One of the great debates that I hear constantly among my investor friends and colleagues is the argument of stocks vs real estate. I am going to use a very realistic example below to show why based on historical averages and pure return numbers, real estate is the clear cut winner. Now, I'm not saying stocks are bad and that you shouldn't invest in them. They have the advantage of being very liquid, easy to invest in, and a good way to diversify. What I am saying is that dollar for dollar, real estate is going to provide a quicker path to wealth than the stock market. The number one reason that I can say this with confidence can be summed up in one word - LEVERAGE. Let's take a look at what I mean.
For this example let's assume that I have $100,000 to invest and a 15 year time horizon. A March 2021 article in the Motley Fool shows the historical returns of the S&P 500 at 9% and the average US home appreciation rate since 1940 has been 5.5%. Wait a minute, didn't I say that real estate provided better returns? This is where that leverage part comes in.
Sure, this is a bit of a simplified example but I did use very realistic numbers that reflect long term historical averages. There are probably arguments over expenses, fees, and other small details. If the numbers were remotely close, I would say - "let's dig deeper" and see if the advantage switches. But this isn't even close so it would take a lot of "ifs, buts, thens" to turn this around. Plus the cherry on top of collecting passive cash flows from rents once the asset is paid off makes real estate the no brainer choice for me.