Real Estate vs Stock Market Returns 2019

by | Feb 8, 2019

What is the better investment for returns, the stock market or real estate?

In this article, we will examine why real estate investing is a great investment choice but also why real estate investing can give you a higher return on investment over investing in stocks. 

Real Estate vs Stock Market Returns

Why Real Estate?

It’s often been said that the best way to acquire wealth is to be born into it. The second best way is to marry into it, however, it is probably true that many who take this route usually would agree that it is anything but easy. Further, the next best way or method which allows practically anyone to achieve wealth is investing in real estate.

In fact, more millionaires are created by their endeavors with real estate than all other endeavors combined. If you simply take a look at Forbes list of The World’s Billionaires you will have an understanding of that fact. Andrew Carnegie, the Scottish-American industrialist who led the expansion of the American steel industry during the late 19th century once said, “ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

Yet, many people who pursue wealth usually find it impossible to accumulate any serious wealth. One reason is they consistently and blindly listen to the mainstream financial gurus into promising to hand over their savings and letting them grow their portfolio through stock investing, mutual funds, index funds, etc. Knowing that these types of investments take control out of their hands, unwittingly. That is, by investing in stocks, they leave their future in the hands of others instead of taking control of their own family’s destiny.

“Property is desirable, is a positive good in the world. Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built.” – Abraham Lincoln, 1864

We are constantly being bombarded about putting your money in the stock market, maximizing your 401k contribution, or investing in mutual funds, etc. However, the participation rate is not what it is cracked up to be. According to the United States Census Bureau, only 5.5% of households directly own any stock, 10.7% own stock indirectly in the form of a retirement account. And the majority of these investors are in it for the long haul, therefore, it is unlikely to have a great annual return from the dividends. Earning passive income from being a stock investor requires more potential capital to start and fully relies on corporate profits.

Control; Real Estate or Stocks

Contrary to the average belief; real estate investing and stock investing is not the same investment. In fact, many investors who invest in stocks will not do their due diligence; as a Warren Buffet would. They simply invest in the stock market in the same way you would in gambling or playing cards at a casino. Analyzing stocks requires time and understanding of a company’s financial reports, financial statements, and balance sheets. For most, these investors turn to the experts, i.e. financial advisors.

But with stocks, you have limited control. All you get is a stock certificate in the form of digits from your favorite broker. With stocks, your only hope is that your investment will become a “winner.” In that, your so-called “gambling” will eventually give you a return on investment (ROI). The reality is, you have no control over the performance of the stock. Your hope and dreams are in the expertise of an executive board, in that, you hope the company’s management executives can increase the value of the stock.

In real estate, however, if you own real estate property, you are the boss, you are the landlord, you are the manager. You have complete control over your investment. If you have rental property, you get to decide who qualifies as your tenants and who do not. With real estate investments, you decide on how to improve the property to increase value so that you can increase the rent, therefore, increasing your return on investment.

Granted, many investors find that real estate investments become a headache and time-consuming. They resort to the famous and apparently often “clogged toilet” scenario and dread getting that phone call early in the A.M. Yet, these same investors will spend weeks, months, and even years hunting for that stock or initial public offering (IPO) that will make them the next Bill Gates or Warren Buffet. After all, if you would have bought 100 shares at the original offering price in 1986, it would have had nine stock splits and bloomed into 28,800 shares being worth close to 3 million dollars today. But then again, a quick look at the history of AOL, as a once-promising future now is irrelevant. Further, many companies due to the strangle of laws, e.g. the Sarbanes-Oxley Act, and other financial constraints. These companies are not choosing to go public and seeking out private investors. Even some are buying its stock back and removing themselves from the stock market.

Rest assure, stock investing, if done professionally and wisely will indeed take a considerable amount of time, learning, and experience if you want to become profitable. Yet, even if you become profitable; it doesn’t necessarily mean that your return on investment is better than real estate investing. And it certainly doesn’t allow the control that investing in real estate allows.

For instance, as previously mentioned investing in stocks; you have no control over increasing the value of the stock. On the other hand, if you purchase real estate there are hundreds of ways to increase the property’s value, e.g. by painting the house, renovating a new kitchen or bathroom, changing out drapes or curtains, installing new windows, installing an alarm system, adding a swimming pool, adding a fence, paving the driveway, etc. By simply allowing the value of the property to increase you potentially increase your return on investment and most of the time immediately. If you purchase a rental property and increase the value of the property; the rental income will also go up. It is one to one punch, increase the value, increase the ROI. With stocks, it is just a matter of hoping for the best and hoping that the executive directors of the company know what they are doing. And you still have that possibility of the stock tanking or even worst turn into another Enron Scandal.

Rental Properties vs Stocks

The stock market is very volatile and depending on the stock and the level of risk it can be down or up. However, the S&P 500 can give an average annual dividend yield of 1.8 percent. Now compared to apartments and rental properties the average falls into the 6 percent to 10 percent range.

But for simplicity, let’s compare two investors, Tom and Bob. Both Tom and Bob will start out investing $1,000,000. Tom decides to focus on stocks; Bob decides on rental properties. Tom at the end of the year will receive an income of $18,000. Bob will receive (based on 6 percent) an income of $60,000.

However, even if Tom were able to reach 6 percent or even a higher return. Tom’s income will be taxed as ordinary income, whereas Bob’s will be taxed on business income. In other words, if Bob’s business entities are set up correctly; Bob could avoid much of his tax liability because he owns a business. And that is one of the beauties of investing in real estate compared to investing in stocks. Now mind you, the IRS does allow you to write-off capital loss if you lose money on stocks. But you are definitely not getting a return on investment and certainly not profitable.

Leverage; Real Estate vs Stocks

One huge advantage with real estate over stocks is the concept of leverage. Basically, leverage means that you use a small amount of cash to acquire real estate. Let’s break this down a bit, say, you want to purchase a $200,000 rental property that has a net operating income (NOI) of $20,000 per year. For you to leverage, that is, acquire and control this property (assuming a loan-to-value ratio of 90 percent), you can finance this rental property for $20,000 down and borrow $180,000. Your investment becomes only $20,000 and allows you to acquire a $200,000 rental property.

On the contrary, when you have $20,000 of cash to invest in the stock market, you can only buy $20,000 worth of stock. There’s no leveraging and no controlling when you buy stocks. There is a way to buy stocks on margin, but even so, it is limited and if the stocks go down in value. They can still make a “margin call,” basically making you pay the portion of the stock that tanked. But in most cases, $20,000 of cash will buy you only $20,000 in stock.

Now let’s look into a few examples of how leveraging increases your return on investment. Let’s say you are looking into purchasing that $200,000 property and you analyze that the potential net operating income (NOI) (income after expenses, e.g. mortgage, property taxes, maintenance, etc.) is $20,000 annually. This is how powerful leveraging can be:

Example 1: $200,000 all-cash purchase

ROI (return on investment) = NOI (net operating income) / Cash Investment

ROI = $20,000 / $200,000

ROI = 10%

For this example, you will take in (income) $20,000 annually. And you will have no mortgage, therefore, maximizing the NOI. You paid cash for the property and your return on investment is 10 percent.

Example 2: $50,000 down payment; financing $150,000. Assuming your yearly mortgage payments at a 4 percent interest rate ($716 x 12=$8,592). Now your new net operating income is $11,408. However, your ROI is greater at 22.82 percent.

ROI (return on investment) = NOI (net operating income) / Cash Investment

ROI = $11,408 / $50,000

ROI = 22.82%

Example 3: $20,000 down payment; financing $180,000. Assuming your yearly mortgage payments at a 4 percent interest rate ($859 x 12=$10,308). Now your new net operating income is $9,692. However, your ROI is even greater at 48.46 percent.

ROI (return on investment) = NOI (net operating income) / Cash Investment

ROI = $9,692 / $20,000

ROI = 48.46%

Do you see the power of leveraging the bank’s money or someone else’s money? Also, notice how the net operating income decreases as your cash investment decrease, but your return on investment skyrockets. Yes, net operating income is important and you want to grow that as high as possible but it is the return on investment that becomes key.

Appreciation; Real Estate vs Stock Market Returns

Furthermore, although leverage is a great advantage to owning real estate. Another advantage is the value of appreciation. Appreciation, essentially, is the increase in the value of a property. According to the United States Census, from 1963 – 2008, the average new homes increased 5.4 percent annually. Now considering that the average size of the home has also increased from 983 square feet to 2349 square feet and that inflation also may impact the price of the home. Generally, the national average of appreciation value falls between 3 and 5 percent.

Now to illustrate the advantage of appreciation. Let’s go back to those previous examples, e.g. example 3.

In example 3, your original investment is $20,000 on a down payment and you are financing $180,000. Again, assuming your yearly mortgage payments at a 4 percent interest rate ($859 x 12=$10,308) and your net operating income is $9,692. But when you calculate appreciation, say for example at 3 percent. Your market value now becomes $206,000 on your property. And your return on investment is a whopping 78.46 percent. Obviously, you would have to sell the property to get that appreciation value back but I am simply demonstrating a point that stocks do not work like this.

ROI (return on investment) = NOI (net operating income) / Cash Investment

ROI = $15,692 / $20,000

ROI = 78.46%

 “When I tell people that property is not just as good as other investments, not just a little better, and not even just a lot better than other investments, but tens or even hundreds of times better than other investments, most people do not believe it.” – Real Estate Riches – How to become Rich using your banker’s money.


It’s true! Stocks can make people extremely wealthy. In fact, it only takes investing in one great stock and holding it for a very long time to change your family’s destiny forever. However, this article attempts to focus on real estate vs stock market returns. With that said, the realistic approach to the stock market is that it is hyped up more than what it is made out to be. It is possible to get returns to that of the lottery but it is also very unrealistic. And to those who are successful stock investors, they actually spend a lot of time, gain a lot of experience, and even made a lot of mistakes before they reached their level. With real estate investing, I believe that you can reach better returns from your investment. Obviously, there is no short cut to success but with the right training, education, and determination real estate can get you there faster.

This page may contain affiliate links. This website and its pages are not intended to constitute legal, financial, or tax advice. The information on this website and its pages are not intended to constitute investment advice and all content are the views and opinions of the author(s), contributors, or administrators. Please read our disclaimer for more info.

Real Estate Real Estate vs Stock Market Returns 2019