Rental property vs. Stock Market

Comparing investing in the stock market to owning rental property

Real estate is a popular topic of conversation.

  • Is it wise to rent?
  • Do you want to buy?
  • Are investments worth it?

Most Belgians will never possess something more valuable than their home. It also carries the most sentimental weight.

In some worldwide cities, home prices have soared by a factor of two or three during the past two decades. The common belief is that renting is a waste of money and buying is a good investment because it increases the owner’s equity.

We thought it would be interesting to compare investing in rental homes with investing in the stock market. Investors may now have more faith in real estate due to recent stock market turbulence. But let us be clear: there are no true or false solutions to this problem. Both asset types have a place in a portfolio.

People can get wealthy by investing in real estate. The stock market can be a source of great fortune for some. Some people who put money into real estate have seen their fortunes dwindle. Some people’s investments in the stock market have turned out to be disastrous.

Each of us has unique tastes that have developed over the course of a lifetime.

Disadvantages and benefits

We can begin to understand the nuances of this debate by comparing the benefits of renting to those of investing in index funds.

Rental property versus Index Funds

Rental Property vs. Stocks

In what ways do properties excel over other investment options?

It turns out that people of various cultural backgrounds have varying attitudes towards private property. Unlike the Belgians, many people in continental Europe would rather rent than buy a home.

It shouldn’t come as a surprise that we learned that nothing is as safe as houses and that “a Belgian’s home is his castle” from playing Monopoly with our family when we were kids. The scripts we’ve experienced throughout our lives have a significant impact on our “money personality.”

We have no doubt that if you asked a hundred Belgians how they would invest half a million euros, the overwhelming majority would reply that they would buy a house.

But why is it so popular with investors?

Perhaps it’s because buying real estate is an easy and non-threatening way to put money to work. Everyone feels they have some experience with it, even if only from buying their own home or knowing what to look for in a rental, and it’s easy to see why it has value and how to make money from it.

It has a real, tangible presence.

That’s a piece of it, for sure.

The fact that investing in the stock market never needs a plumber is a minor inconvenience compared to the benefits, in the eyes of most investors.

On the other hand, we’ve just come to appreciate that real estate is the ideal psychological investment for the average investor for three more reasons:

1. You must never sell in a panic.

The story of the online stock brokerage that investigated the trading habits of its most profitable customers is fascinating. It turns out that the secret ingredient was their demise. When it comes to investing, we tend to act at the worst possible moment and do the worst possible thing. Since using a smartphone to buy and sell only takes a few seconds, it is far too easy to succumb to our emotions’ (i.e., the neurotransmitters in our brains) worst instincts. But if you’re feeling anxious about real estate, you should be afraid enough to contact an estate agent and a solicitor and complete several documents. then keep that level of apprehension going for the months it will take to close the deal.

2. You can’t be a price-checking maniac.

It’s ridiculous to worry about whether your home’s value has changed in the last few hours or days. Still, this is something that some stock market investors do repeatedly. On multiple occasions. Again, this appeals to the worst in human nature and may lead to a pattern of behavior called “myopic loss aversion”. It can make you feel down and cause you to act at the wrong time. If you have no intention of selling, the stock price is irrelevant; nonetheless, many stock market investors will tell you that the color of an arrow may make or break their day. We bemoan our reliance on the subjective opinions of valuers, yet the fact that you won’t know your property’s true value until the day you sell it is, once again, a significant mental benefit.

3. You have no choice but to think in the long term.

You should always look at the big picture while investing in real estate, stocks, or any other type of asset. A rising trend is typical. But it’s hard to resist the urge to think in the short term and try to “beat the market” by dipping in and out. That’s a form of gambling, not an economic strategy. In contrast, the substantial financial and practical costs and duties associated with trading real estate compel you to view your investment with a longer time horizon.

Contrary to popular belief, real estate profits are not always as they appear.

Historically, stock market investments have produced higher returns than real estate investments over the long run. Historical evidence shows that the stock market has never lost money in the long run.

Historically speaking, the average annual return on a real estate investment has been between 3% and 4%.

The returns on investments in international stock markets consistently average 10% per year.

The difference in returns could amount to tens of thousands of euros over the course of a lifetime of investing.

Discomfort Levels

Owning a rental property outright isn’t easy. Finding tenants is the first step. You may have to wait until you find new tenants to cover your expenses if your current ones quit.

Even if you factor in taxes, insurance, maintenance, and repairs into rent, you should still expect surprise expenses (a new roof or water infiltration may eat away months of profits in an instant, for example) that you can’t predict.

There are some who are better able to handle it than others. You shouldn’t just look at the return on an investment but also at all the costs and effort involved in making that investment. Consider the time and effort required to think strategically and physically maintain your assets. The more traditional forms of investing (stocks, bonds, etc.) all avoid these “hassles.”

Investing in REITS (real estate investment trusts) allows you to gain access to real estate without dealing with this ‘fuss factor. Investing in these allows you to reap the benefits of equity ownership (diversity, liquidity, and, usually, strong returns thanks to competent property management) without bearing as much of the burden or taking on as much risk.

Investment in real estate or the stock market?

A home is an investment in your quality of life, not your bank account. We think the capital markets are a better option than real estate for developing our wealth in the long run (assuming you understand them, can easily access them, and can stomach the ride).

We understand that property may seem more secure to some people because of the poor performance of many retail equity investors. Being Belgian, we, too, find houses fascinating. And please understand that we are not saying that purchasing real estate is an awful plan. It makes complete sense as part of a well-rounded life strategy and investment portfolio.

Though we consider ourselves to have successfully navigated “the ladder,” we would advise anyone looking to follow in our footsteps to always give the matter due consideration and avoid becoming too emotional or caught up in the surrounding buzz.

Many of us lack an adequate grasp of the statistics and dangers involved. Buying real estate instead of putting money into a pension or retirement fund is not a wise idea. In contrast to the world’s leading corporations, real estate may not generate any income. The primary purpose of any business is to generate as much profit as possible. In contrast, the neighborhood’s market conditions, and overall economic climate are more important factors in determining a home’s value.

Choose a home that fits within your budget, is somewhere you’d like to live, or is part of a diversified portfolio that also includes stocks, bonds, cash, and other assets.

Get in touch if you’d like a second assessment of your current assets and savings.