In late 2011, we posted a blog article entitled A Dose of Realty: Stocks vs Rental Property. The article points out that most Wall Street bankers, brokers and financial planners are guilty of distorting reality, at best, and outright deceit, at worst, when comparing the performance of the stock market vs the housing market.
Anytime figures are published about this subject, the actual comparison is not stock investing vs real estate investing…it’s a comparison between stock performance and owning a home to live in.
The numbers that are generally compared are stock gains against home appreciation, and quite naturally stocks appear to perform better. Why? Because the comparison is between a stock investment that has the potential of producing income…and a home in which there is no potential at all of earning income? It’s what as known as an “apples to oranges” comparison.
Frankly, if the comparison was between stock investing and real estate investing…the stock market would not even belong in the same league. So, the Wizards of Wall Street must create distortions and deceit in order to scare people away from real estate. After all, their fees and commissions are at risk.
Cold, Hard Facts
To illustrate the point, let’s take a look at some cold, hard facts. The Dow Jones Industrial Average, over a 12 year period from Sept 10, 1999 to Sept 9, 2011, went from 10,462 to 10,992. That’s 530 points…representing a 5% total gain. So, a $100,000 investment would have produced a $5,000 gain…$417 per year or .4%. (And, that’s only if your own investments did as well as the Dow. Most investors actually lost 20% or more during this 12 year period.)
What about investment real estate over these same 12 years? Using the national average of 10% of value for gross rent for a typical $100,000 home ($1000 per month), subtract 25% for expenses (primarily taxes and property management) and the net rent is about $750 or a $9,000 annually. (Vacancy rates and maintenance aren’t factored in, but neither are rental increases, appreciation or re-investment of profit, which would more than offset those expenses.)
Multiply the annual net rent of $9,000 and over the 12 year period, you would have a total gain of $108,000, or 108% (9% annually).
You might be thinking “what if the value of the property actually falls? What then? To start with, the yield would still be the same – $108,000. Then, you would just sit back and wait for the value to rise again…it always has and always will.
Bottom Line: Stock Market gains of $5,000 vs Real Estate gains of $108,000.