Stocks vs. Real Estate

Both real estate and stocks have had their day, but the question you need answered is this: Which contender is the superior long-term bet today?

Round 3
What leverage gives you, transaction costs take away. When you buy, you shell out for mortgage processing, credit reports, title insurance, appraisals, a lawyer for the bank, a lawyer for you, local transfer taxes and other charges. You may also pay a percentage point or more of the loan up front to lower your interest rate.

All in all, closing costs can run 2% to 4% of your purchase price. Sellers have to lay out a 6% commission for their agent, prepare a place for sale and, if it's their home, pay to move. Buying and selling can total about 10% of the purchase price.

Such costs make real estate a tough game. That $550,000 house (the one that gained 10% in two years) just turned into roughly a break-even proposition. And that total doesn't include the cost of maintenance and refurbishing, mortgage interest, taxes or insurance, which may add up to more than what you'd have laid out to rent a similar property.

Expenses run even higher if you are the owner of an investment property. You have to add the cost of advertising for tenants, evicting those who mess with you and carrying empty apartments.

In their study, Francis and Ibbotson didn't deduct such costs when they calculated returns. Had they, real estate would have fared worse. Stocks, by comparison, are incredibly cheap to own and sell. At a discount brokerage such as Scottrade, you can pay anywhere from $7 for an online purchase to $27 for one that is broker assisted.

Same when you want to dump your stock. A mutual fund that tracks a broad index of stocks can cost you as little as 0.09% of assets a year.

Performance Leverage Costs Taxes Transparency Effort Volatility Diversification Decision
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