The Wealth Building Guy

Bawldguy, over at Behind The Curtain has a great post up today comparing a $100,000 investment in stocks vs $100,000 invested in Real Estate.  It’s such a great post that I’m going to reprint it here :

I don’t know about you, but I’ve been listening to ‘investors’ debating the whys and wherefores in the stocks vs. real estate debate. Is anyone going to seriously take the position that the stock market is the way to secure your retirement? You no doubt have read various media articles comparing the two.

The journalist usually ends up concluding the investor has to choose what’s better for their particular situation. That’s media-speak for “I had to write a piece on this topic and don’t know what I’m talking about, but it sure sounds good, doesn’t it?” Let’s put this subject to bed once and for all. We’ll put them in the most transparent way possible side by side so even a journalist can discern which way is north on the map. Of course I’ve always maintained the media has not ever done their research diligently on this topic, but we’ll give it a shot anyway.

Here’s how we’ll do it. I contacted my Financial Planner as a source for an historically reliable annual growth rate in the stock market. I decided to use the S&P 500. For the past 50 years or so it has performed at a growth rate of approximately 7.9% annually. Sounds impressive, but of course that’s not every year, just like real estate doesn’t always go up 40% a year. In fact let’s be honest and say right up front that both real estate and stocks experience downturns from time to time as part of the normal business cycle.

Let’s set the parameters first. I’m going to grant annual growth of 10% for 10 years for the S&P. We’ll use $100,000 as our opening capital investment amount. For real estate we’ll use the same amount, buying small income properties using 10% down payments. (Note: This isn’t theory, I’ve been executing this exact scenario successfully for decades now, and have done so recently in two additional states.)

We’ll use an annual appreciation rate of only 4%. I’ll assume the stock’s annual return will be able to maintain a 10% annual growth by selling and buying different stocks as the professionals see fit. I’m also assuming the real estate investor will do one tax deferred exchange at the end of the fifth year. Though I won’t impute any costs to the buying and selling of stocks, I will burden the real estate investor with a selling cost of 8% when he exchanges.

Let’s see what happens.

After 10 years (rounding to the nearest $100) the stock investor has $259,400 ¬a profit of $159,400 over the 10 year period. A 10% annual growth rate on the originally invested capital.

Real estate has ended up with $458,000 - a profit of $358,000 for the same 10 year period. A 16.435% annual growth rate on the originally invested capital.

We gave stocks the benefit of 2.5 times the growth rate we gave real estate.
This still doesn’t take into account the benefits received from the real estate that don’t exist with stocks. Any income derived over that period generated by the real estate would not be taxable because of depreciation.  All excess depreciation would then be allotted to the ordinary income (salary from job) of the investor, resulting in thousands of dollars in taxes not paid. On the other hand any dividends derived from stocks are taxable. With rare exceptions the only way the stock market investor gains any tax shelter is when he loses his money, which is far more likely in stocks than in real estate, especially over the long haul.

Now imagine what this same $100,000 could have done for you, (and has for my
clients) if you’d been pressing the right buttons for the last decade with your real estate investment portfolio. In my experience, even with some bumps along the way, 10 years of prudent and Purposeful Planning almost always results in multiplying your original capital 10-30 times, depending upon the region, your timing, and how vertical the rises were in that particular 10 year period. This immediate last decade would have resulted in your $100,000 turning into at least $1.5-2MIL.

Even if you said the stock market during the last decade had grown 20% every year, your $100,000 still wouldn’t even be close to $700,000. (About $620K)

Can we please put this so-called debate to rest now?

Behind The Curtain is a fantastic real estate investment blog, and I encourage all of my readers to go check it out!

Benjamin Bach is a Real Estate Consultant with Keller Williams Golden Triangle Realty in Kitchener Waterloo dedicated to building wealth for his clients through smart Real Estate investments, and helping people achieve success. If you are interested in how you can start your Real Estate portfolio, or have any questions and buying or selling a home, you can email Benjamin (benjamin AT benjaminbach.com) or reach him at 519 772 4376.

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