Personal Finance 

Investing in Real Estate or Dividend Stocks

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For the last few weeks, I’ve been scouring real estate sites on the lookout for properties that might make good rentals. With all the stories about foreclosures and short sales, you’d think that good deals could be had at every corner right? One of the benefits of being smart with credit and not accumulating a lot of debt is being able to put that to good use in the darker times. I was hoping this was one of those times (as the stock market was a year ago).

Unfortunately, while there seem to be decent deals out there, the struggle I have with investing in real estate is that it comes with significant transaction costs, significant time requirements, and significant risks because it’s difficult to diversify.

Cash Flow vs. Asset Value

There are two ways to make money when it comes to investing. You either earn a nice return every month (or quarter, or year) off the cash flow or you earn a nice return on the sale of the asset (or some mix of both). With a rental property, you can earn it off the rent you collect each month or you can earn it off the gains when you sell the property. A common strategy is to just have the rent cover the mortgage and then bank the gains when you sell the property. With stocks, you can make your money off dividends or you can make it off appreciation of the stock’s price. Once you boil down any investment into those terms, it becomes easy to figure out which you’re more comfortable with.

With real estate, the cash flow is taxed at ordinary tax rates as income (whatever you don’t offset with expenses). With stocks, the cash flow is taxed at long term capital gains if they are qualified dividends. On the sale of either asset, it’s short term capital gains if you’ve held it for less than a year and long term if you’ve held it for more than a year.

Both Offer Good Prices

We’re in a unique point in time when real estate and stocks are relatively cheap. Real estate prices were walloped, and continue to be depressed, following the economic meltdown and the “Great Recession” that followed. Stocks, as much as they’ve soared in the last year, are still much lower than their peaks right before the banking crisis. The Dow Jones Industrial Average peaked at 14,168.53 on October 9th, 2007. It’s barely over 11,400 today. Relative to their highs, both are much cheaper than a few years ago.

Transaction Costs & Liquidity

Here’s the big difference between the two and why I think dividend stocks trump real estate. The cost to buy and sell stock is $5 and the market is liquid, which means you can get into and out of a position within minutes. That and the stock market provides far more information than the real estate market because of sheer transaction volume and SEC reporting requirements.

Have you ever tried to sell a house? First, you need to pay 5-6% to the seller and buyer real estate agent. The process takes a long time, the asset is huge (relatively), and the marketplace just simply doesn’t provide as much information as you’d probably like (annual report for a property showing income? assets? cash flow?).


Leverage is often touted as the reason why real estate investing is so powerful. You can put 20% down and reap the benefits of renting out 100% of the home. While that’s certainly attractive, you can get that kind of leverage (and more) on the stock market as well through options. Leverage is not something only available in real estate.

When I compare the two, it just seems like investing in the stock market is the winner?

{ 25 comments, please add your thoughts now! }

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25 Responses to “Investing in Real Estate or Dividend Stocks”

  1. zapeta says:

    I think another reason why stocks win is that you don’t have to worry about finding a renter, dealing with maintenance, and hoping they don’t trash the place. I’m more than happy to put my money in stocks and collect the dividends.

    • Shirley says:

      Years ago my parents had rentals and my brother and I helped clean them up after a renter moved to get them ready for new tenants. Some tenants were great about cleaning and maintenance reporting; others were definitely not. Never again!

  2. BrianC says:

    I’ve thought about investing in real estate as well, but I value liquidity too much right now. REITs might be one option, though.

    • live green says:

      Yeah, I feel the same way. I have wanted to invest in real estate, but it is much more risky, not very liquid and more of a hassle than just investing in stocks/bonds/mutual funds.

  3. cubiclegeoff says:

    I agree, the stock market is probably the way to go. Unless you have the time and can find the right deal, real estate seems to be more of a hassle than it’s worth.

  4. roommate says:

    I think real estate is better than stocks, no offense. With stocks you have to pay capital gains tax and dividend taxes which diminishes your return rate. With real estate you don’t have to pay any taxes if your profits are less than quarter of a million dollars.

    Once I pay off my small cheap $80k house I will be getting $300 from my roommate and $300 from myself because my rent would be $0 per month and 4 percent from appreciation and inflation. So my total return would be a little more than 12% per year, which is pretty good considering that the S&P 500 had a return rate of -37% in 2008, which will take many years to recover from.

    • Jim says:

      The tax bit is only true if you live in the home for two out of the last five years.

      • Clay Ivy says:

        Even if you have not lived in a property, you can defer the capital gains tax by doing a 10-31 exchange. However, you are required to reinvest that money into a property of greater value. You will eventually pay taxes if you cash out, but your profits compound at a higher rate with the deferred taxes.

    • Scott says:

      Technically, you should pay taxes on the renter’s payment…

    • Shawn says:

      I like the comparison between stocks & real estate and how each generate money. I also agree that stocks in general seem to be the less time consuming of the two. However, I think you might be overlooking a lot of the advantages of RE.

      As mentioned, the 10-31 exchange is a great program which allow you to defer taxes on profits made in the sale of a property assuming you upgrade to a more valuable property.

      Depending on how much money you invest and how good of a deal you receive on the property, it can be possible to have a management company deal with finding tenants, cleaning, ect. I’m not recommending it for everyone because it takes a bite out of profits, but its always an option. It is kind of like paying for a full service broker. Most of us wouldn’t pay for it, but it’s an option for those who do not want to deal with picking their own investments.

      Also, owning real estate ultimately can become a business which allows you to deduct interest paid on mortgage, gas mileage, and many other things.

      I’m not saying RE is a better investment than stocks, but I think the article left out some key benefits that RE Investing offers.

  5. shckr7 says:

    Hello Jim,

    Do you feel the same way about REIT’s as well? (ie. S&P 500 vs REIT ETF?)

    Even though I have been investing for the better part of a decade, I have been reasonably conservative in the type of trades that I have made (straight equity buys – no options).

    With the holiday almost here, I will find myself with some good reading time. Does anyone have a good book on options that they would care to share? (I hope this does not derail the main topic of discussion too much….)


  6. Chuck says:

    Dividend stocks are just value stocks. Income from dividends is not fundamentally different from selling shares that have gone up in value. (After all, retained earnings are still earnings!) Larry Swedroe has an article about dividend investing. Limiting yourself to value stocks that pay dividends decreases overall diversification (and therefore increases risk):

    Vanguard has a whole whitepaper about why you should look at total returns (dividends AND increase in value) instead of just dividends:

    I agree that stock investment is better than rental real estate, assuming you choose a broad-market stock investment.

  7. freeby50 says:

    Real estate is certainly more work and illiquid.
    If you don’t want that then don’t get into real estate.

    I’ve had success with real estate. A lot of the financial gain has been from finding the right property at the right price. We bought a 5 plex 4 years ago for 80% of market value at the time and its now worth 30% more than we paid for it so its a 7% annual gain. Plus the rent has paid us about 5-6% on our equity. Thats with no mortgage so no leverage. Of course thats not easy to find. If I could find another such property I’d buy it today, but I don’t konw any like that myself. I think half of it is finding the right property for the right price. The other half is putting in the work yourself. I look it more like a part time job where you’re the boss and you start your own business.

    An alternative to ought right ownership of real estate would be to buy a REIT. REITS trade as stocks so they give you the flexibility of a stock with dividends and allow you to easily invest in real estate.

    • Clay Ivy says:

      Great advice about REITS. For those who don’t want to deal with renters, REITS are a great way to get some real estate exposure. I think your in the right place with the small multi-family buildings. I am focusing in the same place. They can provide good rental income, and they add a little more safety than single family housing. In single family if you have one vacancy you have 100% vacancy for that building. Small multi-family provides income even if some units are vacant. Plus, they are not much harder to manage than a single family property.

  8. VR says:

    “While that’s certainly attractive, you can get that kind of leverage (and more) on the stock market as well through options.”

    Options are not equivalent to the leverage you get with a mortgage. Futures would be a better comparison. Keep in mind that neither pays dividends.

  9. GetSpatial says:

    I think there is a place in a portfolio for both dividend stocks and for real estate. There are more similarities than you think, in that you have to do research in order to find stocks that are appropriate, and to find good real estate. I would say that real estate is simpler to do a cost analysis on, as there are fewer variables.
    Do a simple search of an area to find school quality, nearby values of comparables, property tax rates, utility costs, etc.
    Real estate is definitely more labor intensive, and you have to work and learn in order to make it profitable. There is a good saying that you make your profit when you buy property, not when you sell it. This means finding a quality property, and purchasing it for at or below market value. This will allow you to rent it and cover the mortgage plus maintenance costs.
    As for the costs of selling. Yes, it is 5-6% to be split between both agents. However, if you are purchasing now, selling shouldn’t be on your horizon for a long time. If you are not looking at real estate as a long term investment but are thinking of flipping, then this is an apples to oranges comparison with dividend stocks.

  10. Jim:

    Thanks for the insightful post. But while both stocks and real estate are off their peaks, don’t forget that the latter has fallen a lot more than the 20% stocks have dropped from their zenith. Real estate is the very definition of an underpriced asset at this point. And there’s little danger of it going obsolete.

  11. govenar says:

    Do REITs give you the best of both worlds?
    Though, the REIT index fund I bought in 2009 has already gone up a lot (more than most of my stock picks), so maybe the real estate recovery has already been priced into them.

  12. Clay Ivy says:

    It is important to recognize the work and potential problems associated with owning real estate. The one thing I disagree with is that real estate makes it hard to diversify. It is true that it would take a lot of time and capital to diversify within real estate. If you had single family housing, small commercial buildings, and some raw land, it would take a lot of money and effort. However, when seeking diversification I think it is best to view the entire investment portfolio as a whole. Real estate provides diversification to our entire investment portfolio. It is not necessary to diversify within real estate. Buying real estate as a part of a larger investment portfolio is diversifying. What are your thoughts on this?

  13. Scott says:

    I personally own NLY that pays 15% or so, but the dividend can fluctuate based on profits / cash flow. They have to pay out 90% of profits to be considered a REIT.

    My other dividend holdings are:
    T – 6% (just bought at $29)
    INTC – 3% (bought at $18.70, now $21.10)
    CTL – 6.2% (although I bought it when it was about 8% @ $36 / shr in August…its $46.80 at end of today, so I’m up $10 / shr & getting a dividend)
    I may move on after such a run up, I’ll keep you posted.

  14. Mike says:

    I think diversifying into real estate might be a good idea. An all stock portfolio might not be such a good idea from recent experience.

  15. Marco says:

    I know this is an old article but I felt I needed to comment. I don’t think either are better than each other. They are simply 2 diverse investments. Its like saying, “are GICs better than high rate savings accounts?”

    Its a personal choice. Myself, I prefer Real Estate. I consider there are 3 guaranteed returns with Real Estate where stocks can only have 2 uncertain returns. In RE, you can consider the net cash flow from rents, the yearly appreciation of you asset, and one commonly left out, the mortgage is being paid by your tenants. They slowly convert your borrowed asset into a fully owned asset. Yes, you will argue vacancies, repairs etc…..but thats the challenge in finding a good rental, just as you would find a good stock to invest in that will yeild constant dividends and not drop in value. I don’t know many homes that have actually dropped in value after purchased!

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