When does it make sense to invest in real estate vs invest in stock market?

As far as I understand it, it's all comes down to your ROI - compute how much your down payment would be if you invested it in the stock market, and compare that to how much your house would be worth in the same amount of time.

For an $800,000 home (SF Bay Area), I would need a 20% down payment of $160,000. If I instead invested the $160,000 in the stock market and get a 10% return (historical average returns), I'd have $3.173MM in 30 years (again, assumes 10% compounding interest). I would have made $3MM.

If I instead put the money into a house, I would own the house in 30 years. Assuming the $800,000 house appreciates at 3.5% annually (a number I read in a local publications), the house would be worth $2.28MM in 30 years. After the loan was paid off, assuming I made regular payments I would have paid much much more than $800,000 over the 30 years. But let's say I did end up only spending $800,000, best case I would have made $1.482MM (2.28-.800=1.482). But realistically my net return would be much less than $1.482 due to interest on the mortgage....and the cost for home maintenance which I didn't even include!

Which get's me to my real question 1. Did I make an incorrect assumption in how to go about comparing the two outcomes? 2. If I didn't, I'm having a hard time understanding why I should put my $160,000 into a real estate investment which has a mortgage and home maintenance costs (one article I read said assume 1% of your home value per year, so $8,000/year for this example) instead of just putting it in the stock market.

Yes I realize that 10% stock market return is not guaranteed - it's just the historical average. Yes I realize that the home appreciation value I used (3.5%) could end up being more (or less) and therefore significantly impacts the outcome. But If I were to put my money somewhere, it just seems smarter to bet on the stock market instead of real estate.

Yet people are always investing in real estate. What am I missing?!

Can anyone recommend an online calculator that can help me with this comparison?

 

You'll also have to add in property taxes, additional cost of utilities and HVAC, maintenance and upkeep (including unexpected repairs), interest on the mortgage, other buying and selling costs, time spent upkeeping the outside (snow, leafs, gardening, mowing, etc.) as well as tools necessary for these jobs, home insurance (additional over renters insurance), necessary appliance and furniture purchases above those required if you rented, any HOA fees, home inspection fee, home security costs, and obviously the fact that you'll be in debt for another 15 years. These are costs that renters do not face that you'll have to add in if you want to compare buying a house and renting, and all of these together can be substantial costs. Chances are also that the monthly mortgage payment will be higher than a monthly rent fee, which means less money that can be invested in a real investment vehicle.

 

I feel that to invest in real estate we need more money, so real estate are for those who have more capital. Also, it requires a different level of knowledge as they are two different games.

 

Think you missed a BIG point here, as far as I can see you didn't calculate any sort of rental income for that property. Obviously an investment property will be rented out and that will bring in a monthly cashflow, usually enough to take care of most of the mortgage payments.
If it's not an investment property but a house for yourself, then you need to count how much you will save per year living in the house vs renting a similar one from the same neighbourhood.

Overall I think real estate is a very lucrative business due to the stable and continuous incoming cashflow. (rent) However I prefer to invest in real estate through REITs since that saves me all the hassle. Everything is managed by professionals, I literally do not have to do a single thing and I still get my monthly paycheck.

 

Vacancy risk is only an issue if you don't know what sort of renters you look to target. With the house I've stayed out for the past 3 years (and known people who had lived in 2 years before me,) the landlord has barely had to lift a finger in that time, or put money into the property. As far as I can recall, he's only had to pay for an electrician to come out once and repairman for our dishwasher in the time I've been here. And because its a college house, the tenants basically just find friends to live here and cycle through.

I also got a buddy who manages a 3-bedroom house for his dad and the tenant he has living there is a single 50 year old man who is a manager at a Round Table. He says he's been a god-send of a tenant and he's only had to go over there one time to renew the contract agreement. And the house was in perfect condition when he got there.

 

Depends on the area but in general yes. However, as long as the price is right for the location, it won't stay vacant forever. A month or two in a few years span I can understand, but that doesn't really make a HUGE difference in terms of rental income.

 

Preach unto the choir...truth be told...to make yourself safe, you could go both ways to avoid the sharp pain of 'vacancy risk'...just my $0.02.