Comparing the returns and particularities of real estate investments versus stocks

Abstract

The present research aims to provide a comprehensive analysis and comparison of residential real estate investments and stock investment, for the private individual investor. This work’s geographic focus is the European Union with a special focus on Belgium, Germany, France, Luxembourg, the Netherlands, Italy and Spain. Unleveraged returns for both types of investments were computed by using the historical data of a diversified stock index, the price/rent ratio in various cities, and the historical housing price appreciation in different E.U. countries. It was found that unleveraged stock returns were more attractive than unleveraged residential real estate returns. Leveraged returns were then analyzed. It was shown that a residential mortgage is often a better mean of leverage for the individual investor than a margin account and leveraged residential real estate returns surpassed leveraged stock returns. In the second part of this paper, different particularities that could affect one’s investment vehicle choice were reviewed. Stock investment proved to be more liquid and passive, taxation was very investor-dependent, and ethical forms of investments exist for both investment vehicles. For the investor focused primarily on obtaining the highest return possible, investing in leveraged residential real estate properties was recommended. For the investor who is more interested in an investment’s liquidity and passivity, stock securities were recommended. Other factors affecting one’s investment vehicle decision were also discussed.