Real estate is the most common investment Americans make, whether or not the consider it an investment. In fact, almost two thirds of Americans own real estate, while only about half of Americans own stocks2. What’s more, real estate is gaining popularity as an investment vehicle alone. A recent Gallup poll found that 30% of Americans felt real estate was the best long term investment, while only 24% named stocks best.
When you compare real estate to stocks, it’s easy to see why real estate growing in popularity. First, consider how stocks work. When you buy shares of a stock, you are buying shares of a company, and the performance of your investment largely depends on the decisions that company makes. The company also determines whether or not to pay out dividends to its investors.
When you invest in real estate, you own a physical asset, and you can make money off that asset in a number of ways. Some choose to find properties that they can repair and improve, and then resell for a higher price. This is sometimes called “flipping,” and for experienced investors can provide large profits.
However, the vast majority of real estate investors purchase properties to turn into rentals: the investor finds a property, leverages a down payment to take out a mortgage to buy the property, and then rents the property out. In this scenario, the investor earns returns in a couple of ways. First, there’s appreciation as home prices go up over time. Second, and most important, there is the income in the form of rent. Ultimately, the steady stream of income will pay off the mortgage while the cash flow (rental income left over after mortgage and expenses are paid) builds wealth and the property builds equity.
But how do real estate’s returns compare to the stock market? Let’s compare the two since 2000. In January of 2000 the S&P 500 was at 1,394.46 points. After several peaks and valleys, it rose to 2002.16 in February of 2015, showing an increase of 607.7 points or 43.5 percent. An investment of $100,000 in the stock market in January 2000 would be worth $143,500 in February 2015.
Now look at home prices of the same period of time. In the National Association of Realtors Existing Home Sale report, the median sales price of an existing single-family home in January 2000 was $139,600. In December 2014, the median sales price had increased to $209,500, showing a 50.07 percent increase—and this includes the worst housing crash in recorded history. So $100,000 invested in real estate would have grown to $150,071.
Keep in mind, however, that this number doesn’t include cash flow, the most important element of a real estate investment. When you factor in the cash flow you would have earned of the same period, real estate would have earned you exponentially more!
Today mortgage rates remain low and home prices are still below their peak, opening amazing deal for many investors. It’s easy to see that when compared to other asset classes, real estate is indeed the best avenue for building wealth for many!