Real Estate or Shares – What’s the better investment?

I’m investing in companies. I own real estate, too. But participating in the success of companies is more profitable and the best way to build a fortune, especially for the average private investor. In today’s post, I’ll tell, why I’m right.

share benchmarkI’m from Germany, a country where people don’t trust the stock market. Germans believe that the stock market is a casino where you only can lose money. That’s why the rate of stock market investors is quite low. And that’s the reason why Germans, although living in one of the richest and economically strongest countries, don’t get a decent return. I started this blog, because I want to tell people about my experience as a private stock investor. I’m doing it in the hope to encourage others to build a fortune like I did. In my blog post “Why I prefer to invest in Stocks” I talk about the advantage of stocks in comparison to other investment opportunities. Today, I want to pick that point and tell you about something really interesting, I read these days.

I believe, some things can’t be said too often. One of these things is that stocks are the investment with the best returns. And they are simple enough for everybody to understand, so that everyone is able to invest successfully in companies. Lately, I read one or the other really interesting article about investing. It’s not always that I’m such a lucky reader. But times are on my side and I want to share these informations with you, like I did in my last blog post about Howard Marks thoughts on passive investing. I’m convinced that every average private investor can learn a lot from these. I recently read in a German investment magazine about the performance of stocks, real estate and gold.

Real estate

I love real estate. I love great houses and I love to live in one of these. Like almost every good German, I believed for a long time that owning a property would be a good investment, especially regarding your retirement. As a nation of people who are scared of shares, property investing is the answer your parents give you right from the beginning. But it’s the wrong answer you get.

Owning a property could make sense for some people. It depends on the time you’re planning to live in the house, on the location, on the price and on the relation to the costs of renting. When interest rates are low, like they are today, buying a property could make more sense than renting one. Money is cheap and instead of paying the landlord and helping him building a fortune, you can pay yourself and the bank and build yourself a fortune. But don’t expect decent returns.

ROI of property

The return of capital of property isn’t quite satisfying. Since 1900 gross profit of property was globally near 1%. In countries like the U.S. it was 0.3% and net profit was globally -2%. So owning a house and living in it, isn’t a real good deal. It isn’t just the price which makes property less profitable although you need a good deal of capital to start buying. It’s because of the costs after the purchase. Owning a property means that you have maintenance costs and costs for insurance. During the years, your property will lose in quality and you have to keep up by renovating cabling, piping, windows, heating etc. Always something that is really expensive. And you don’t know if you would get your investment back when you are selling your property.

And don’t believe that property prices aren’t as volatile as stock prices. They are! The only thing is that you don’t see it as clearly as with shares. Shares were traded every day. And each day you can see the price falling or rising. Properties aren’t sold every day. Normally, there’s a certain time between buying and selling. So price development isn’t that visible. That’s why many people value volatility too low. And prices could fall deep below value like in the crisis of 2008.

Real estate isn’t for those with risk aversionreal estate

Although the mentioned above is fact, many believe, investing in real estate is less risky. Especially here in Germany, where so many people try to avoid risk wherever possible. That’s why so many like to invest in ETFs. They hope to minimize risk through wide diversification. In their eyes, diversification is one of the most import things you have to do regarding shares. But when it comes to real estate, the same people don’t think about it. They buy one property regardless the risk of no diversification. Only a few are able to buy as much property as needed to diversify the risk.

I love real estate, but I wouldn’t buy any for investment reasons. I still own one for renting, because selling it now would be unreasonable. The property costs me nothing. I also own one where I live in, but next time when my family and I are moving, I won’t buy a new one. It is not worth.

Shares are more profitable

I rather would take the money and buy more companies. The historical capital gain of shares is around 5% per year. Even if your market timing was (or is) bad, your return is worth the investment over the long run. Shares are less expensive than real estate, so can start investing with a little budget. And with ETFs you can profit from the success of companies with less risk and average returns.

What’s really interesting is that an increase in interest rates isn’t that bad for stock investors. Although shares suffer at the beginning of increasing interest rates, higher interest rates are better for higher returns. Over the past 120 years, it has been seen that the higher interest rates, the higher the stock returns over the next 5 years. It’s kind of logic, because when money is scarce, people want to be rewarded for putting their money into companies. So nobody has to fear increasing interest rates.

Should you overweight high growth countries in its portfolio?

Well, that’s a good question and many would think that this has to be a great idea. But historically there is no correlation between expected economic growth and stock market returns. In fact, the most profit was made in those countries in which economic growth was weak and forecasts were bad. In the following 5 years, investors could make a profit of 25% a year. This is understandable, because mostly stocks were extremely undervalued.

real estet learnWhat do we learn?

Well, one thing we could learn is that real estate could be an investment for living and for passion, but it’s not an investment with great return. Returns are better, when you rent your property, but they aren’t as good as returns from stock investing. The biggest problem of real estate is that you need decent capital to start your investments and you always have maintenance costs.

We also could learn that investing in stocks is a reasonable and profitable alternative (and for the best alternative). Although volatile in the short run, shares are very profitable over the long run and less riskier than many people think. Regardless your timing, if you’re patient enough and are able to wait, you should get your return. Investing in stocks is possible with little money and needs no maintenance costs.

For both investments applies that you need some knowledge. So you have to learn what’s needed to invest successfully and you have always have to do your homework. There is no easy way to make money.

(The post is based on an interviewed with Elroy Dimson, Chairman of the Centre for Endowment Asset Management at Cambridge Judge Business School, in Capital 07/18)

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7 Comments

  1. Kate Welling says:

    My husband wants to get into investments, so I am happy I read your article. I thought it was interesting how you note that investing in real estate is risky! It makes sense why so many people think it is risk-free, as you mentioned. I think that my husband and I will meet with a financial planning company to help us invest in something great.

  2. Financially Free says:

    Interesting read. However, I tend to disagree. Investing in rental properties can give significantly higher returns than the stock market because of leverage. If you only have to put 20% down to buy a rental property you can get a really good return compared to the return the same 20% would have given you on the stock market. But of course, it also comes with more work.

    1. Well, leveraging can give you great returns. You can leverage property as well as stocks. I have a property fully financed, with no down payment. That’s really lucrative. In the end, I get something for nothing. But don’t forget the maintenance costs you will have.
      In Munich, one of Germany’s best addresses, the real return since 1970s is 2% a year. And the Herengracht-Index, a price index for top real estate in Amsterdam, recording prices since 1628, reported 1% return a year.
      Certainly, you can get great returns with properties as well as with stocks. But I’m not talking about the risky investments. I’m always talking about investments for the average private investor. And having that in mind, stocks are much more reasonable than properties. If you have to buy a property for maybe $500,000 with only $100,000 down, your investment is a very risky one. Think of 2008. Suddenly, your property was worth much less than thought and above all than paid. But your credit of $400,000 is still worth $400,000.

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  4. Fausto Borchers says:

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  5. Hee Connely says:

    Oh my goodness! an amazing article dude. Thank you

  6. Reedy says:

    Alright so it’s not really a question about the topic at hand here but… how long does it take you to put together these kind of posts? Is it easy? Like did you have to research all this stuff? I’ve been wanting to start a blog myself, so just curious. Sorry not totally relevant but figured I’d ask. Thanks in advance

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