Why Real Estate Outperforms Stocks and Bonds

When I first began buying rental houses and apartment buildings, I could easily find properties that offered net unleveraged rental yields* of 10 to 16 percent. In some areas of the country, such as the Midwest, you can still achieve such favorable results. More typically, today’s rental properties yield four to eight percent.

You might tell me that four to eight percent doesn’t seem like a great rate of return. But relative to stocks and bonds, properties win hands down. Let me explain why.

Why Rental Properties Outperform Stocks

At present, the annual dividend (income) yield on the S&P 500 stock index barely reaches 1.8 percent, and just .45 percent on NASDAQ stocks. The Dow-Jones (DJIA) is somewhat higher, at around 2.25 percent. If you follow the advice that says you must diversify across a broad variety of stocks, you might achieve a yearly income of $15,000 to $20,000 (1.5 to 2 percent average yield) from a stock portfolio valued at $1 million. In contrast, a million in property value would return a rental income (net of expenses) of $40,000 to $80,000 a year.

So the message is clear. If you accumulate a million dollars in stocks and are determined to survive above the poverty level in the future, you’ll need to eat your nest egg. But accumulate a million dollars in property and, to live an average-to-above-average lifestyle, you’ll never need to eat your nest egg. And your net worth doesn’t diminish.

Why Rental Properties Outperform Bonds

Currently, long-term investment grade bonds yield about 4.5 to 6.0 percent. Without taking on much default risk, that means you could count on receiving $50,000 to $60,000 a year from bonds for each $1 million you invest. Bonds deliver income returns that approach the level of income offered by high-quality rental properties. Also, compared with a fully diversified portfolio of stocks, bonds clearly rank superior, but here’s the rub:

Your bond income will not increase as the result of inflation or economic growth and, as consumer prices go up, the buying power of your bond income will continuously erode. In terms of purchasing power, $60,000 of income today will equal $40,000 after just 10 years. In contrast, over time, both stock dividends and property rents tend to climb each year to higher levels.

So what’s the verdict? Stock income increases over time, but the puny yield produces too little income. Bonds return a better yield than stocks, but fail to offer the possibility of growth. Worse, in an inflationary economy, the real value of bond income declines.

So if history is any indicator, it is clear that you will achieve an extremely competitive yield, growth, and protection against inflation with rental property.

 * Rent collections, less all cash expenses and mortgage financing. You calculate this figure by dividing the price of the property into its net income; e.g., $10,000/$100,000 = 10 percent yield.

For more ways to leverage more income from your money, be sure to read the new book Trump University Wealth Building 101: Your First 90 Days on the Path to Prosperity.  Available soon from Trump University and all major booksellers.