Real Estate Vs Stocks – An Investing Showdown

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This is a debate that will likely rage until the end of time. I tend to find the loudest voices are deeply entrenched in one camp vs. in the middle. I’ve already made it clear that for the large part of my portfolio and investment strategy, I’m in the real estate camp. It doesn’t mean that I’m not building a stock portfolio as well, it’s just gravy on top of a cash-flowing real estate portfolio.

I always love hearing others’ take on the debate. This is a good one. Today’s Classic post is republished from The White Coat Investor. The original post can be found here. Enjoy!


I’ve noticed a strange but interesting theme among investors.  Real estate investors like to denigrate stock investors as speculators who buy “paper assets” subject to market crashes.  Stock investors bash real estate investors as “people who want a second job,” “get rich quick schemers,”  and “people who can’t accurately calculate a return.”  As with most stereotypes, there is some truth to them.  Both types of investments have their pluses and minuses.  You can do both of them poorly, but done well, both are likely to lead to wealth.  I have at times found myself in two separate arguments at the same time, one in which I am defending real estate investing and one in which I am pointing out its flaws.  In this post, I’ll discuss some of the advantages of each, as well as ways in which they are far more similar than the extremists like to admit.

8 Ways to Compare Real Estate vs. Stocks Investments

1. Generating Profit From Business Ownership

Real estate investors seem to forget what a stock is.  A share of stock is partial ownership of a business.  Believe it or not, GEExxonApple, and Disney all make money.  If you own a share of these companies, you share in the profits.  These profits come as dividends and as capital gains.  A share of stock is not like a piece of gold, where it’s value is purely speculative.  Future cash flows can be discounted to the present and a real value assigned to the company.  While there is a significant speculative component to short-term returns, this cancels out over the long term, leaving the stock investor with a fundamental return derived primarily from how well the business is run.  This is far different from buying a barrel of oil or a painting and hoping the value goes up.

Well-run real estate is also a profitable business, with a fundamental return derived primarily from rents.  Increased rents, in turn, increase the value of the property.  Both investments involve placing your capital into a business that has the expectation of generating a profit on that capital.  Those who have done better in real estate like to say real estate has higher returns and vice versa.  But as near as I can tell, if you’re accurately calculating unleveraged returns and taking into account the value of your time, the returns are very similar with both asset classes over the long run.

Advantage: Tie

2. Generating Passive Income

Stock investors, particularly buy and hold index fund investors, pride themselves on portfolios that take literally minutes a year to maintain and deride real estate investors for failing to take their time into account when calculating their returns.  Some real estate investing, of course, requires so much active input from the investor that it becomes a career.  Consider a house-flipper for instance.  He spends days searching for a property, hours and hours purchasing it, a few more days fixing it up, and hours and hours selling it for a profit.  This investor might be very proud to say “I bought it for $75K cash and sold it for $115K just 3 months later!”  That’s a 332% annualized return!  However, if he includes the $25K he put into it, that return drops to a 63% return and if you include the 120 hours of time he poured into it the return drops to 10% annualized (perhaps 6-7% after tax), and there was significant risk of that return being a lot worse.

Next on the spectrum of passivity is the real estate investor who does his own property management and maintenance.  Experts estimate that on average throughout the rental cycle, each unit you own will require 5 hours a month to manage and maintain.  Even if you buy and hold this property for years, and hire a property manager to do most of the management tasks, many hours of work above and beyond what it would take to maintain a portfolio of index funds are required.

There are yet more passive ways to invest in real estate.  We’ve discussed real estate syndication on this blog numerous times.  There is some initial time required to do due diligence, but after that, there is little ongoing time requirement.  The more passive you wish to be, of course, the more ongoing expenses you have.  Finally, you can invest in “real estate flavored stock”, such as the Vanguard REIT index.  While most experts agree REITs are a separate asset class from the overall stock market, the correlation with an index fund portfolio will be far higher than an investment in an apartment building in your city.  Real estate is generally a much more active investment when compared to stock index funds, but there are ways to minimize the active involvement.

A real estate proponent also has the counter-argument that while it is possible to invest in stocks in a very passive manner, there are a whole lot of people out there doing it actively.  That ranges from picking actively managed mutual funds and reviewing them from time to time to day trading.  The more active your investing, the more you need to take into account the value of your time in calculating returns.  For a busy high income professional able to trade time for money at a very high rate, maintaining passivity in his investments is very important.

Advantage: Stocks

3. Generating Income And Capital Gains

Far too many investors fall into the “income investing” trap.  Dividend stock investors are the classic example, but real estate investors are even worse.  It is important to understand the concept of total return investing to avoid this trap.  A dollar spends just the same whether it came from income or from capital gains.  Neither is necessarily any better.  Both stocks and real estate have both an income and a capital gain component.  10% returns are not unusual for either investment, but with a stock you are much more likely to get 8% from capital gains and 2% from dividends whereas with real estate you are more likely to get 8% from income and 2% from capital gains.

If you fall into the income investing trap, you would think that real estate is somehow the better investment because the income is higher, but in reality returns are returns.  Real estate investors like to argue that total return stock investors are “eating the goose that laid the golden egg” but in reality the stock goose grows faster and lays smaller eggs when compared to the real estate goose.  They both provide the same amount of food in the end.

Real estate investors love to talk about “becoming financially free” and “replacing their income” with the income from their properties.  There is nothing magical about real estate in this respect.  The money you spend doesn’t care where it comes from.  Safe withdrawal rate (SWR) studies show that you can take a certain amount of inflation-adjusted money out of a portfolio each year and expect it to last.  If you’re just spending the income, the portfolio will last forever, but you’ll end up with a lower standard of living than you could have had with a total return SWR approach. You can just “spend the income” with both stocks and real estate.

However, one benefit of real estate over stocks is that because real estate returns come more from income than capital gains they are less volatile.  If you have the same return from a less volatile portfolio, you can have a higher safe withdrawal rate from it. Plus, the process is more automated with real estate.  The capital gains component tends to move along at the rate of inflation, automatically increasing income each year with inflation, so you can just take the inflation-adjusted income each year and spend it without any complicated calculations.

Advantage: Real Estate

4. Tax Advantages

Real estate investors love to talk about the tax advantages of real estate.  There are many, but there may be even more with stocks.  Real estate investors are able to deduct their expenses, including mortgage interest, from their income.  Businesses (stock shares), of course, get to do this too.  Real estate investors get to depreciate their assets, but so do businesses.  The stock investor may not be as aware of all these benefits, but he is reaping their benefits all the same.

Real estate investors like to point out that they can avoid capital gains taxes by exchanging from one property to another and then at their death the heirs inherit it with a stepped-up basis.  However, if you inherit stock shares, you also get a step up in basis.  You can also tax loss harvest both assets.  Stocks enjoy more favorable tax treatment of their returns.  Long-term capital gains and dividends are taxed at a favorable tax rate whereas real estate income (the lion’s share of returns) is taxed at your full marginal tax rate.  Exchanges do cost stock investors taxes, but not if done within a retirement account. Real estate investors like to point out that they get “paper losses” for the first few years of ownership.  Unfortunately, for a high-income investor like a physician, those paper losses can’t be used to offset earned income.

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Stocks are also easily invested in using retirement accounts.  401Ks and other tax-deferred accounts save taxes with an up-front tax break, tax-protected growth, and a tax-bracket arbitrage at the time of withdrawal.  Roth accounts don’t provide that up-front tax break but do provide tax-free growth and withdrawals for you and your heirs.  Aside from REITs, it can be a big pain to invest in real estate in retirement accounts, and even if you do so, you lose some of the tax benefits, like depreciation, that you would otherwise get.

Advantage: Stocks (Slight)

5. Ability to Use Leverage

One of the biggest advantages of real estate investing is the ability to use leverage in a safer manner.  It is possible to invest in stocks using leverage through a margin account, although most investing experts recommend against it.  The main issue, aside from increased volatility and variable interest rates, is margin calls.  In a big bear market (which will come as it always does) the investor will be forced to come up with cash to cover the margin call.

Mortgages, however, are generally long-term loans, are fixed at low-interest rates, are collateralized with the property itself, and are non-callable.  It is possible to use mortgage money to invest in stocks, but you are then putting your home or other property at risk, rather than just the investment.  Leverage, of course, works both ways, and there are plenty of real estate investors who were ruined in the recent housing market downturn due to using too much leverage, but as a general rule, it is far safer to use in real estate investing than in stock investing.

Advantage: Real Estate

6. Liquidity

One of the biggest downsides of traditional real estate investing is that it is highly illiquid.  Roundtrip transaction costs may be up to 15% of the value of the property, 5% to buy and 10% to sell.  Plus, it may take months to do so.  In contrast, a portfolio of publicly traded stocks can be liquidated under normal conditions in minutes.  While there can be some illiquidity issues with stocks in a down market, they pale in comparison to the issues with real estate, where there may be no buyers for a property at any reasonable price for years.  It is also far easier to rebalance a more liquid portfolio to maintain an appropriate risk level.

Advantage: Stocks

7. Efficiency

The publicly traded stock market is highly efficient.  It might not be perfectly efficient, but compared to the real estate market it might as well be.  There are many opportunities to both outperform and underperform in real estate depending on your skill level.  If you are skilled at assessing, purchasing, and selling property and talented at managing it, you will be rewarded with high returns.  If you try to manage your own rental property but aren’t good at screening tenants and feel badly raising rents to the market rate, your returns will stink.  With stock investing, especially using a buy-and-hold static asset allocation of low-cost index funds, your talent and skill will have little effect on your returns, for better and for worse.

Advantage: Real Estate (slight)

8. Volatility 

Nobody gets their rental property assessed every month, much less every minute of every day the markets are open.  That doesn’t mean the value of the property doesn’t fluctuate wildly.  The value of a property is whatever someone is willing to pay for it.  However, the owner only thinks about the property value on rare occasions; perhaps once a year when the tax assessment comes and when he buys and sells it.  Since he isn’t confronted with a talking head on CNBC every afternoon screaming “buy buy buy” and “sell sell sell” he is unlikely to sell except when his life circumstances change.

Stock investors should also be like that, but who are we kidding.  The vast majority struggle to stay the course in market downturns, so much so that they often have to mix stocks with an asset that has a lower expected return (like bonds) to lower volatility to the point they can sleep at night.  Stocks are risky investments with high expected returns.  Real estate is also a risky investment with high expected returns.  Bonds, however, are relatively lower risk with corresponding lower expected returns.  The more bonds you have to hold to lower volatility, the lower your return is likely to be over the long term.  Real estate’s lower volatility, whether real or just perceived, allows investors to tolerate a riskier portfolio, boosting expected returns.

Advantage: Real Estate

Overall Winner

Looking at these eight aspects of investing, I see real estate winning 4, stocks winning 3, and a tie.  That is essentially a draw in my mind.  The truth, however, is that you don’t have to choose between these two great asset classes.  You can have both. I have a large percentage of my net worth invested in stocks.  I also have a significant percentage tied up in real estate, including my principal residence, a rental property, shares of the LLC that owns the building housing my business office, and REITs.  Both assets provide great returns and diversify each other.  You may favor one asset class over the other in your portfolio, and that’s fine, but you can reap big benefits by avoiding an extreme position in this debate.

What do you think?  Stocks?  Real Estate?  Both?  Sound off in the comments section!

8 COMMENTS

  1. I think it isn’t an either or. Fortunately, we can have both. I enjoy more passive income from real estate than from stocks. Unless you buy dividend producing stocks (and that comes with its own difficulties) then checks don’t just flow to me from stocks. I get plenty of checks from rent though.

  2. I agree with Wealthy Doc. Don’t have to debate which one is better when you can split your investments into both classes and help diversify your portfolio as well as taking advantages that each has to offer and minimizing disadvantages by having the other class balance it out.

  3. I’ve done both. Real Estate has by far produced a better return. But I actually own the real estate myself. I have not invested in real estate from a distance, such as REITS or syndication, or crowd funding.

    I think it is important that you do both.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  4. Just my opinion, but many sophisticated people have strong distrust and often avoid the public markets? I don’t blame them. Many markets and securities are trading paper certificates without any whim, rhyme, or reason. Performance of the stock is based on what others are doing, and not correlative with the factual performance of the business. How crazy is that? Small shareholders are letting other people control their destiny, and often one’s success comes at the expense of the other. No thanks. Real-estate is a more honest and transparent investment. Owner occupied commercial real-estate gives you the best opportunity to control your own destiny. I would bet that the real-estate heavy portfolios have become much richer than stocks/bond holders over the decades.

  5. I am a 47 yo “retired” physician. Retired is in quotes because I had to leave my practice due to an automobile accident where a drunk driver ruined my life. But didn’t ruin it completely because I had a disability policy that I purchased five years ago when I was perfectly healthy. I am never one to just go half speed with anything, and purchasing my policy was no different. I had the office overhead policy, and all the riders in place to set me up financially. It took a little nudge to shell out $900/month but my sister died during childbirth at age 43 from an amniotic fluid embolism (which you have a better chance of winning the lottery), but she was financially prepared for her family. Well, even though an illegal with no license and no insurance caused the accident which ruined my career, I am now collecting $16,000/month TAX FREE until age 67. Plus my monthly income goes up yearly with inflation, and I can do anything else (other than being an clinical physician) to earn as much extra cash as I want to. My advice to high income earners is to make sure you have a disability policy, and make sure it is set up to benefit you for life. I have spoken to a few former colleagues whom have a policy but it is for $5,000/month! Or sometimes people get sold sold policies that are only good for two years and all of a sudden the monthly check stops coming! Why spend ANY money for just a measly $5,000/month? Now I have all day to think of ways to earn extra cash. Real estate and the stock market is what I have chosen. I am actually killing it with all the volatility! But I have spent the last year self teaching myself about the market just like I used to study in med school. I trade options mainly, and also practice RISK MANAGEMENT! You will lose your tail if you don’t. It is impossible to win every trade. You can lose five trades and blow $1,500 but win just one trade and make $3,000 and you are up 100%. Also, you need to be able to get up at 5am and start the premarket research and search for news catalysts. I know practicing physicians do not have the time to learn the market in order to make money in it. I really wanted to try the market when I heard 90% of investors will lose their money. I believed if some of these people can do it, then I can do it! You have to be able to set stop orders and/or trail stop orders, etc. But one of the things I loved about medicine was teaching the medical students, interns, and residents. Now I love teaching anyone who wants to learn about the market. If anyone would like to learn (and I am not charging any money), I would be glad to help. Teaching helps me to understand better and to review things. The market is all about reading and learning the little things. for example, when earnings come out, it is nothing to do with how a company did for that quarter, it is all about their projected guidance. I used to nail it with a company on earnings and the stock went DOWN! It was later that i found out that it is all about a companies guidance. Also, learning how to use the EDGAR database, and so much more. Hopefully, I can teach someone from my mistakes so they can learn those little things, and not lose any of those unrealized gains. My email is aerialdroneart@outlook.com. I was thinking of starting a blog and discussing what it is like living with a disability where I am unable to walk anymore and how to integrate my new life, living in chronic pain (where I refuse to take any narcotics), and how it has placed a lot of stress on my marriage. Going through the depression. I can honestly say money does not make you happy. It sure helps, but it is not the answer to life. If anyone would like to help me out with starting a blog, that would be much appreciated. I can win at the market but I want to win in life as well. I feel I can help others with dealing being a minor league baseball player at age 22 to now needing my wife to help me get out of bed in the morning at age 47. Thank you all for continuing to read on. I have a tendency to babble now! HAHAHA
    PS I don’t feel like proof reading this! 🙂 I feel I earned it

  6. Kudos to you for reinventing yourself. I found the stock market infinitely fascinating since I started pvt practice in 1994. I’d buy on margin between patients and unload a few days later. Better than Vegas. Never tried options but have done DGI since 1994. Have you read Security Analysis? I know it’s ancient but helps to figure out if Q10s/ EDGAR data is fairy tales. Lots of buybacks now clouding the picture. My goal was always to make more/year at LTCG rate than earned income rate. Got there quite a few years ago but still enjoy the ride from investing/ practicing. Rejoiced to read you got REAL disability insurance. We’re 2 MDs so we’ve kind of self insured. Just glad you’ve discovered joys of options trading. With respect to blog, I can barely drive my keyboard. Apologies in advance.

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