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Stocks or Real Estate? Why I’ll keep on renting…

Stocks or Real Estate? Why I’ll keep on renting…

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by November 3, 2016 Finance, Housing

You would think that only a decade after the largest real estate driven boom and bust in US (if not global) history, people would look more skeptically at home ownership as their primary (and often) sole source of wealth building. But for many Americans, their primary residence is their primary investment… to their detriment.

An equal, lump sum invested in the market not only historically performs much better than real estate, but is also subject to far fewer transaction fees eating into any gains.

I’ve heard from a lot of home buyers who are bragging about the substantial growth in their home values over the past couple of years. (Nevermind that these gains are almost 100% attributable to declining interest rates and could see an opposite reaction on their way up.) These owners have seen their homes nearly double in price if they were lucky enough to buy near the bottom five years ago and they’re quick to self-apply praise for having the foresight to invest in real estate.

Congrats to those of you who made money (well actually it’s all paper money until you actually sell), but before you do your victory lap, maybe you should consider what you gave up.

I conducted an analysis of which would be a better investment over the past five years:

A median home in one of the country’s hottest markets VS. the S&P 500. (Note: September was the last date for which I had dividend info for the S&P 500. Both the S&P and median home prices are down slightly since September.)

2016-11-03_9-37-08

The answer wasn’t even close. Between buying a home in straight cash and living in it, versus using that money to invest in a broad index fund and renting, the equities crush it. The return on equities were better even before you accounted for reinvested dividends or the 6% transaction fee you would pay a realtor to sell the place.

Maybe you bought the bought the place as an investment and rented it? Well that would make the returns even worse as you’d spend almost as much as you collected in rent living elsewhere and would have to pay taxes on your gains (since it’s not a primary residence).

Now, I’ll fully admit (and will write a blog post about it later) that you can improve your rate of return by leveraging (i.e., taking out a mortgage) your purchase during a period of high growth and by making improvements to the house (i.e., sweat equity).

But when I have to chose between:

5.66% annual gains while taking on the increased risk of investing in a single asset, in a single neighborhood and all the man hours required in maintenance and transactions;

versus

14.57% annual gains while sitting on my ass, enjoying the diversity of owning a share of America’s 500 largest companies and the fruit of their innovation;

 

I’ll pick stocks every time.

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