Real estate investing is often (erroneously) believed to deliver a return on investment that falls somewhere between stocks and bonds when volatility is also factored in. What the typical investment advisor probably won’t tell investors, however, is that when inflation is also factored into the mix, real estate investing outperforms stocks over time, every time.
“If you can beat the stock market at all, it’s only by a tiny percentage,” wrote Bigger Pockets. “You might as well give monkeys some darts to throw at the stock pages in the newspaper.
If you think this sounds a bit too far-fetched, consider a March 2017 study by the esteemed Cass Business School in London, which found that among 10 million randomly-created indexes, each containing 1,000 U.S. stocks in equal amounts (enter the monkeys!), and over a period of 45 years nearly all of them beat a more targeted cap-weighted index, which weights individual stocks according to their actual market capitalization; a semi-controversial scheme that gives the largest companies the most impact on the value of the index.
Real Estate Investing and Alternative Investments – What’s the Difference?
To start with, the real estate market is much more local than the stock market since every property only has one buyer, but stocks are all bought and sold countless times. Why does this matter? Because it means the phrase “beating the market”, takes on a whole new meaning when it comes to buying real estate such as investment properties.
“Whether the stock market is efficient or just unknowable is somewhat immaterial; you can’t expect to consistently beat it”, wrote Bigger Pockets. “On the other hand, the real estate market is without question efficient”.
For one thing, when the stock market begins to drop, it’s a toss up whether or not the investments will ever regain the value they lose, and in some cases, they can lose all value permanently. On the other hand, investing in real estate means that even if the market crashes or takes a major downturn, real estate investors still own their brick and mortar investment properties (as long as they can afford to make the mortgage payments), and that alone adds up to more stability than investing in the stock market ever could.
In addition, predicting the amount of investment income vacation home rentals will provide, for example, is a much more exact science than trying to determine what even the most consistently-performing stock might do, even in a good year. In addition, real estate investment offers a wider array of options if things do start to go south.
“If you’re buying a property to rent out, you control who lives there,” wrote Bigger Pockets. “You either choose them yourself, or you delegate that decision to someone you trust. If that person doesn’t perform, you can choose to remove them and get another person in there. Your hands aren’t tied. And if renting doesn’t work out for you, you can choose to sell the property”.
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