Can Investing in a Home Renovation Out-Perform the Average Stock Market Performance?

Everybody knows that investing your money is the best way to make it work for you and grow. Millions of people around the world invest money every day seeking both short term gains and long-term profits. There are numerous different ways to make your money work for you, but the question is what is the best method?

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Q2 2020 hedge fund letters, conferences and more

The stock market is probably the most well-known investment option for many people followed closely by real estate. Both have the potential to make excellent returns on the initial investment, but does one have the edge?

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Stock market investments, when looking at the percentage gains over a long period, will generally out-perform any other investment. Stocks in general trend upwards, and with a properly diversified portfolio the risk from a market or sector crash is minimal in the long-term. Real estate investments on the other hand, while generally increasing over time, only do so at a rate just above inflation—not enough to retire on by any means.

It sounds like real estate, while a good investment, will never out-perform, but the answer isn't quite that simple.

Which One Has Greater Potential

While real estate investments may only appear to increase a few points above inflation on the surface, the real picture is much deeper. When investing in stocks it's dangerous to use leverage (a borrowed multiplier of your investment money). Without leverage, your gains are limited to a percentage of whatever money you have available upfront. In the real estate world, however, leverage is standard practice in the form of mortgages. Buying real estate with leveraged money, and only paying a small down payment, allows you to see potentially much greater gains as you can earn a couple of percentage point gains on a much larger amount.

The second major benefit to real estate is that you can earn additional gains by renting the property out while waiting for the overall investment to mature. Stocks are largely static, with potentially only minor dividend payments each year. Real estate, however, has the potential to generate passive monthly income, in addition to any gains when it is finally sold.

Real estate investments also have better tax arrangements than stock investments meaning that you get to keep more of your gains when you achieve them.

Real Estate Doesn't Mean Buying New Properties; Renovation Can Also Increase Value

Stocks require an upfront purchase at a good price point to maximise your gains over time. If you don't have a lump sum of cash available to buy a large number of stocks before the price jumps then your ability to make good gains will be greatly diminished. It's impossible to make money on the stock market without making a new purchase, but the same isn't true for real estate.

If you already own some real estate, you can significantly increase the value of the investment gradually over time through minor and major renovations. Everything from a new coat of paint to adding some amenities like pools will add value to your property and therefore investment. What's more, these gains can be realised almost immediately if you are renting your holding out.

Comparing Stock Market Investments with Real Estate

It's incredibly difficult to analyse stock investments versus real estate investments over the long-term as a vast array of factors go into every real estate deal. The number of variables makes it almost impossible to calculate returns in a like-for-like manner.

What can be covered, however, is the value of ETF funds, and the returns they achieved. ETF funds are a type of investment fund where money is pooled together to buy into various investments and shares are then made available. In this case, we are looking at the S&P 500 fund which tracks the top 500 companies on the US stock exchange, and the Vanguard Real Estate ETF which puts its pooled money into real estate.

Over the short term, there isn't much difference between the returns, and in the 3 - 5-year window the S&P 500 wins out by a 35% margin. When we extend the view out to long-term investments of 20+ years, however, the Real Estate ETF wins out with gains over 3 times higher (213% vs 619%) than the S&P 500.

Final Thoughts

Whatever method you choose to invest your money, it's clear there is great potential for long-term gains when you pay attention and diversify your portfolio. With a little bit of extra work, though, real estate investments have the potential to far out-perform stock market investments. Of course, that still doesn't make them a sure thing, as nothing when dealing with investing money is, but if you are looking to make solid returns on your savings, and don't mind putting in the work and research to make sound decisions, then it's hard to beat real estate.