There are two types of questions that arise when comparing stocks and real estate investment. Which one is a better investment? and which one is a safer investment? People can have opinions but opinions are not as useful as fact. The following research what is better and what is best.
Rate of return on all
On research, out of all types of investment such as stocks, treasury bond and real estate investment etc the real estate, the real estate investment has the best return on investment. This is for the residential real estate. The bonds and the bills fall after residential rental investment.
Equities vs real estate
Depending upon the area and the country, investments perform differently. There are times when equities perform way better than rental investment. The results of such comparison can be different in different countries or even different locations. There are countries where the real estate value has declined such as Japan. It is due to the decline in the population and because of the increase in aged population.
Risk and return
The value of stocks varies from time to time. But they are high risk and high return. Equities come with high volatility and risk. In comparison, treasury bonds are low risk, low return. Economists suggests that risk and return have a strong correlation. There is something in the market that keeps these two factors directly independent. But this rule does not apply rental properties. They are low risk and high return.
Throughout history, residential real estate investment is always low on risk and high on return. There are certain reasons for this. The first being, real estate is expensive and one time investment. Real estate investment has high barrier to entry. Real estate cannot be bought and sold in a blink. It can take months to be transferred.
Measuring Risk vs return
There are ways to measure investment against its return. The risk reward ratio should be calculated. This is called Sharpe ratio. Start with the assets return. Now subtract the return of the going with a short term. The risk premium should be divided by the average annual standard deviation. The higher ratio indicates a better investment, greater return relative to the risk.
Treasury bonds are at a Sharpe ratio of about 0.2. For stocks, the ratio is at 0.27. These returns are strong but still volatile. The risk is very high in such cases. For residential real estate the Sharpe ratio is 0.7. That is a figure too powerful to ignore.
Returns and GDP
Advanced economies have slow economic growth. Still the returns have done better than GDP growth in some countries. Overtime, returns on these assets tend to average growth around double. Everyone wants their wealth and income tied to the returns to stocks and real estate and not to GDP.
What about bonds
As already said, bonds are low risk and low return. That is a boring idea. No risk no fun and that too with low return. Why not invest in something that is low risk and still high return. Because risk in investment is not that fun. Rental properties, especially rental homes are a great way of generating monthly cash flow. There was a time when bonds performed very well, but that time is gone now. it was in the 80’s. In fact that too was an anomaly. There were times when bonds earned negative returns. Bonds can expire and rental properties pay forever. During inflation the value of bonds may go down but rents rise alongside inflation. Bonds are stable but still low on investment.