Average rate of return
- Stock Market: 10% (before inflation). 7% (after inflation)
- Real Estate: 10% (especially in the San Francisco Bay Area)
ROI based on own money or borrowed money
- If you invest $100,000 in stocks, with a 10% ROI, you’ll get $10,000 at the end of year one.
- If you invest $100,000 in real estate (20% of a $500,000 house), with a 10% ROI, you’ll get $50,000. Your ROI is based on the value of the property ($500K), not your $100K down payment. Most of your ROI comes from borrowing $400,000 from the bank.
Of course, you can also borrow $400,000 and dump it all into buying stocks but
- no one, especially a bank, would lend you $400,000 to invest in stocks, and even if they did, the interest rate would be more than 10%, causing you to lose money
- unless you invest in something like index funds, investing in individual stocks is more risky because their values can plummet in very short periods of time, e.g. Facebook dropped by 26.4% in just one day. A single-day devaluation like that would never happen in real estate. Real estate depreciation can occur, but it would take at least months.