Yahoo Finance 3 Long-Term Investments That Are Always Better Than Real Estate
Every year since 2014, investors have ranked real estate as the number-one long-term investment, according to polling results from Gallup. In the 2024 version of the survey, a whopping 36% of Americans ranked real estate No. 1, far above the 22% that favored stocks and 18% that chose gold. But does real estate actually provide the best long-term returns?
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The responses to the Gallup survey are perhaps not surprising, considering how well real estate has done coming out of the 2008 Great Recession and, more recently, the bounce back from the coronavirus pandemic. Many Americans now have either first-hand experience with booming real estate values or have friends and colleagues who have done quite well. But over longer periods of time, certain other asset classes have performed better than real estate, including the ones listed below.
It’s important to note that no single investment is “always better” than another, even if it outperforms on an absolute basis. Investors have their own individual financial objectives and risk tolerances, and it’s more important to pick investments that meet your needs than those that may be numerically superior. With that in mind, here’s a look at some investments that can be better than real estate, particularly over the long run.
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Stocks
When it comes to absolute performance, stocks have an unassailable record over the long run when compared with real estate.
According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, real estate has returned 6.99% annually over the past 10 years, and 9% over the past five years. These are hefty returns and occurred during very good periods for real estate in general. Still, stocks handily outperformed the real estate market over these periods, with the S&P 500 index posting average annual gains of 10.87% and 13.4%, respectively.
This outperformance continues over longer periods of time as well. According to Experian, over the last 30 years, through 2023, the S&P 500 has returned 8% annually, vs. the 5.4% of the housing market. Add in the fact that the S&P 500 has never had a 20-year rolling period in which it has lost money, and it’s easy to give stocks the edge over real estate.
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Bonds
Bonds don’t post the huge outperformance numbers that stocks do over real estate, but they still come out on top. According to Charles Schwab, over the past 30 years, bonds have returned 6.8% annually, topping the 5.4% of real estate.
There are exceptions on a year-to-year basis, of course. In 2022, for example, real estate returned 5.67% while corporate bonds actually fell by 15.14%. But over the long run, bonds have the edge.
One of the additional benefits that bonds have over real estate is the guarantee of the return of your principal. While that promise is only as good as the financial strength of the issuer, for high-quality companies or U.S. Treasuries that promise can be very sound.
Tax-Advantaged Accounts
A tax-advantaged account isn’t exactly an “investment,” but it can be a better place to put your money than real estate. Tax-advantaged accounts like IRAs and 401(k) plans offer tax-deferred growth and provide tax deductions on money you contribute. While real estate can also offer some tax benefits, the deductions you get from contributing to your accounts can amount to 25% or more every year, depending on your tax bracket.
Things To Consider When Investing in Real Estate
The biggest drawback when it comes to investing in real estate is that it is illiquid. Unlike stocks, exchange-traded funds or even bonds, all of which can be liquidated essentially immediately, it can take days, weeks or even months to sell a property.
Real estate can also be an expensive proposition. In addition to laying out a big down payment that can amount to tens of thousands of dollars or even more, you’ll have to pay various fees and real estate commissions to buy and sell real estate.
Real estate is also an ongoing expense. Unlike stocks or bonds, which simply provide you with a return as they appreciate in value and/or pay interest or dividends, real estate requires annual maintenance, upkeep, property taxes and so on.
Values in real estate can also be extremely local. In other words, the average annual return for the housing market as a whole may or may not apply to your particular investment.
The double-edged sword of investing in real estate is that in spite of its conservative reputation, real estate investments are typically highly leveraged. Unless you’re paying for your property in cash, you’ll likely be borrowing somewhere between 80% and 95% of the value of your home. This greatly magnifies any price swings, both for the better and for the worse.
The Bottom Line
There are certainly plenty of benefits to investing in real estate. Your primary residence provides you with shelter and memories, and rental properties can generate monthly income and provide various tax benefits. But in terms of liquidity and long-term returns, there are other options out there that can top investing in real estate, in spite of the fact that most Americans think it is the best investment option.
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