It shouldn’t surprise anyone that I read a lot of financial websites and blogs. For some reason it seems that I’ve recently read multiple times about the comparison between stock market and real estate investments. More specifically, what I’ve read is usually something similar to the following statement:

Over long periods of time stock market returns outperform real estate returns.

The supporting data used to support such a claim is usually something like saying that the stock market averages around 8% while real estate only averages 3 or 4 percent (or pick your own numbers based on some past time period). On the surface, this seems like a pretty cut and dry conclusion, one that one person will say “it’s proven that a diversified portfolio generally beats real estate investments”. I can’t say that I agree with this statement, and wouldn’t say that it’s been “proven”, especially if it’s only “generally”.

This aside though, I don’t understand how one can think stock market investments will outperform real estate, especially diversified stock market investments, which usually means index funds or mutual funds. When these people think of real estate investments, they must only be concerned with the actual appreciation of the full value of the property. In this case, stock market returns may be higher. But I believe that most people would be and should be concerned with their actual returns.

When looking at real estate investments, the more important measure of your returns is better viewed as a percentage of the actual amount invested. For instance, if you put 20% down on a $100k property, then your actual cash outlay is $20k. If the property increases in value only 4%, it’s now worth $104k. This four thousand dollar increase is then a 20% return on your initial investment which is much better than what most people will attribute to real estate. You just can’t forget the effect of leverage on your investments.

And I haven’t even mentioned the benefits of the cash flow properties can produce and what’s known as Cash on Cash return. I’ll leave this for another post though. I just wanted to put my thoughts out there on this subject since I keep hearing that broad index funds and the like are supposedly so much better than real estate. Such a blanket statement just can’t be true.

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