Real Estate Investment Property

Whether to purchase real estate investment property or invest in equities is an often asked question amongst investors and analysts alike. On the face of it, the stock market would yield a higher return per annum than money invested in a real estate investment property. However a closer look will reveal that real estate investment property is really the smart option.

The stock market vs. buying investment property: 1987 – 2007

Studies over the past two decades of the NASDAQ and S&P 500 show that they have on average grown 10 and 11 percent per annum respectively. During the same period, the average real estate investment property in the US has appreciated 5.6% per annum.

What these figures don’t show is the volatility of equities markets. When the dot com bubble burst in 1999-2000, the NASDAQ lost a massive 75% of its value. During this period, real estate investment property continued to gain in value roughly at the same average rate.

In general it has been demonstrated that there is a very low correlation between real estate investment property and the stock markets.

Leveraging real estate investment property

Investors in real estate investment property can leverage their funds. However the volatility of the equities market makes this a risky strategy there. When purchasing a real estate investment property, typically the investor puts down only 20% of the total amount. The rest of your real estate investment property is financed by the bank. When you factor this into the equation, you are effectively making 13% on your real estate investment property. Another plus is that over a long period, rental income from a real estate investment property will generally far supersede dividend income from equities. Therefore overall your real estate investment property will not only yield a better return than the stock market but the real estate investment property is a far more secure and safe investment in the long run.