5 Reasons Why I Invest in Stocks vs. Real Estate

Buy land, they’re not making it anymore. That’s the start of a compelling argument to invest in real estate. And I’m not here to say otherwise. Instead, I’m saying there’s a better investment opportunity. Let’s look at the top reasons why I invest in stocks vs. real estate. Then below, I’ll show you two compelling reasons to invest in real estate.

Why I Invest in Stocks vs. Real Estate 

1. Stocks Outperform Real Estate 

There’s not a lot of great research online showing stock returns vs. real estate… so I’ve done my own. I used the Case Shiller Home Price Index and compared it to S&P 500 returns. And although we’re in 2020, I used 2015 as an end date to show mid cycle levels for both stocks and real estate.

Timeframe Real Estate S&P 500 
10 Years -0.27% 5.05% 
20 Years 3.90% 6.18% 
30 Years 3.84% 7.86% 
40 Years 4.76% 8.11% 
50 Years 4.82% 6.39% 

Over 10, 20, 30, 40, and 50 years, stocks have outperformed home prices. But with these results, I still admit that it’s hard to compare stocks vs. real estate returns. It’s not an apples-to-apples comparison. For example, the numbers I ran don’t directly include dividends or rental income. Home prices also don’t reflect commercial real estate and other segments. 

This is a point real estate fans are quick to bring up. But I also looked at popular REITs and they tend to underperform over the long run as well. To find out why this is the case, my next two points give some insight. 

2. Stocks Don’t Have Closing Costs or Other Fees 

When you buy a property, there’s usually a hefty closing cost. According to Zillow, the average homebuyer will pay about two to five percent. On top of this, every year you’ll have to pay property taxes, homeowners insurance, utilities, and maintenance. In some places you’ll also be hit with HOA fees. 

Renting out your property can help pay these fees and provide extra income. But with renting comes more costs. Finder fees, background checks, legal costs, and other expenses eat into your rental income. People also tend to take less care of things they don’t own. I’ve heard too many cases of bad tenants destroying a year or more of rental income. 

3. Less Work to Invest in Stocks 

With stocks, you can own a part of a business without having to do any work. You can buy stock in the world’s best businesses – or a basket of stocks – with the click of a button. Then you don’t have to lift a finger until you’re ready to sell. 

Real estate, on the other hand, isn’t hassle free. It takes time finding tenants, making repairs, keeping up with regulations, and filing taxes. Now, you can have a management company do all of this for you… but it further reduces your returns. 

4. Stocks Have a Lower Barrier to Entry and Exit 

With less than $100, you can invest in the stock market. Technology has helped level the playing field. And thanks to pressure from Robinhood, most brokers now offer free trading. This is where real estate has lagged behind. Only a few lower cost choices like REITs are available. But as mentioned, their long-run returns aren’t as attractive. 

Buying property directly isn’t cheap and borrowing to do so can take a hefty down payment. The amount you pay in interest also moves inversely with the down payment. On top of that, when you want to sell, it can be a lengthy, expensive process. 

5. It’s Easier to Diversify with Stocks 

With lower barriers to enter the stock market, it’s easier to diversify. With a small portfolio you can buy stock in companies from different industries. You can also buy stock from around the world. This can help lower overall geographical and political risk. While one position might struggle, others can help you stay afloat. 

To find an uncommon view of diversification, check out my recent research… Diversification is Protection Against Ignorance. It reveals a misunderstood quote from Warren Buffett. 

Unique Benefits of Investing in Real Estate 

To make better decisions, it’s vital to seek out opposing information. And in my objective approach, I’ve found two big benefits to investing in real estate which stocks don’t provide. 

1. Building Equity Instead of Renting 

Buying a home makes more sense if you know you’re going to live in it for many years. This allows you to build equity. If you’re currently paying rent, a portion of that goes to your landlord’s pocket. That’s after they pay all of the fees mentioned above. But instead, that could go back towards your net worth. 

Another benefit to buying your primary home is a tax advantage. If you live in it most of the time and meet other basic IRS requirements, you won’t have to pay any capital gains when you sell. But this benefit doesn’t extend to a portfolio of rental properties. 

2. Lower Cost to Leverage 

Real estate allows you to leverage up with a high debt-to-equity ratio. With the property as collateral, lenders can take ownership if loan payments stop. And this feature of real estate doesn’t extend as well to other asset classes. 

Borrowing costs are at historical lows and leverage can help you amplify returns. So if you know what you’re doing, this is a great advantage to real estate investing. Although, leverage is also a double edged sword. When the housing crisis hit, excessive borrowing led to larger losses. 

2.5 Local Expertise 

Local expertise is another reason to justify buying real estate… but it overlaps with investing in stocks. That’s why it comes in at 2.5. It isn’t a third standalone reason for buying real estate. Still, it’s one of the overlapping benefits I’ve found worth mentioning. 

If you have a deep understanding – or inside information – of a niche market, you can outperform market averages. For example, in real estate you might know your local community better than other home buyers. Do you know about plans to build a nearby school or other gentrification projects? This inside information can add to your property value and gives an edge over other investors. 

Final Thoughts 

Both real estate and stocks can provide healthy returns and produce steady income (dividends). Although, with the research I’ve laid out, I’ll be sticking to stocks for now. I don’t have the local expertise to justify buying real estate. Also, I don’t know – with a high level of probability – that I’ll be living in the same area for 10 plus years. 

Have you done well with real estate investing? Or have you been burned by it? Do you think I’ve missed an important piece of the stocks vs. real estate discussion? 

You can reach out directly or leave a comment below. Also, if you’ve found my research useful, I’d really appreciate you sharing it 😊 and of course you don’t have to. I’m just happy you stuck around this long. That alone motivates me to publish even more of my insight. 

Invest mindfully, 

Brian Kehm 

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