Real estate investment in current economy vs stock market

[Shrey A.]

I hope I will not be hated on for this question. I have been an investor in stock markets for the last 7 years. In the last 5 years, an index fund for S&P500 has yielded 75% returns (15% yearly on average?). The stock where I would sell and get my downpayment has showed > 200% return in last 5 years (yes, some stocks are crazy!). Now while I'm super pumped to invest into some good real estate opportunities, the best deals I can find are ~15% Cash on Cash yearly, if I include equity, it goes up to 25%, if I assume yearly 2% appreciation, it goes up to 30% returns. 

Yes, both stock market and real estate are cyclical. So it is really confusing as to would it be wise to pull some of my stock investments and put in real estate.

What do people on this forum think?

[Will Fraser]

Hi there, @Shrey A.!  This is a good question and I'd love to toss in my opinion here.  

While the approximate returns over the past five years may track closely the most appreciable difference between equities investing (especially through broad market indexes like the S&P500) and real estate investing are:

• Equity investing in PRIMARILY unrealized - your "gains" or "losses" are hypothetical until you sell.  True, they may throw off some dividends, but these are minimal in a broad-market index and, at best, relatable to a bond.
• Real estate investing is multi-dimensional while equities are primarily monolithic - in real estate investing you'll participate in the cashflow, appreciation, and equity growth that you mentioned in your post, while also benefiting from favorable tax treatment.  With equities you have a value-store that rises and falls with the (?) health of the companies that make up that particular index
• Real estate investing CAN BE cyclical . . . it can also be linear, or a hybrid of the two.  If you are constrained to buying, for some reason, in San Francisco, Seattle, NYC, and downtown Chicago then you'll be subject to the ebbs and flows of a cyclical real estate market, but if you own property in any of the many linear or hybrid markets across the US then you'll not be exposed to that same dynamic.
• Real estate investing is derived from the economy as a whole, thriving or lulling largely in step with the total real economy, while perhaps the primary thing COVID has shown us is this:  the equities market isn't.  It's derived from something, but it seems that that "something" involves a lot of coca and a tipsy buyer-base.

Taking it all in view I tend to think that while the past 5-10 years of broad-market index based investing has been fantastic, it is not wise to think that it will continue to operate in the same way.  Conversely, real estate, while perhaps toppy in terms of price, continues to plod forward as a sound investment that throws off appreciable amounts of cashflow.