Real Estate or Stock Market? Of Course Real Estate – And Here is Why!

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This is probably the biggest debate between investors, analysts, gurus and cab drivers, what is a better investment — real estate or the stock market… Many reasons and explanations have been given by geniuses and anonymousness over the years, they all made some good points, and they all made some bad points, but there are 2 main reasons, why one is better than the other.

According to a reliable data and House Price Index from the Federal Housing Finance Agency, from 1975 to 2013 in US real estate market, a $100 investment have grown to about $500. A similar $100 investment in the S&P 500 over that time frame would have grown to approximately $1,600. Confused? Just wait…

But there are 2 major factors that will affect your end return and profitability more than anything else, and those are Leverage, and Fear, (fear of the stock market of course…) and these are the 2 reasons why real estate takes the bet.

Leverage is the name of the game, no investor got rich without using it, no bank is able to exist without giving it. And the higher the LTV the higher your returns will be (Yes, I know it works both ways, but let’s wait a second). Stock brokers would give you 1-to-2 LTV on your stock portfolio with a crazy interest of 9% on the margins. While mortgage banks will easily land you 1-to-5 (when putting down a common 20% down payment) at approximately 4–5% interest… In other words, for every dollar your stock portfolio goes up you profit twice the amount, but for every dollar your real estate goes up you profit 5 times the amount…

In 2017, the median average for Americans stock portfolio is valued at just under $54,000… while the median average American home value is $200,0000… what does that mean? It means that most people are trusting and feeling safer putting the majority of their hard earned money in real estate investment rather than in the stock market. Yes, we all fear of being highly invested in the stock market. Righteously, for many reasons, from security and safety to the feeling of accomplishment and ego… You too, are likely to feel safer buying a 200K house than having a 200K stock portfolio… Now, let’s put the numbers for a test, shall we?

If we go by the Federal Housing Finance Agency, your stock portfolio (S&P 500) will likely to gain an average of 23.75% ROI per year, over the time.

your real estate investment will likely to gain a lower average of 7.6%, per year over the time, so if you buy an average home at $200K, your home value will appreciate at a pace of $15,200 a year, but when you put a typical 20% down payment of $40,000, that becomes an annual average return 38%, and your return will start compounding over the years… You should add to that the equity you will be building over the course of the next 30 years (typical 30 years fixed mortgage at 4.5%, on 160K), which is $2,520 on year 1, and growing every year until the loan matures (In common amortization table the principal portion of the monthly payments grows every year in compare to the interest) or another 6.30% a year… that combines to a total of an average annual return of 44.30% on year 1, and growing every year…

To conclude, Real estate may not only end up be more profitable for you in the long run, but it will most likely allow you to sleep better at night, and that is just as important… Real estate is what most humans feel comfortable with, you can see it, you can feel, it you can sleep in it and its there to stay. Another good example of why I think people feel much more comfortable going ALL IN on real estate rather than in the stock market is the large number of families and privately held real estate portfolios like The Sol Goldman trust, Milstein family, Manocherian brothers and many more, and the little known families who hold an exaggerate stock portfolio which is their main holding…

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” — Franklin D. Roosevelt

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