’s a long-standing debate. There’s less initial capital required when investing in stocks than when buying real estate. However, when investing in Spokane properties, investors are able to leverage financing in order to buy an investment that has a higher value. In addition, stocks have more volatility compared to real estate investments.
But what about returns? Which asset class has produced better returns over long periods of time – real estate or traditional investments like stocks? It’s challenging to answer this question partly because everyone’s investment goals are different. What works for someone who’s in their 50s may not work for someone in their 30s. This means that every investor has to carefully analyze their own investment horizon.
There are some broad-stroke data that can help us compare how the two asset classes stack up as long-term investments.
Real Estate vs. Stocks
Stocks’ value tends to increase quicker than real estate. Over the decades, an S&P 500 index fund has produced total returns of 9-10%. Even so, the stock prices also go down much faster than real estate prices.
Meantime, prices of real estate are prone to slightly outpace inflation. Since 1940, the median home value in the US has increased by 5.5% every year. Nevertheless, we have to take into account that properties are significantly larger today: in 1940, the average home was 1,246 square feet, while in 2010, the average is 2,430 square feet. So if we adjust for home size, the yearly increase drops to 4.6%. And after we account for inflation, the average home value has grown by 1.5% annually.
An important thing to consider is that an investment in real estate has a stronger return potential. Here are some of the reasons.
- Although home values barely outpace inflation, unlike stocks, where investing with borrowed money is pretty reckless, this is definitely not the case with buying properties. For real estate investments, you can use significant amounts of financing without adding a ton of risk. When buying stocks, people usually use the cash they already have. In real estate, you could only put down a down payment and finance the rest. If you use debt responsibly, it’s a healthy part of a real estate strategy. Therefore, as a real estate investor, you have the ability to gain leverage on your capital (aka investing with someone else’s – like a private lender – money). Leverage will considerably amplify your ROI (return on investment), which is why most investors choose it rather than paying cash for properties.
- As a real estate investor, you’ll also enjoy several tax advantages that stock investors don’t. For instance, deductions for property taxes, insurances, mortgage interest, property management fees, repairs, improvements, maintenance, and even advertising expenses to rent your property. You could also depreciate the cost of the property over time. When you are ready to sell, avoiding capital gains or depreciation recapture on the sale of the property by doing a 1031 exchange.
- By owning rental properties, you can deduct mortgage interest as well as other expenses like maintenance and regular repairs, running a website to promote your rentals, hiring a professional management company, paying an accountant and attorney for services that are related to the properties, and even mileage expenses when you drive to check on the rentals.
- You can rent out investment properties in order to generate income. Regular cash flow from renting out your investment property is great because your tenant pays off the property mortgage for you. With each passing month, you build equity. Typically a property that is purchased with cash see returns of 5-10%. If you leverage, it’s possible for returns to be as high as 10-15% range.
The combination of these factors can produce attractive long-term gains.
Now, there are some downsides to real estate investing.
- It takes more time and effort to buy properties than to buy stocks.
- Real estate is an illiquid investment.
- House appreciation isn’t guaranteed.
- High transaction costs.
When it comes to the pros of investing in stocks, here are some of the most relevant.
- It doesn’t take a huge cash infusion or a lot of time to buy some stocks, which makes it an appealing option.
- Stocks are liquid – you can easily buy and sell them, which means that, in case of emergency, you can rely on them.
- It’s easy to add these investments to tax-advantaged retirement accounts.
- There are plenty of stocks and ETFs to choose from, thus the portfolio can be easy to diversify.
Investing in stocks has its cons, as well.
- Stocks tend to be more volatile than real estate, which can lead to a more risky investment.
- Selling stocks can cause a capital gains tax – may trigger big taxes.
- With stock investing, there’s a potential for emotional investing.
- Some stocks can move sideways for a long time.
At the end of the day, both real estate and other traditional investments present rewards and risks. Therefore, investing in one, the other, or both is a personal choice that depends on your investment style, pocketbook, goals, and risk tolerance.
Under the right circumstances, Spokane real estate is an option that can offer nice diversification, yield better returns, and be lower risk than stocks. At CIVIC, we specialize in real estate investing and have several loan programs you can choose from, depending on your needs. Get in touch with us and we’ll help you get started!
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