Investing is a critical decision that shapes financial growth and security over time. This article explores the performance of two popular investment options—Dutch Rental Real Estate and global stock ETFs—over the period from 2015 to December 2023. By starting with an equal investment of €100,000 in each, we analyze key metrics such as growth, taxes, returns, volatility, and management effort to help investors make an informed choice.
--> Spreadsheet - Analysis Stocks vs RE in the Netherlands
1. Summary of the Analysis
This study provides a detailed comparison of two scenarios:
Dutch Rental Property (Real Estate):
- Assumes an average Dutch income in 2015 with a mortgage limit based on that income.
- Fixed interest rate for 30 years, alongside all associated costs (e.g., taxes, maintenance, etc.).
Global Stocks ETF (ISAC):
- Broad all-country world ETF with 100% stocks.
- Expense ratio (TER) of 0.2%, with no additional investments over the period analyzed.
The goal: identify which investment generated higher returns and better value from 2015 to 2023.
This analysis accounts for factors such as property appreciation, rental income, taxes, stock market growth, and associated costs to ensure a holistic comparison.
2. Structure of the Analysis (Spreadsheet - Analysis Stocks vs RE in the Netherlands)
- Introduction: Methodology and Assumptions (summarized in this article).
- Stocks vs. House: General comparison and summary.
- Stocks Analysis: Year-by-year ETF performance.
- Real Estate Analysis: Costs classification and year-by-year rental property performance.
- House Investment Cash Flow: Profit/loss breakdown for real estate.
3. Assumptions and Information used for the Analysis
Incorporating a range of assumptions to ensure a fair and consistent evaluation. Here’s a detailed breakdown of the assumptions and considerations used:
General Notes
- Timeline: Both investments are evaluated over the same period, from January 2015 to December 2023, to ensure consistency (9 years) - I am working on the estimates for 2024 & 2025 (TBD).
- Comparative Metrics: Metrics such as total returns, taxes paid, annualized gains, and volatility were calculated for both investments.
- Data Sources: Historical data for real estate prices, rental yields, interest rates, and stock market performance were used to ensure realistic assumptions (view in sheet 2 of the excel).
Real Estate Investment (RE)
- Property Selection: The analysis assumes an average property in the Netherlands, not specific to Amsterdam but reflecting general market trends (to keep an avarage and to avoid picking a neiborhood where home prices grew 300% in the last 15 years).
- Mortgage Terms: A mortgage was calculated based on an average Dutch income in 2015, with a fixed interest rate (specific to January 2015) and a 30-year loan term.
- Rental Income: The property is assumed to be rented out for the entire duration, generating consistent rental income (some months of vacancy periods are considered even if rare in the NL). Rental prices are based on 2015 averages with modest annual increases to reflect market trends.
- Appreciation: Property appreciation is based on historical data for the Dutch real estate market (according to EU dataset please view sheet 2 on the excel analysis)
- Costs and Taxes: The model includes all associated costs, such as purchase costs, notary fees, maintenance, property taxes, mortgage interest, insurance, and potential vacancy periods. In NL, taxes on assets and stocks are paid as Box 3 income (similar to a "wealth tax" not as a traditional capital gain tax).
- Management: The analysis assumes the investor actively manages the property, accounting for the additional time and effort required. Furthermore, a BIG assumption are maintenance costs which is keep very low: should I assume that higher maintenance for a property in ''good state"? but a portion of that amount would need to be also added to an increase in value of the property.
ETF Investment
- ETF Selection: The study uses a broad-based global ETF (e.g., ISAC All-Country World Index) representing 100% stocks, chosen for its diversification across industries, sectors, and geographies. Other ETFs were not included to keep the analysis simple. Also following the property selection, I wanted to consider a broad global ETF.
- Investment Amount: A lump sum of €100,000 is invested upfront in 2015, with no additional contributions over the period.
- Dividends: The analysis includes reinvested dividends, reflecting a total return approach. Dividends are accounted for quarterly, aligning with typical ETF payout schedules.
- Costs: The ETF’s expense ratio (TER) is 0.2%, representing standard management fees.
- Volatility: The study measures the ETF’s price volatility (13.4%) over the period, reflecting the fluctuations in the global stock market.
4. Final Results Summary
Here’s a snapshot of the investment outcomes as of December 2023:
- Delta Difference: 6.5% higher gains for real estate.
5. Key Insights
- Both investments performed exceptionally well over the analysis period.
- Real estate slightly outperformed stocks in total gains (€222,965.56 vs. €216,465.49). The total RE gain is calculated reducing the gross value by the remaining loan amount.
- Real estate benefitted from leveraged growth via a mortgage, whereas stocks provided passive, liquid returns.
- Taxes were notably higher for real estate, but overall gains more than compensated for this.
- Volatility differed significantly: Real estate showed a lower volatility of 4.66%, compared to 13.4% for stocks.
6. Conclusion
Both real estate and ETFs offer compelling opportunities for investors, delivering strong returns over the analyzed period. However, each comes with unique advantages and challenges:
- Real estate offers slightly higher returns (122.97%) but requires significant effort, higher taxes, and greater management time.
- ETFs provide more accessible, flexible, and diversified growth with lower barriers to entry and minimal management effort.
- Returns are very close, with a difference of only 6.5% (higher gains for real estate).
Outcome: While real estate investments offer the highest returns, the significant effort required raises the question of whether the incremental gains justify the considerable time and involvement compared to more passive alternatives like ETFs.
Ultimately, the decision depends on an investor’s preferences, risk tolerance, and financial goals. Real estate might be ideal for those willing to commit time and effort for potentially higher returns. In contrast, ETFs appeal to those seeking a passive, liquid, and low-maintenance investment.
Before making a decision, consider liquidity, diversification, risk tolerance, and market conditions. For a deeper understanding of real estate costs and cash flows, refer to Sheet 3: House Return Detail.
7. Further Considerations
Risk Management
Real Estate Risks: Market downturns, property devaluation, tenant defaults, vacancy periods, and unforeseen costs such as major repairs.
Stocks Risks: Market volatility and economic cycles. However, ETFs mitigate risk through broad diversification across many assets.
- Takeaway: Real estate carries more specific, localized risks, while ETFs distribute risk across global markets.
Liquidity
Real Estate: Inherently illiquid. Selling a property involves a lengthy process of valuation, marketing, and closing, often taking months.
ETFs: Highly liquid. Investors can buy and sell in real time during trading hours.
- Takeaway: ETFs are a better choice for those needing flexibility or immediate access to funds.
Diversification
Real Estate: Concentrated investments tied to a single asset in a specific location. Achieving diversification requires owning multiple properties across regions, which demands substantial capital.ETFs: Naturally diversified, investing in a basket of assets across industries, sectors, and geographies.
- Takeaway: ETFs offer built-in diversification, minimizing the impact of any single asset's underperformance.
Market Cycles
Real Estate: Influenced by interest rates, local economic conditions, and supply-demand dynamics. Timing a purchase or sale to align with favorable market conditions is challenging.
ETFs: Affected by broader economic cycles and global market trends. Diversification within ETFs cushions the impact of market downturns.
- Takeaway: Market cycles impact both investments, but ETFs are less dependent on timing compared to real estate.
Further consideration? Any opinion? what would you choose?
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