Real estate and the stock market are often compared to each other, mostly because they are the two most common places for people to invest their money. However, simply comparing growth in home prices to that of the stock market is problematic when trying to determine which is the better investment, as it doesn’t paint a complete and accurate picture.
Take for example a recent Business Insider blog titled, “Is buying a house a better investment than the stock market? We did the math, and the answer is clear”. In it, they charted home prices against the S&P 500 at various points throughout the housing crisis until now in order to demonstrate that stocks have consistently outperformed real estate.
Since May ‘11, which roughly marks the beginning of the housing market recovery, home prices are up 48%, while the S&P 500 has shot up 99%. That means the house you bought for $1 million in 2011 is now worth $1,480,000, and the $1 million you invested in stocks around the same time has nearly doubled. These numbers alone would certainly seem to support the Business Insiders’ claim that stocks are the better investment, at least over that specific period of time. But they‘re forgetting one very important detail…
Buying a $1 million house doesn’t cost $1 million. Assuming you paid a 20% down payment, it only cost you $200,000 initially. So that $480,000 of equity you’ve built up over 7 years is actually a 240% increase on your initial down payment. Even after factoring in 7 years of an estimated $4,500/month in mortgage, property taxes and insurance, the $578,000 total that you have invested into your home has yielded an 83% return. Further, if you’ve been operating this home as a rental property, that extra $378,000 you’ve spent on monthly overhead was likely recouped (and then some) by the rental income you’ve collected, as well as the tax advantages you’ve benefited from.
Don’t get me wrong, investing in real estate isn’t necessarily for everyone. It requires more maintenance than stock investments, and it comes with a lot more headaches. But if you’re up for the challenge, it can prove to be a highly rewarding endeavor. Trust me, I keep going back for more after 25+ years!