Wondering how real estate has performed over the decades, compared to stock markets?
Deni and Brian break down average historical stock market returns along with average real estate returns to give you a sense for what you can expect from each asset class.
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Deni: Hello, everyone, and welcome.
Deni: Deni and Brian here from Spark Rental on our weekly Facebook Live and podcast. And please let us know if you’re joining us. Where are you joining us from and any questions you have? Just shoot them in the chat. We will do our absolute best to answer them as we go along. This is pretty relaxed. So, we’re not dogs flying in the back. You’ll understand. Why not? Just kidding. So last week we talked to Nick Disney and that was an interesting just an interesting interview. A really cool guy does a little bit of this and a little bit of that all surrounding real estate investing. But very interesting.
Brian: I find it fascinating he hadn’t worked a real job in like 20 years. And even then, you know, he yeah. I mean, like he basically had never worked a real job. I loved it.
Deni: Yeah, it was crazy. And today Brian is going to talk to us about the comparison between investing and real estate and to and stocks. So, the difference between the returns someday I’ll get my speech back. And so, yeah, without further ado, Brian, why don’t you talk to us about stock market returns?
Brian: Sure. So, if you look at the average return on the S&P 500 since its inception back in the 1920s, I guess back then it wasn’t the S&P 500, it was like the S&P 80 or something like. But yeah, if you go back to the inception of the S&P, the average annual return on it, including dividends, has been around ten and a half percent. You know, back in the fifties, they opted to 500 companies and it’s 500 of the largest companies in the US. So that’s a pretty good return, right? Like ten and a half percent per year. Obviously, some years it has a negative return, some years it goes down, other years it has a spectacular return. So, for example, last year in 2021, the S&P 500 returned a 28.41% return if you include dividend dividends and reinvestment. Now, this year, the stock market has not done so well, returned around -12.2% year to date. That’s actually as of yesterday. So, you know, today’s numbers are not reflected, but you get the idea. But yeah, so stock markets, have a lot of volatility, but strong average growth if you average it over time over the decades.
Deni: And this is definitely the reason that you speak all the time about diversification.
Brian: Yeah. Yeah, absolutely. So, you want to have some money in stocks because these are strong average returns. But if you are living on those returns as a retiree, this is why you don’t see 80-year-olds with 100% of their asset allocation in stocks because the stock market can and does crash. All right. So, and yeah, before we jump over to real estate returns, I will add that stock market returns around the world do very you know, if you look at. European stock market returns in the last 30 or so years. They’re a little lower than the S&P 500 average return. You’re looking at an average return in the 7 to 8% range in European stocks over the last few decades. Some emerging markets, you can see higher returns, although they’ve actually been a little lower for the last decade. But, you know, as a general rule, stock market returns, you can count on 8 to 11% as sort of an average long-term return on the stock market.
Deni: So how about real estate?
Brian: So real estate, you’ve got a couple of options to invest in real estate. So, it’s hard to pinpoint one average real estate return if you own real estate properties directly, for example, being a landlord like you and I talk about all the time, then high returns depend on the individual deal, right? And that means that your returns on a rental property depend on your skill level as an investor, which is not the same as investing in, say, index funds in the stock market, which requires zero skill at all. So, I mean, Danny, you and I, we’ve earned a 200% return on a land deal that we did not long ago, right where we sold the property for over three times what we bought it for. And it was a small deal. Right. It was a piece of undeveloped land. But you can earn crazy high returns on real estate if you know what you’re doing. Novice investors usually lose money on their first rental property or on their first flip on their first deal. Broadly speaking, typical rental property income yields are usually in that 4 to 7% cap rate range. So that’s just cash flow. That’s just your income yields. Right now, real estate doesn’t just produce cash flow. It also appreciates over time, at least on average. So, the national average home price appreciation rate in the US is around 4%. So, the most recent number I found for that was actually from a year or two ago and it was like 3.9%. Of course, over the last two years home prices have just skyrocketed big time and are actually throwing off that average. So, for example, in 2021, we had around a 19% national average for home price appreciation in the US. Now in some markets it was like 57%. I mean it was crazy.
Deni: Like mine. It’s crazy.
Brian: And in other markets they barely bumped up at all. But yeah. So, you’re looking at a national average of around 4% annual average appreciation for your real estate prices plus typical rental property cash flow yields in like the seven or 4 to 7% cap rate range. Now one thing that’s different about real estate than stocks is you can leverage other people’s money to buy it and invest in it. Right. Like you borrow investing property loans to cover 80% of the cost of these properties. So, you and I talk about this all the time, how leverage magnifies the return on a deal. So, if you buy a bad deal with leverage with, you know, financing most of the purchase price, you’re going to go from a moderately bad return to a really bad return. If you leverage other people’s money to buy a really good deal, then you also are going to magnify those positive returns. So, you’ll go from getting a decent, good return on your cash to getting a spectacular cash. On cash return.
Deni: What do you think the number like the number one or two reasons is that people don’t get that return. Then it makes it not such a great investment.
Brian: Makes real estate not a great investment?
Deni: Well, their particular deal is it repairs. I mean, that’s what I usually see is they jump into a deal and then something big occurs.
Brian: So, you know, as we talked about earlier, real estate, direct real estate investing requires knowledge and skill and labor to earn consistently decent returns. So that’s why new investors often lose money. They don’t have that knowledge and skill, so they often end up with negative returns on their first year or two or very modest, mediocre returns on their first year or two. And the more deals you do and the more knowledge and skill you have, the better your returns are going to get. You know, I mean, we know investors who are veteran investors who won’t invest for anything less than like a 14% annual return, you know, I mean, you know, they can consistently get returns in the teens or even the twenties because they know what they’re doing. Right. So, it’s really the number one differentiator is knowledge and skill for direct real estate investing. And of course, bear in mind, we were talking about rental properties specifically a minute ago. You know, there are all kinds of ways to invest directly in real estate, from vacant land to self-storage to Airbnb properties to flips, you know, you name it, there are a million ways to invest directly in real estate.
Brian: And by the way, I did add a rental property ROI calculator link in the comments. It’s free. You can use it to calculate the returns on any given deal with leverage. There is a loan feature in there as well. All right. Now, directly buying real estate is not the only way to invest in real estate. And this is something you and I have talked about more and more over the last year or two. Real estate crowdfunding is a more recent way to invest in real estate, and it’s great. I have a decent amount of my own personal money tied up in real estate crowdfunding investments. We can walk through a couple examples of crowdfunding investments that I personally have money in and the exact returns that they offer. To give you a sense for how those compare to both stock market returns and direct rental property investment returns. So, on the more conservative end and the more liquid end is concrete, and that’s spelled REIT like reit, like real estate investment trusts.
Deni: There’s a link in the chat if you want to check them out.
Brian: There we go. So concreit, what they do is they invest in short term, hard money loans, basically purchase rehab loans to real estate investors. So, they put their money into a big pool of these loans. And when you invest in them, you buy shares in that big pool of loans. So, they pay a 5.5% annual dividend. They do pay.
Deni: That better than a savings account.
Brian: Way better than a savings account. And unlike most real estate crowdfunding platforms, it’s very liquid. And that’s why they offer this relatively modest return, this 5.5%, because you can pull your money out any time.
Deni: I mean, I use it and it’s really kind of the app is really cool. Just let you know.
Brian: It’s a great super slick mobile app. Yeah. So, there’s no penalty on your principal. Unlike most real estate crowdfunding platforms, there is a very small penalty on your recent dividends if you sell your shares, having owned them for less than a year. But super liquid but modest return, right? 5.5% compared to 10.5% on the stock market, but very safe and stable and easy to pull your money out. All right. StreitWise is another real estate crowdfunding platform. They pay an annualized dividend of 8.4%. So, it’s a significantly higher dividend yield than concrete pays, but it’s a five-year commitment. Now, you can put your money out early, but there is an early withdrawal penalty if you do so. And that’s on a sliding scale. So, the earlier you withdraw your money, the higher the penalty, basically. And we’ll add a link to the comments. Oh, you already did for Streitwise as well. Yeah. I’ve got some money in streitwise. It’s a great dividend. They pay their dividend quarterly. So again 8.4% annual return compared to the stock market’s ten-and-a-half percent average return. But Streetwise has been paying that 8.4% dividend like clockwork, very stable investment.
Brian: They own a few very, very large office complexes. So, and with very high-end tenants like Wells Fargo and I can’t remember the other ones, but very reputable tenants, long term tenants. All right. Fundrise. Now, they are not a one size fits all investment platform. The way that concreit and streitwise are. Fundrise offers a whole bunch of different investments and different investing plans. The two that we’re going to focus on today are their growth plan and their income plan. And those are exactly what they sound like. The income plan has higher dividend yields, but lower appreciation growth, whereas the growth plan has a lower dividend yield, but it aims for much higher long-term growth. So, for the growth plan, you can expect a dividend yield in the 2 to 3% range every year, plus appreciation in the 0 to 20% range every year, just depending on how real estate does and in particular their properties. But they do own apartment buildings and single-family rentals and loans. I mean, they have dozens and dozens of different investment properties, some of them quite large, like large apartment complexes all across the US.
Deni: Now when you go in to use fund REITs, do you pick and choose the type of investment or you just kind of.
Brian: You do if you have invested at least, I think it’s a. Thousand dollars is the minimum for you to select the plan. Otherwise, your money just gets put into a big pool of investments. So, they have actually a series of different plans or investment levels. And the more you invest, the more control you have over picking and choosing individual investments and strategies. So, the growth plan, 2 to 3%, annual dividend 0 to 20% annual appreciation. The income plan has a higher dividend yield like 4 to 5% dividend yields and you know, like 0 to 15% or so annual appreciation. So, in 2021, the total return for the income plan was around 18% and that was about 5% of that was dividends and 13% of that was price appreciation. The growth plan had a return of around 25% in 2021, and that was around 3% dividend yields and 22% appreciation. So yeah, you can earn very returns from fund dries it’s not, but it varies a lot more than concrete and streetwise do which have set returns that you’re buying into. So, I love fundrise. It’s a great platform. And then the fourth and final real estate crowdfunding platform we’re going to offer today to for comparing returns is ground floor. They have a totally different model. They let you invest in individual loans that are issued to real estate investors. So again, these are hard money loans. They’re like short term purchase rehab loans. So, they pay between six and a half and 14 and a half percent interest each year, depending on the risk grade of the loan. The safer and lower risk the loan. The lower the interest rate it pays, of course. So, I typically invest in C and D grade loans, and I earn an average of nine and a half to 10%, and that is including defaults. And, you know, people who don’t pay as agreed.
Deni: So, you have experienced that. But it hasn’t been as much as you know. Good. Good ones.
Brian: Yeah. Yeah, know it. Now, granted, that being said, we’ve been in such a strong real estate market that home prices have been appreciated, appreciating so fast that even if someone defaults, they can foreclose and take the property back. And it’s, you know, you’re still going to be covered. If we were in a housing market correction and real estate were declining in value, I would expect a lot more of those loans to defaults. And of those defaults, more of them did lead to true losses. I’ve actually never had a I’ve invested in hundreds of loans in ground floor, never actually lost money on a loan. The worst that has happened to me is that I didn’t earn a return on it. I got my original principal investment back, but I didn’t actually earn my interest on it. That was the case where the borrower defaulted ground floor, took the property back and then they sold it. So, there was no interest or profit on it. But I got 100% of my actual principal investment back and that was the worst-case scenario that I’ve experienced. Now that being said, you know, a bunch of the loans are currently in default and, you know, some of them will sell and some of them will go to foreclosure. And it is what it is. But that’s why I only invest 10 or 20 bucks in each loan, which is a nice thing about ground floor. You can invest with ten bucks. Same thing with Fundrise, by the way. Minimum investment, ten bucks. So. Makes it easy to diversify.
Deni: Yes. And it gives you a chance to check it out, see how it works before you put in more.
Brian: Yeah. And one other thing that’s nice about ground floor is that these are short term loans. So, you don’t have your money tied up for five years like you do with most real estate investing or crowdfunding platforms. Like Streitwise, like fundrise, you get your money back 6 to 12 months typically. So that should give you a sense of how different types of real estate returns compare to average stock market returns. There is a study that I like. It’s a few years old now, but they compared different asset class returns over the course of 145 years across 16 countries, 16 developed countries. This was mostly North America and Western Europe. And they found that rental properties and stocks averaged a similar return across those 145 years in the low 7% range, according to this one study across all these countries. But rental properties had half of the volatility, the price volatility that stocks do, which makes sense, right? Home prices don’t bounce all around the way that equities do. So, their point was actually that you can get the same high return on rental properties that you do on stocks without the risk. Right. Without the volatility. But that being said as we talked about earlier, rental properties take knowledge, skill, and labor to invest in stocks don’t anyone can go buy shares in an index fund that just mirrors the S&P 500 and doesn’t require any skill.
Brian: It doesn’t require any labor. And you get strong returns. So, I personally recommend that you invest in both stocks and real estate. They’re truly apples and oranges. This whole notion of comparing the two and trying to pick one or the other, that’s a losing game. The winning game is to invest in both and to get the advantages of both because those advantages complement each other like stocks are for high growth, low income, high volatility, but also high liquidity. And they’re completely passive. Real estate offers stability, but low liquidity. And that’s why the prices are so stable is because it takes so long to sell properties and it cost so much money to sell them, so they don’t fluctuate that much. Moderate to high income from real estate, but low to moderate growth. Price growth. You have some tax advantages for real estate, but direct investing requires skill and labor, so they complement each other well. Invest in both. If you don’t have the time or the interest in learning how to invest in rental properties, invest in real estate crowdfunding, it’s really that easy.
Deni: Awesome. Well, thank you, Brian.
Brian: Yeah. No, I mean, I think it’s important to every once in a while, pause and just look at the numbers on these things. So many investors have assumptions about, oh, well, this is what I can earn on real estate versus this is what I can earn on stocks. But maybe they’re not actually running the numbers and looking at historical data for that. So, I think it’s important every once in a while, that you pause and actually look at the historical data and have the real numbers at your disposal.
Deni: Right. And then these options are, again, good, because you can go in, you can play around with them, you can try it with a little bit of money. Some of them do have minimum requirements. So, it’s a good way to kind of learn as you go and diversify still.
Brian: Absolutely. And of the four real estate crowdfunding investments that we talked about today, three out of the four. You can invest with ten bucks. Streitwise does require a much larger minimum investment of $5,000. But you can invest in concreit with $1 and you can invest in ground floor or fundrise with ten bucks. So, on that note, let us know what you guys want to hear about in the coming weeks. Stay in touch. We love to hear from you. Message us through Facebook. Email us that [email protected] and we will catch you guys on the flip side.
Deni: Absolutely. Have a good day. Bye Bye!