Almost every day, I hear advertisements about buying gold because it is such a great investment. As I have heard these claims, I have wondered how real estate stacks up to gold as an investment.
Surprisingly, some correlations exist between buying gold and buying real estate. Both investments are considered a good hedge against inflation and fluctuations that occur when the government overspends and the Federal Reserve weakens the value of the dollar. Both have intrinsic value, meaning their price never goes to zero like some stock investments have done. Both are considered long-term buy-and-hold investments. Both require insurance to protect against risk of loss. Both claim to offer price stability, meaning their prices are less volatile than stocks.
Admittedly, over the past 40 years, gold has performed extremely well. From 1974 through 2013, gold increased in value from $158.93 an ounce to $1,356.30, an average annual increase of 5.51 percent. From 2006 through 2011, when real estate was experiencing its worst performance of the past 40 years with an average annual decline in value of -2.19 percent, gold was soaring at an average annual increase of 17.30 percent. During that period, gold increased in value 260.42 percent. Gold seems to perform better during periods of economic decline when stocks are experiencing a bear market.
However, from an appreciation perspective, over the past 40 years, real estate has more than held its own, increasing an average annual rate of 5.43 percent, which includes the great recession years of 2006 through 2011. From a pure appreciation standpoint, gold beat real estate over the period from 1974 through 2013 by an average annual appreciation of 0.08 percent, a virtual dead heat between average gold prices and average prices of new home sales.
Unlike gold, however, appreciation in value is not the end of the story for real estate; it’s only the beginning. Real estate far outperforms gold in all of the following metrics: cash flow, leverage, equity buildup, tax benefits, stability and control. Although income-producing real estate requires more intense management, most projects generate annual cash flows of 5 to 10 percent of the equity invested. Gold offers no annual cash flow on the equity invested.