Invest in Real Estate or Stock Market
Posted on Jul 28, 2017
Average rate of return:
- Stock Market: 10% (before inflation). 7% (after inflation)
- Real Estate: 10% (especially in the San Francisco Bay Area)
ROI based on own money or borrowed money:
- If you invest $100,000 in stocks, with a 10% ROI, you’ll get $10,000 in year 2.
- If you invest $100,000 in real estate (20% of a $500,000 house), with a 10% ROI, you get $50,000. Your ROI is based on a lot of money you’ve borrowed from the bank, not just the initial deposit.
Of course, you can also borrow $500,000 and dump it all into buying stocks but
- no one will probably lend you $500,000
- stocks are volatile and investing in them is more risky
Saving Money Every Month:
- If you put aside money every month, e.g. $500, for retirement or tuition for your kids, you have less money every month to spend.
- If you buy a rental property and rent it out, the rent money you collect will pay for the mortgage. This is akin to saving money except the renters are saving money for you – you don’t have to put aside money from your paycheck. In addition, the rental property will also appreciate in value. In this sense, you benefit financially in two ways
- from paying down the mortgage
- from appreciation of the house
Renting vs Owning:
- With renting, you lose all the rent money and the rent goes up every year or so.
- With owning, you only lose the mortgage interest you pay (although that’s tax deductible for a primary residence). A bulk of the monthly payments you make go into equity to pay down your loan. This is also akin to saving money and doesn’t even include the appreciation of the house. Plus, with owning, you get a bigger space that you can customize (home improvement) to your liking which will also increase the value, e.g. bath or kitchen remodel.
Living off of an investment
- If you need $100,000 to live every year, then with a 10% ROI, you need $1,000,000 invested in the stock market. However, due to inflation, $100,000 in year 1 will not be worth as much as $100,000 five or ten years later.
- With a real estate investment property, once the property is paid off, the rental income is pure profit (minus costs such as taxes, insurance, etc). Since rent costs increase with inflation, your rental income also increases with inflation. This doesn’t even include the appreciation of the house itself.
- The stock market is much more volatile than real estate and is not a tangible asset.
- Investing in the stock market is not a business
- Investing in real estate (e.g. rental property) is a business which can give you tax benefits.