Should I invest in the stock market? Or real estate? Which investment will deliver better long-term returns?
When comparing stock prices vs. housing prices at a simple glance, one may conclude that the Stock Market has delivered higher returns. But, pricing alone is only part of a bigger picture. You also have to look at the impact of leverage in real estate.
Leverage allows for an increased acquisition power by a factor of five on average, which means that the standard 20% downpayment gets you an 80% credit from the bank to come up with 100% of the investment required to acquire the asset. This ratio is referred to as Loan To Value (LTV) and may vary depending on a variety of factors.
For this comparison, we will use the CEIC – U.S House Prices Growth average rate of 5.3%, calculated using quarterly data from Mar 1992 to Mar 2020 using the Federal Housing Finance Agency House Price Index.
On the other hand, we will use the commonly known 10% annualized growth rate of the S&P 500 index even though the MoneyChimp calculator shows a 9.19% annualized growth rate since its inception through Dec 2019.
Based on the above data points, let’s compare the two by using the hypothetical initial investment amount of $50,000. We take into account both compounding in the S&P 500 and the impact of leverage in our Real Estate investment.
In a very counterintuitive fashion, we can observe that even though the average return in real estate is almost half the S&P 500 (5.3% vs. 10%), the Return on Investment (ROI) is higher with real estate. At year 30, the real estate investment outperformed by $304,570, and 20.3% annual ROI.
It’s important to note that in a later post, we will get into the additional benefits of investing in real estate, tax benefits, cash flow, and control over the investment. Factoring in all these benefits will exponentially propel your returns even higher as well as add a level of resiliency over the stock market.