Do a search for real estate vs. stock market investment and you will see tons of opinions comparing these types of investments. You get some pretty passionate supporters on either side of these options. I don’t think the choices are mutually exclusive. And when you drill into the different options to invest in each of these products, you will find a huge variety of options that can fit the investment to your risk tolerance and investment needs.
You can’t really compare returns without factoring in risk. The risks in each asset class are quite different. So, you might say its comparing apples and oranges. But another way to look at risk is how willing is someone willing to lend you money to invest in either asset class? You buy stocks on margin, which means someone will finance you up to 50% of a purchase. When the value of the stock goes against the investor, the bank is usually quick to come and make that margin call. On the other hand, a typical real estate financing option is to put 20-25% down, meaning the bank puts up about 75% of the purchase. You hear the term underwater mortgages and the bank doesn’t intervene until you try to do a short sale. For the typical investor using typical financing options, it would appear that real estate is seen as a less risky investment. The caveat is that there are certain market distortions because of government intervention. For example, banks would be willing to give you more money on margin if the government didn’t put regulation in place to manage margins. One thing I can say about risk is that a real estate investor seems to have more control in managing risk when compared to a stock market investor.
Another area of comparison is liquidity and efficiencies in the market. Look at the bid/ask spread on your typical equities and your transactions costs. Translate that to the real estate market and you see a huge disparity. What does that mean to the typical investor? Whether its day traders or just very nervous investors, the ability to get in and out of the market usually leads to some poor decisions that compound into a herd mentality. Recent trends in automated trading may add to the obstacles that an active investor faces in the stock market. Contrast to the real estate market, each transaction is typically much slower, costlier and inefficient. This leads to less panic decisions. This also opens up more possibility for someone to get an edge in the real estate market. In the stock market, someone getting an edge usually means its illegal you are going to jail at some point.
So, what does all this mean to me? Personally, the stock market has been a great friend to me. I have been fortunate to be in the market since the late 80’s and mostly invested in the right index funds. The returns have been tremendous and I didn’t spend much time on the investments. But I recognize that past history is no guarantee of future returns, as every financial advisor will tell you. I spent many years in the Commodities trading markets. Like commodities physical trading, active real estate investment gets you involved with many interesting situations and you are in more control of your destiny. I am not looking at a get rich quick option on stocks or real estate investments. But I am learning about each type of investment and figuring out ways to optimize my investments.