Should you put your money in stocks or real estate has been the question of generations but there should by now be enough evidence to point us toward an answer. Keep in mind that basic principals of keeping your investments diversified, understanding investing tax consequences, and keeping cash flow under control is paramount and should be analyzed before making any investment decision. With that out of the way, however, how has real estate faired compared with stocks and are there substantial reasons to invest in one over the other?
Before we review the data, it’s important to note the tax benefits of both asset classes. Real estate in the U.S. as an investment (ie. rental property) can provide significant tax benefits, including depreciation and taking passive losses which can sometimes offset other income and tax-deferral on the capital gain from a sale if doing a 1031 exchange for another like-kind property, to mention a couple of strategies. (For more on these tax-benefits, see my blog.) However, unlike real estate income, most U.S. stocks generate a qualified dividend which is taxed at a lower rate and can be exceptionally more liquid should you want to sell. There are many more qualitative reasons to pick one investment over the other and it’s important not to let profit data drive your decision only.
Since the very end of 2009, the S&P 500 returned 188% and the iShares National Real Estate Index (IYR) returned 100%.^1 Since Feb 1, 2001, the returns were 159% and 149%, respectively.^2 Amazingly, after two decades the returns are approaching each other.
Of course, national data doesn’t help investors who want to buy locally. According to Zillow, the mean house price in Seattle is $732K, San Francisco $1.38M, and New York $638K. Seattle grew -1.9% since last year and expects to grow .5% next year. SF is .1% / .7%, and New York is -.7 / -1.3%. (The S&P 500 grew 24% in 2019.)
Stocks and real estate have both benefited from a decade of low (almost negative interest rates). The 2018 Tax Cuts & Jobs Act have reduced the corporate tax rate and created the Qualified Business Income tax-break (QBI), which can apply to real estate profits in a significant way.
Historically, stocks and real estate have been the sole protectors against inflation. Now, we see success in these asset classes during a period of zero inflation. This should be cause for some alarm as there’s insufficient data to help us fully understand the current environment.
Stocks offer liquidity and the ability to diversify your investments. You can also buy real estate that’s securitized, meaning real estate stocks or non-traded real estate investment trusts (REITS) that share similar benefits as buying a rental property outright. Rental property income, after expenses, may be taxed at your marginal rate and you’ll have to manage the property (or hire a property manager).
At Eureka Wealth Management, I’ll help you analyze the profit potential of investing real estate over stocks and will coordinate with your tax advisor to take advantage of the various tax benefits that may apply. I also do retirement planning, insurance, and investment management. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.