Last updated: 27 Aug 25 23:31:47 (UTC)

Invest in Real Estate or the World's Great Companies?

“Real estate is a business, not a passive investment.” ―Dave McDanal

A question I get occasionally is, “What about investing in real estate?” It’s a valid question so let’s compare real estate to (my favorite) investing in a broadly-diversified collection of the world’s great, publicly-traded companies.

1) Performance

Which generates a greater return on investment: stock ownership of Google, Exxon Mobil, Coca-Cola and JP Morgan Chase, or the buildings they occupy?

The absolute silliest of all real estate illusions is that one’s home (or rental property) provides significant growth of capital. Since 1945, according to the Nobel laureate Robert Shiller, American family home prices have risen at a rate of about 4% per year.

Whereas the return of the American Funds Investment Company of America since 1945 has been 12%. And you don’t have to heat the the ICA in the winter.

“Someone who claims to think that buying an apartment complex or an office building or a strip mall ― or all three ― will produce a greater return on his capital than does owning a basket of the 500 largest, most profitable, most soundly financed and most innovative companies in America and the world is not rational.” ―Nick Murray

2) Security / Safety

Most people invest in real estate because they don’t understand equity mutual funds or think they’re “risky”. They believe that real estate is a safer investment than equities.

But are they really?

If you own and are liable for the mortgages of those four companies’ buildings mentioned above, your position inherently carries much greater risk than if you owned the stocks, where there is no personal liability. (That, among other things, is actually the genius of common stocks, and indeed of the corporate form of organization.)

There is also one overwhelming benefit of mutual funds, which is of course diversification (as an example, the American Funds Growth Portfolio invests in over 1,200 companies from all over the world). If you end up, late in life, with the huge preponderance of your net worth in essentially the same leveraged, illiquid asset class, it won’t matter what the relative risks of equities and real estate are perceived to be: you will have raised your own personal risk profile to and beyond the red line.

3) Maintenance, Costs & Flexibility

Real estate is inherently illiquid, incurs substantial acquisition and disposition costs, and demands significant management oversight. It is subject to recurring expenses, such as property taxes, homeowners association fees, and maintenance costs, which are paid separately.

In contrast, mutual funds present a more streamlined investment proposition. They incur a one-time cost (which is waived for investments exceeding $1M), and have very low annual expenses which are deducted directly from the account (usually less than 0.8%). Note: you can also purchase mutual funds as C-shares or F-shares that don’t have an upfront charge, however the annual expense (which lasts forever) is much higher, often double.

Mutual funds are very flexible in their withdrawal allowances. Should you wish to take out a portion of your investment, this can be easily accomplished online or with a phone call, and must be completed within a maximum of five business days, by law. Conversely, real estate does not offer this flexibility, as partial withdrawals are not feasible (if you need $20,000, you can’t just sell your garage!).

Moreover, real estate income is fixed, regardless of your immediate needs. For instance, if a rental property generates $1,000 per month, but you require only $800, the excess $200 cannot be ‘left’ in the property. Mutual funds, however, allow for such flexibility, as you can withdraw only the amount needed, leaving the remainder to compound for future growth.

Finally, mutual funds can be paired with a variable annuity (don’t use “fixed” or “index” annuities!) in order to generate a guaranteed monthly income for life (on two spouses), while the balance continues to be invested in the world’s great companies. This guaranteed income will increase when/if the mutual funds grow, but never down. When both spouses die, the children inherit the balance of the account. This guaranteed lifetime income is not possible with real estate.

I’ll leave you with this article by Nick Murray…

Feel free to schedule a no-obligation, no-cost conversation with me.

Michael Paulding Thomas

Celebrating 36 years in the industry
Investment Advisor • Securities Principal
Series 6, 26, 63, 65 • Life
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