Shares or real estate?

Last updated 09.11.2021

Investing money: Shares or real estate?
What is safer Shares or real estate?
For which investor are shares more suitable, for which real estate?
If real estate: How much wealth in real estate?
In this article we get to the bottom of those questions.

  • Commonalities: Asset class, time horizon, target group
  • Historical returns in comparison
  • Leverage Shares vs. Real Estate
  • Asset inflation Shares vs. real estate
  • Passive income Shares vs. real estate

Shares vs real estate: similarities

In principle, shares and real estate differ greatly from each other, but both investments belong to the same asset class. In both cases, they are tangible assets.
If you look deeper into each of the asset classes, there are different strategies:
Depending on which shares(growth stocks? Value stocks?) or real estate(high leverage or a lot of equity? Speculative areas or conservative long-term winners?) are selected, every investor will find the "sector" that suits him or her. Depending on the approach, both equity and real estate investments can be flexibly adjusted in terms of risk.

On the basis of this flexibility, it can be said in principle that both shares and real estate in some form are suitable for almost every investor.

The time horizon has another thing in common. Of course, both forms of investment can also be viewed speculatively and in the short term, but in most cases both shares and real estate investments are made for the medium to long term.

Shares and real estate are also similar in terms of the target group. After all, both investments are possible with small monthly amounts. You can set up a share savings plan from around €50 per month and with real estate the monthly burden is in a similar range (often even with a neutral cash flow of +€0). However, a certain creditworthiness is required here.

Test now: Does real estate as an investment suit you?

Real estate vs Shares: Yield

An important difference between real estate investments and equity investments lies in the form of financing:

Real estate investmentEquity investment
Funding throughDebt capitalEquity
Return on equityHigh, as little equity is usedLow, as a lot of equity is used
  • If I, as an investor, now invest 10,000 euros of my own capital in a share, I can expect a return of between 5 - 7% p.a. (this is the long-term average on an MSCI World ETF).
  • If I, as an investor, use 10,000 euros of equity capital for a real estate investment, I can buy a condominium worth approx. 100,000 to 120,000 euros with it (assumption: the ancillary purchase costs are covered by equity capital).
    My return on equity is then a multiple of the above-mentioned return on shares, at least 20% for our clients, usually much higher.


In the investment field, we often speak of the leverage effect. This describes the leverage effect that basically results from borrowing. In practice, this leverage effect is applied to real estate, but only rarely to shares. 

Debt leverage is an instrument for making optimal use of a small amount of equity.

In the case of shares, leverage can be used by buying derivatives or by taking out a Lombard loan. With derivatives, an investor can acquire more positions than would actually be possible with the equity capital invested. With a Lombard loan, the investor borrows from his securities account and receives outside funds from the bank for the purchase of shares - at correspondingly high prices. Trading with leverage always involves the risk of a total loss and is therefore not for beginners.

Investing money in real estate - Most people think that a lot of their own money is needed for this. But this is not the case, because it usually makes sense for the investor to cover only the ancillary purchase costs (notary and land registry costs as well as land transfer tax and, if applicable, estate agent costs) with equity capital. The full purchase price is financed.

Leverage in real estate is achieved through a standard bank loan. Debt financing has a positive effect on the return, as shown above. In the case of real estate, the risk is very limited, since a high loss in value is usually not to be expected.

Asset inflation Shares vs. real estate

Since the Corona crisis at the beginning of 2020, central banks on all continents have been pumping billion after billion into the monetary cycle almost in unison to get the global economy going. Inevitably, this measure leads to an increasing money supply ("Broad Money Supply M2"). In practical terms, this means that more and more dollars, euros and Remnibi are distributed among a constant amount of goods such as real estate, gold, Bitcoin and shares. Even a child can see what this must lead to - inflation and rising asset prices . The consequence of increased inflation is the loss of the purchasing power of money.

Increasingly since the Corona crisis in 2020, both shares and real estate have benefited from rising prices. This trend is likely to continue in the coming years. 

Passive income Shares vs. real estate

In order to generate passive income, hardly anything is better suited than the purchase and rental of a property.

It is also possible to build up passive income with shares, but you have to make sure that the shares pay dividends. Then, however, the value of the share does not increase much. Growth stocks do not usually pay dividends, so investors have to decide whether they want to earn a regular income from their share transactions or speculate on an increase in value.

In the case of real estate, again, both are given:

  • The property generates rental income, whereby this rental income can be seen as a kind of dividend - which is distributed monthly
  • The increase in the value of the property that is realised with the sale is the equivalent of the price gain on a share. 

Real estate could thus be described as the better share: Low equity investment due to debt leverage, high dividends thanks to monthly rental income and participation in value increases on the real estate market. 

Historical returns Asset classes

As an investor faced with the decision of equities or real estate, the question arises in retrospect: What is there to say about the historical returns of these asset classes? 

In order to make a reasonably "fair" comparison between shares and real estate, we need to keep one thing in mind: Shares are normally used by the typical private investor without borrowing. The capital available for old-age provision is invested, a loan is not taken out. 

The situation is fundamentally different for real estate as an investment, for which a construction loan is usually taken out. Thanks to the current low interest rate policy of the Fed and the ECB, interest rates have been in the basement for more than six years. Thus, leverage costs almost nothing.
The more debt capital (and thus less equity capital) is used, the higher the return on the equity capital used.

Historical return MSCI World

The return generated by an investment in the MSCI World is a suitable benchmark for real estate investment. We look at the period from 1987 to today. During this period, the average annual return was 8.53%.

Historical return on real estate

In the case of rented property as an investment, one can expect a return on equity of 20 to 25% if 100% of the capital is borrowed. If the investor wants to use more equity - e.g. raise 20% of the purchase price from his own funds and only finance 80% - then a return on equity of 5 to 10% can be expected.

Attention: These figures do not include the increase in value of real estate in Germany. The percentages mentioned refer to the accumulation of wealth through rental income. To get a complete picture, one would have to add the appreciation, which would even increase the returns.

The Corona crisis in 2020 showed how stable the value of real estate is in contrast to that of shares. Stock markets collapsed by up to 30% at their peak, while real estate, as before, was in a steady appreciation trend.

House_price_index_with_low_volatility

Condominiums lost almost no value during Corona.

Conclusion: Comparison of real estate shares

When comparing shares or real estate, real estate clearly comes out of the ring as the winner. The leverage effect can be used without increased risk and you do not have to decide between regular returns or Increase in the value of the property a choice. Despite some similarities, real estate has significantly more advantages and sends shares to the brink in round two. You can read exactly how investing in an income property works in the blog article "How investing in an income property exactly works".

By the way: A combination of both asset classes is not mutually exclusive - quite the opposite. In principle, shares and real estate make a great tandem:

  • In times of economic downturn, when shares often perform poorly, real estate benefits from low interest rates (cheaper borrowing and increase in value through capitalised earnings value method)
  • In times of economic upswing, both equity valuations and interest rates rise. Since real estate prices rise at the same time, diversified investors benefit optimally from this asset combination of shares and real estate.

We would be happy to advise We will be happy to advise you on the optimal combination of both asset classes. With our 360° package for income properties, we will be happy to accompany you on the way to your first (or next) income property. 

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