Real estate has long been seen as a cornerstone of sound investing. It offers stability and the security of owning a physical asset. Many investors favor it because it provides both rental income and long-term appreciation. However, is real estate truly the best investment option? Especially when compared to higher-growth markets like the Nasdaq index? This article compares a 150,000 EUR investment in both real estate and the Nasdaq index. Each investment is fully financed through loans. A smaller amount is used to keep the comparison accessible to readers in various countries. However, the figures can easily be adjusted to fit individual circumstances. Multiplying the amounts by an appropriate factor allows for relevance based on local market conditions.
Real Estate vs. Nasdaq: Key Investment Examples
To make a fair comparison, let’s break down the numbers, costs, and formulas used to calculate the returns for each option, highlighting both opportunities and potential drawbacks.Example 1: Real Estate Investment (150,000 EUR Loan)
- Loan Terms:
- The real estate investment is fully financed with a loan at an interest rate of 3% over 20 years, resulting in monthly mortgage payments of 831 EUR.
- Formula for Monthly Mortgage Payment: Mortgage Payment=Loan Amount×Interest Rate1−(1+Interest Rate)−YearsMortgage \, Payment = \frac{Loan \, Amount \times Interest \, Rate}{1 – (1 + Interest \, Rate)^{-Years}}MortgagePayment=1−(1+InterestRate)−YearsLoanAmount×InterestRate Result: 831 EUR per month
- Property Appreciation:
- The property appreciates by 150% over 20 years, increasing its value from 150,000 EUR to 375,000 EUR.
- Formula for Future Value: Future Value=Initial Value×(1+Appreciation Rate)Future \, Value = Initial \, Value \times (1 + Appreciation \, Rate)FutureValue=InitialValue×(1+AppreciationRate) Result: 375,000 EUR
- Rental Income:
- The property generates 600 EUR per month in rental income, adjusted annually for 3% inflation. Total rental income over 20 years is 193,467 EUR.
- Formula for Total Rent: Total Rent=∑Year=120Monthly Rent×12×(1+Inflation)(Year−1)Total \, Rent = \sum_{Year=1}^{20} Monthly \, Rent \times 12 \times (1 + Inflation)^{(Year – 1)}TotalRent=Year=1∑20MonthlyRent×12×(1+Inflation)(Year−1) Result: 193,467 EUR
- Inflation-Adjusted Property Value:
- After adjusting for 3% annual inflation, the real value of the property in today’s terms is 207,628 EUR.
- Formula: Inflation Adjusted Value=Future Value÷(1+Inflation)YearsInflation \, Adjusted \, Value = Future \, Value \div (1 + Inflation)^{Years}InflationAdjustedValue=FutureValue÷(1+Inflation)Years Result: 207,628 EUR
- Ongoing Costs:
- Maintenance, insurance, and taxes are estimated at 3,000 EUR per year, totaling 60,000 EUR over 20 years.
- Loan Interest:
- Over 20 years, the total interest paid on the loan is 62,664 EUR.
- Formula: Loan Interest=Monthly Payment×12×20−Initial ValueLoan \, Interest = Monthly \, Payment \times 12 \times 20 – Initial \, ValueLoanInterest=MonthlyPayment×12×20−InitialValue Result: 62,664 EUR
- Final Profit Calculation:
- After accounting for appreciation, rental income, loan interest, and ongoing costs, the final profit is 295,803 EUR.
- Formula: Final Profit=Future Value+Total Rent−Initial Investment−Loan Interest−Ongoing CostsFinal \, Profit = Future \, Value + Total \, Rent – Initial \, Investment – Loan \, Interest – Ongoing \, CostsFinalProfit=FutureValue+TotalRent−InitialInvestment−LoanInterest−OngoingCosts Result: 295,803 EUR
- ROI (Return on Investment):
- Formula: ROI=Final ProfitInitial Investment×100ROI = \frac{Final \, Profit}{Initial \, Investment} \times 100ROI=InitialInvestmentFinalProfit×100 Result: 197.20%
Example 2: Nasdaq Index Investment (150,000 EUR Loan)
- Loan Terms:
- A margin loan of 150,000 EUR is taken at 6% interest over 10 years, resulting in 90,000 EUR in total interest payments.
- Index Growth:
- Over 20 years, the Nasdaq index grows by 10% annually. For the first 10 years, the investment grows under the burden of loan interest, after which the loan is paid off, and the investment continues to grow.
- Formula (First 10 Years):Future Value10 years=Initial Value×(1+Annual Return)10Future \, Value_{10 \, years} = Initial \, Value \times (1 + Annual \, Return)^{10}FutureValue10years=InitialValue×(1+AnnualReturn)10 Result: 389,423 EUR.
- Formula (Next 10 Years):Future Value20 years=Future Value10 years×(1+Annual Return)10Future \, Value_{20 \, years} = Future \, Value_{10 \, years} \times (1 + Annual \, Return)^{10}FutureValue20years=FutureValue10years×(1+AnnualReturn)10 Result: 1,009,125 EUR
- ETF Fees:
- The ETF incurs 0.15% annual fees, totaling 14,176 EUR over 20 years.
- Final Profit Calculation:
- After subtracting loan interest and ETF fees, the final profit is 754,949 EUR.
- Formula: Final Profit=Future Value20 years−Initial Investment−Loan Interest−ETF FeesFinal \, Profit = Future \, Value_{20 \, years} – Initial \, Investment – Loan \, Interest – ETF \, FeesFinalProfit=FutureValue20years−InitialInvestment−LoanInterest−ETFFees Result: 754,949 EUR
- ROI:
- Formula: ROI=Final ProfitInitial Investment×100ROI = \frac{Final \, Profit}{Initial \, Investment} \times 100ROI=InitialInvestmentFinalProfit×100 Result: 503.30%
Pro et Contra: Real Estate vs. Nasdaq Index*
| Investment Type | Initial Value (EUR) | Future Value (EUR) | Inflation-adjusted Value (EUR) | Total Rent Income (EUR) | Loan Interest (EUR) | Other Costs (EUR) | ROI (%) | Final Profit (EUR) |
|---|---|---|---|---|---|---|---|---|
| Real Estate | 150,000 | 375,000 | 207,628 | 193,467 | 62,664 | 60,000 | 197.20 | 295,803 |
| Nasdaq Index | 150,000 | 1,009,125 | 558,728 | N/A | 90,000 | 14,176 | 503.30 | 754,949 |
Conclusion: Real Estate vs. Nasdaq
Investing in real estate provides a stable income through rent and tangible assets. However, with an ROI of 197.20%, it falls short when compared to the 503.30% return from a Nasdaq index investment over the same period. While real estate is often seen as a safer option, this analysis shows that stock markets, particularly Nasdaq, can offer significantly higher long-term returns.
One key advantage of real estate is the steady cash flow from rental income. This income can cover maintenance, taxes, and insurance. On the other hand, Nasdaq investments don’t provide immediate cash flow until the investment is sold. This makes them less appealing to those seeking continuous income. However, Nasdaq’s higher growth potential, as seen in this analysis, allows for faster capital appreciation. This makes it more attractive to investors who are willing to tolerate market volatility.
Of course, no investment is free from risk. Real estate is stable, but it involves significant costs and may lack liquidity. Nasdaq, though offering higher returns, comes with market fluctuations and the risk of loss. Still, both options have their benefits, depending on your financial goals and risk tolerance.
