Real Estate vs. Stocks: Part 2 – Average Returns for Average Investors

by Brandon · 7 comments

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(This article is part two in a two-part series on stocks versus real estate)

Last time, I discussed the idea of the “hero stock” and why the idea of “just picking that one special stock” is absurd and dangerous to your money.

In an answer to this gamble, many financial advisers recommend a diversified (spread out) portfolio, using mutual funds to spread out risk over dozens or hundreds of large companies. This definitely spreads out the risk of losing all one’s money on a company that goes out of business.  The stock market on average over the past 40 years has provided an average return of around 10% per year. Stock salesmen love to point to this number and tell you that this return is better than anything you could get in real estate. Just give them all your money, plus their commissions, and they will provide for your future.

The problem is – with stocks and mutual funds, you are giving up the most important part of your ability to make money – your brain. You are completely dependent upon forces out of your control to make money. Yes, the stock market has traditionally provided a generally stable return, but this return is miniscule to what you could earn in real estate.  Are mutual funds better than nothing? Yes!  Anything is better than burying your money in the ground (or a checking account). An average return of 10% is better than losing money to inflation. However, average returns are for average investors.

By reading articles like this one – it is clear you are not a typical “bury in the ground” or average investor. You want more.  Real estate investing will give you more. Why? One word: leverage. Leverage is the ability to use borrowed money make you money. When you buy a stock, $20,000 lets you buy $20,000 worth of stock. With real estate, however, $20,000 will let you purchase $100,000 or more worth of property (or $500,000 if it is your personal home).

Lets look at an example.

You have $20,000 this year to invest. You want to decide between buying diversified stocks or real estate. Let’s look at both:

  1. $20,000 invested for 10 years and receiving an annual interest rate of 10% could be worth $54,140.86 – a gain of about $34,000. Not to bad. This equates to an average annual gain of almost 17%.
  2. You purchase a newer three-bedroom, two bathroom home in a family neighborhood for $100,000.  You put a down payment of $20,000 (the sellers pay closing costs). Total mortgage payment (on the resulting $80,000 at a 5% bank loan) is $430 per month. The home rents for $1200 per month.  After paying taxes, insurance, a maintenance guy to fix stuff when it breaks, and a other incidentals, you cashflow about $450 per month or $5400 per year. Putting this money back into the loan (not that you would have to, but to compare apples to apples from the stock scenario above), after ten years you will owe nothing on the loan.  Zip. Zero. Additionally, property in the US has appreciated at an average of 3% per year. So, you now own a property that is worth $135,000. Even taking out your initial investment and the cost it would take to sell, you have over $100,000 in equity, equating to a 50% return on investment – three times higher than that of the mutual funds. This 100,000 can now be used to invest in something bigger, better, and with more value.

At the risk of sounding too biased, there are drawbacks to real estate investing.  For one, the money is not liquid. This means that if you suddenly wanted to pull out all your money, it would take time.  Stocks are much easier to get in and out with.  Additionally, stocks do not require any extra leg work. You don’t need to drive by the stock, get phone calls from the stock, or evict a stock.  However, personally I could not invest in something that I couldn’t materially participate in. Perhaps its a lack of trust in others, but I want to have complete control over the destiny of my money. When I make or lose money, I want to make it or lose it by something I did or didn’t do.

This scenario is not a once in a lifetime deal or even a great deal. It is a very conservative look at investing. I believe in maximizing return by purchasing properties well below their value, adding tens of thousands of dollars in equity before even closing on the deal. In the house scenario above, I would have paid $60,000 for it instead, adding hundreds to monthly cashflow and tens of thousands in immediate equity. That is true real estate hacking.

About Brandon

has written 199 Awesome posts in this blog.

Brandon Turner (G+) is the Senior Editor and Community Director and owner of He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

P.S. looking for hard money loans in California? Be sure to check out my friends over at They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

P.S. Looking for more real estate investing knowledge? If you are interested in a top-notch course to help you understand the nuts and bolts of creative real estate investing, I would like to recommend Ben Leybovich's Cash Flow Freedom University. Ben is a close friend and has been my trusted adviser for years. He's a smart guy and CFFU is pretty awesome. The course is waitlisted, but while you wait for an opening Ben will send you tons of FREE content. Seriously. Click here to check it out.

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{ 7 comments… read them below or add one }

Tom September 10, 2012 at 4:35 am

Your argument that real estate offers higher returns because of leverage is absurd. A) You can lever yourself in the stock market just as easily, and B) You conveniently forget to mention that leverage also works in the opposite direction, magnifying losses. So yes, leverage can help you potentially make bigger gains (or bigger losses – therefore just giving a higher risk/return tradeoff), but it is not something that is unique to real estate. Additionally, you oversimplify the buying and selling of houses (taxes, transfers, realtors, etc), and you neglect to include maintenance in the cost of your investments.


Brandon September 20, 2012 at 5:04 am

Tom! I appreciate the comment! I don’t know if I’d say “absurd.” I’d like to see someone buy $60,000 worth of stock for just $2100.00. (3.5% down payment on a FHA loan). Yes, leverage works the other way as well, but if my $2,100 investment suddenly drops in value, I can add a fence, paint the house, whatever to improve the value. Can’t be done with stocks. Also, with the buy-and-hold method – it doesn’t matter how the market does because with a fixed mortgage – the loan is being paid off each month.

I’m not saying stocks don’t have a place in life. But for a 20-something trying to retire by 30 – stocks aren’t going to cut it.

Also, notice above I did include maintenance and all the other costs associated with buying a home.

True, real estate is not as passive as stocks. No one is arguing that one. But for me – real estate is the shortest hack I know (besides dealing drugs or robbing banks) to financial freedom. Thanks for the debate! Love it!


Steve March 12, 2013 at 4:24 pm

Brandon, You mentioned refraining from buying that “hero” stock, yet a single family dwelling seems just as non-diversified as a single stock, and real estate has become quite volatile as we’ve seen the last few years, with significant drops in a few cities. And not to pick your article apart but your example of a $100K home pulling in $1200 /month seems a bit optimistic. I own a $200K home in a high demand neighborhood and am getting $1500 – And you need 25% to purchase a non-owner occupied. I appreciate the article, and I agree that real estate should be part of a portfolio as it’s done well for me, but I just think the numbers are a bit overstated.


Brandon March 12, 2013 at 10:53 pm

Hey Steve,

Thanks for the comment. I agree- a single family home does seem rather non-diversified. I think a lot of it comes down to personal preference. That said, the numbers I used in the figure above are very similar to what a lot of investors find across the country. In fact, one thing we advise a lot on BiggerPockets is the 2% rule – that says a property should rent (monthly) for 2% of the purchase price. So $100,000 should rent for $2,000 per month. This is VERY tough to get in most areas, but it is possible. And that’s what I’m all about. I don’t believe in being the average real estate investor- I believe in being the exception. It’s better to buy one killer deal than 10 crappy ones.
Thanks so much for the comment though! I know this debate can rage forever 🙂


Jason October 18, 2014 at 9:32 pm

You made 100000 dollars on a 20000 dollar investment. This works out to 5 times your money. Except it took 10 years. That works out to 17.4 percent per year compounded. Pencil it out. The S and P 500 has done 13 percent per year compounded over the last 30 years and that does not include dividends. Except you didn’t have to borrow any money to buy to accomplish that. Yes if your numbers really bear out real estate could return somewhat more than that but only after taking on the risk of borrowed money and the pain in the assignment factor associated with maintaining property or having to pay someone to do it. Real estate is great but to suggest that it vastly outperforms stocks even after jacking yourself with debt is to contradict the record. If real estate were so much better than stocks wouldn’t everyone just dump stocks and buy real estate?


Mike November 25, 2014 at 4:36 am

No leverage in stocks? You should study what Buffett did. He put like $100 down in his first partnership, to other people’s hundreds of thousands and later millions and controlled 25% of the upside beyond the first 6% each year (so if there was a 10% return he would get 25% of 4% of the profits). Combine that with excellent investment skills, and the ability to accumulate long term investors, and take over entire companies and unlock capital through things such as using insurance companies operating capital (prior to paying out insurance claims) to buy stock in undervalued companies and it is not hard to see how Buffett became the world’s richest man.

It’s probably more difficult and more costly to start a “hedge fund” now a days but it is possible. (although Buffett never shorted or hedged stocks his partnerships technically were classified as such). The real money in the market though is in starting a fund of some kind and managing money institutionally (mutual funds, hedge funds, exchange traded funds, private equity funds, venture capital funds, etc). It isn’t something everyone can do… But with crowd funding these days anything is possible. 😉

Also, I could buy an out of the money call option in google for a few hundred dollars and control $550,000.00 in stock above a certain price for a week or two. For a few thousand I could control it above the same price for a much longer period of time. A strategy of say 10% of capital at 1% a piece to 10 names and 90% stable income yielding investments would offer plenty of leverage and in a given “expiration cycle” I could not lose more than 10% of account. (Of course losing 10% multiple times in a row would offer potentially much larger drawdowns) If I also bought puts as a hedge I could potentially actually gain money from a large enough crash.


Alex January 21, 2017 at 3:33 am

Is it possible to invest in both stock market and real estate? Would you prefer investing in both?


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