Comparing Return Metrics: Stocks vs Real Estate

Another thing people wrongly compare is the difference between stock market returns vs real estate return metrics.

For instance, average annual return on a real estate deal is based off the initial investment.

In the stock market, the return is based off of the initial investment, plus any increase/decrease in principal.

In a simplified example, say in year one in the stock market you make a 10% return on a $100,000 investment.

Now you have $110,000.

Year two, you also make a 10% return.

This 10% growth is now $11,000 because it's based off of $110,000, not your initial investment of $100,000.

Because of this, to double your investment in the stock market in 5 years, you would need to get 14.2% every year (compounded quarterly).​

To double your money in 5 years based off the average annual return metric in real estate, you would need to have a 20% return per year.

Note: In real estate there are multiple metrics like IRR, average annual return, return on equity, equity multiple, etc. This example is to illustrate different return metrics cannot be directly compared.

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