Should you invest in a house or stocks? We talk about stocks, real estate and digital asset investments on this site. All of them provide their own unique benefits & risks. What if you are just starting out, what should you buy first? Especially if you are currently renting, does it make sense to invest in stocks or buy your first real estate property?
Research & level of effort
People research houses way more than they do stocks. If people took stock research as serious as they do house research, then average institutional investor would have much better success.
I love researching stocks and in some cases my research bouts can go on for months but not all people are like that. In fact people reading forums like Reddit or Stocktwits are know for buying stocks based on a single post or a single tweet. That is the definition of gambling.
However, most people that would buy a stock on a whim, would never do that with real estate. They go see the house, purchase an inspection, count the number of outlets, check electrical wiring, piping, roof, water heater and so on.
Imagine spending that much time and effort on every stock you want to buy.
S&P 500 vs. House Prices
No two houses are the same, so obviously the information below will be generalized. Let’s take a look at US Existing Home Average Sales price % growth since early 2000s.
On average, that is 3.69% growth per year. The number will be considerably different if you are in California, for example. If you are looking to invest in real estate this year, check out best cities for Real Estate Investment in 2021
Okay, how about stocks over the same period?
S&P500 returned 7.39% annualized over the same period.
Looking at this simple percentage comparison, you might think this is a no brainer, I should choose stocks over real estate, but that would be a bad decision. Real Estate investing offers a great number of benefits that stock markets can’t provide.
Let’s consider actual returns in this hypothetical example
Let’s assume back in early 2000s we had $10,000 to invest.
$10,000 invested in stocks would give us $47,650 today or 4.7x original investment.
For real estate, we use $10,000 as a downpayment and buy a property for $100,000.
So it is not the $10,000 that grows at a historical 3.69% but $100,000. Over 21 year period, you end up with a house value of $214,030. Definitely better than $47,650 from stocks. That is all thanks to leverage.
Leverage of course has its downsides. If markets were to crash, you would still owe $90,000 to the bank and they would collect. If they couldn’t collect, it would destroy your credit history.
House is not just an investment
As much as fake real estate gurus like Rich Dad Poor Dad guy like to tell you that that the house you live in is a liability because it doesn’t generate income, the truth is you need a place to live. Sure in some cases renting might be a better choice, especially in incredibly expensive cities but that doesn’t apply to every place. I don’t want to get into renting vs. Owning argument in this post. You have to understand your particular situation and your market.
If you are currently renting and have enough cash saved up for a downpayment and you are thinking should I continue renting or purchase my first place to live.
Ask yourself the following questions. Am I renting right now? Am I happy? Will my monthly mortgage and maintenance costs on my property be more or less expensive than monthly rent payments? If they are lower than your rent, you are better off buying yourself a place to live.
As you make your mortgage payments, half of the payment will be principal pay down on loan. This is money in your pocket. Eventually, you will owe less and less to the bank while your monthly expense remains relatively the same.
What if you decide to invest in stocks to accelerate your savings for a downpayment?
If stocks go up 10% every year historically, why not invest whatever you have to get an extra 10% to use for your downpayment? I hope you see how this is a horrible idea. Historical returns are no guarantee for future results. On top of that, you could get very unlucky and invest right before the market goes down. Over the long run, yes, you are likely to earn 10%/year, but over one year, it is impossible to say. Why patience in investing is crucial .
Do both if you can, invest in stocks and real estate.
Ideally, you will have enough capital saved up for a downpayment and to set up a stock portfolio. This, of course, is ideal because you have two channels that build your wealth. Plus, you get to live in the place that you own.
How to invest in real estate through stocks?
What if you love real estate but don’t want the hassle of going out and searching properties on your own. How can you invest in real estate with a few clicks?
The easiest way to invest in real estate is with the help of REITs. REITs are Real Estate Investment Trusts that you can invest in easily by buying them on the stock exchange.
What is awesome about REITs is that they can provide stable income while achieving diversification that is impossible to achieve if you were to invest in real estate properties on your own.
Here is an example of one of the biggest REITs in the world and the dividend yield that it can provide:
Realty Income, over the last 10 years provided an average income yield of 5% per year for its investors. That is stable income that REIT generates from its invested real estate properties and allocates that income to its investors.
Access to a variety of real estate properties
Another benefit of REITs is that they allow you to invest in very specific properties that you would never have access to if you were to invest on your own.
Individual real estate investors can really only invest in residential units. REITs, on the other hand, allow to invest in large commercial projects. If there is a property type, then there is properly a REIT investing specifically in those properties.
Here are a few examples of some of my favourite specialized REITS.
PSA – Public Storage REIT
Public Storage is the world’s largest owner, operator and developer of self-storage facilities. Our nearly 2,500 facilities across the United States serve more than one million customers. We are a member of the S&P 500 and FT Global 500. Our common and preferred stock trade on the New York Stock Exchange.
GMRE – Global Medical REIT
Global Medical REIT is a net-lease medical office REIT that acquires purpose-built specialized healthcare facilities and leases those facilities to strong healthcare systems and physician groups with leading market share. Our nimble, tenacious and disciplined investment strategy drives growth and delivers long-term value to our shareholders.
PW – Power REIT
Power REIT (ticker: PW) is a specialized real-estate investment trust (REIT) focused on sustainable real estate with attractive risk adjusted returns.
Power REIT is currently diversified into 3 industries: Controlled Environment Agriculture (greenhouses), Solar Farm Land and Transportation.
Power REIT is focused on expanding its real estate portfolio of Controlled Environment Agriculture greenhouse properties for food and cannabis cultivation on an accretive basis.
Don’t invest in stocks if you think buying your first property is something you need to do. Consider safer investments while saving up for a downpayment. Ideal situation is when you can do both comfortably.