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Is real estate a better investment than the stock market?

Nov. 20, 2013
Categorized in: For Buyers

When the stock market takes a wallop, investors look for a safer place for their dollars. Real estate is obviously at the top of the list when that happens.

There are plenty of differences between trading in stocks and real estate. If you are considering a shift in your investment portfolio, keep in mind you'll have some expenses in a real estate purchase that you won't have in a stock fund, but you'll also enjoy some financial advantages that a stock fund can't provide.

The good thing about stocks is that the price is the price is the price. If a fund requires a deposit of $5,000, then you're in for $5,000, less a few dollars for fees or commissions. You expect it will grow enough to at least stay ahead of inflation, but in the past 15-20% growth was not out of the ordinary. So a $5,000 investment that expanded at 5%, was worth $5,250 in a year's time.

In real estate, it's not that simple. A $150,000 property isn't really going to cost $150,000. It may cost you another $15,000 when you add up the down payment, any points you decide to pay, as well as closing fees. Keep in mind that the money you put into real estate doesn't grow based on what you put into the transaction ...

If a house appreciates 8% (that's the average appreciation over the last 50 years or so), the initial investment grows expansively. (Orange County’s appreciation often out-performs the nationwide numbers.)

Let's look at that $150,000 house again. If the value grows by only 5%, the house will be worth $157,500. However, the $7,500 appreciation actually results in a 50% growth rate on your $15,000 initial investment.

The very nature of real estate allows you to earn much more than you could earn in a regular stock fund in any given year. The question usually follows immediately, "But what if the real estate market drops?"

Fair question, and let's take a look at that.

A condo purchase price of $66,000 back in 1989, required a down payment of $1,980, using an FHA 3% down structure. With closing costs, the initial investment was about $3,000. The total investment was less than 5% of the value of the property.

The monthly mortgage payment was higher than the rent being collected by the investor. With the condo fees, it was $75 per month more than the rent. But with rentals, there are more advantages than just monthly cash flow.

The tax advantages for the rental property saved thousands of dollars over the years it was owned. The IRS allowed depreciation of 4% each year (based on the purchase price), as well as deductions for maintenance and real estate taxes. The condo may have had positive cash flow of $900 at the end of each year, but there was also a deduction of more than $4,000 for depreciation and various expenses.

At the end of the day. those years of renting it out just for positive cash flow were a wash. But the market turned up again and the condo had appreciated from $66,000 to $75,000. The eventual return was more than 300 percent on the original down payment, and that's not even including all the tax savings throughout the rental years. How often do you see that kind of return in the stock market?

One of the biggest benefits about real estate is that even in a down market, you have options to make money on your investment.

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User Comments

1. RE: Is real estate a better investment than the stock market?

Written by: Nancy Leight Malick
Feb. 10, 2008

I was told when I first entered real estate, 4 years ago, that the depreciation was calculated by taking the value of the house minus the land and dividing it by 27 years. Is that a true statement? By the way, I've not re-read your Blog, but it seems to be a great piece of information. Thank you.

2. RE: Is real estate a better investment than the stock market?

Written by: Remy Chausse
Feb. 10, 2008
Hi, Nancy -- I wish I could answer your question, but my license requires that I suggest you talk to an accountant.  Let me know if you need a referral ... and thank you for the compliment!

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Open House Cafe

Blog by Remy Chausse
Irvine, California

You can search for homes for sale anytime at www.GoFindRealEstate.com I'm a southern California real estate agent, working with buyers and sellers who often say ... I've never done this before ... I have no idea what I'm doing! ... and we get through it together, as we both look forward to a successful transaction! I created the Open House Cafe to provide a warm and cozy format with tips for buying a new home (or selling the existing home). Every day is open house day for you to ask your real estate questions!

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