Comparison of Real Estate Investments With Stock Portfolio Investments

You have numerous options for investing in real estate, including more liquid investment vehicles such as exchange-traded funds, real estate investment trusts, or REITS, and closed-end funds, or CEFs. You might also choose to invest in real estate in a more direct manner to gain higher diversification benefits than those acquired through market-based real estate investments. A portfolio containing stock and real estate can be managed through one account, if preferred, with a broker-dealer.

Investment Vehicles

In building a stock portfolio, you will be investing primarily in common stocks of publicly traded companies, although you can invest in preferred stock. Real estate investing has four categories -- public equity, public debt, private equity and private debt. Public equity real estate investments consist of REITs, CEFs, and real estate operating companies, the last of which may overlap with stock investments. Public debt real estate consists of publicly traded, collateralized mortgage-backed securities. Private real estate investments consist of mortgages and loans, while investing directly in real estate properties represents private equity real estate investments. You may also use exchange-traded funds to invest in otherwise less accessible investments such as private debt and private equity.

Expected Returns

You should find it less difficult to estimate returns from certain types of real estate investments that regularly distribute proceeds to investors, the consistency of which is driven by ongoing rental revenues from underlying properties. Stock market returns can be estimated by using historical returns as an indicator of future returns. Several companies specialize in calculating expected returns for stocks and provide this data to customers. Over the long term, real estate and stocks generally generate very similar returns, although real estate returns are generally slightly higher on a risk-adjusted basis. According to the 2013 Duff and Phelps Risk Premium Report, stock market returns are expected to be 3.5 percent to 6 percent higher than long-term Treasury note yields.

Pricing and Volatility

One significant difference between direct real estate investments and stocks is that publicly traded stock values are always available via the many data providers and media outlets that publish stock market data. However, real estate properties must be priced using real estate appraisals, which are only prepared at the owner’s request, generally once a year, because the appraisal process can be expensive. Because of this, stock prices are far more volatile than real estate values, and this is part of the reason why risk-adjusted returns are higher than for stocks.

Liquidity

Common stocks are liquid investments, and you can readjust your portfolio for certain parameters such as diversification or asset class allocation relatively easily compared to most real estate investments. However, real estate investments from all four categories tend to produce consistently high yields, which help to offset the effects of liquidity risk. Also, publicly traded ETFs, CEFs, REITs and stocks in real estate operating companies are also liquid, although they offer less of a diversification benefit for your overall portfolio. Direct real estate investments also offer a hedge against inflation not available via stock holdings.