It's an age old question, and I'm invested in both. But I wrestle mentally with which is the better choice. Most of the time the comparison isn't apples to apples because RE is often bought with leverage whereas plain equities aren't. Most retail investors aren't managing leverage by rolling futures etc.
But what if you want to leverage equities to the same extent as a RE investment, take into account financing terms, depreciation benefits, recapture, taxes, hedging strategies for equities drawdowns, and all the works! Which is the better choice.
Here is a summary of such a discussion including assumptions and conclusions. Feel free to double check (easy w LLM) and/or roast the conclusion as much as you want in either direction.
LETF (3x)
Exposure: $100,000
Leverage cost: 2.5%/yr
Dividend: 0.75%/yr
Price appreciation: 28%/yr (UPRO) or 40%/yr (TQQQ)
Tax rate: 40% short-term capital gains on all gains + 0% tax on dividend for simplicity (can include later) --made it STCG because one would likely need to institute some hedging to prevent catastrophic loss.
Duration: 5 years
Real Estate
Property: $100,000
Down payment: 33% → $33,000
Mortgage: 67% → $67,000
Mortgage interest: 5.5%
Accelerated depreciation (MACRS 5-year): assume ~20%/yr
Rental income: 6% → $6,000/yr → taxed at 35% → $3,900 net
Appreciation: 3% or 5%/yr
Depreciation recapture: 25% of total depreciation
Duration: 5 years
Net Gain
3x LETF (UPRO, 28%)
149,050
3x LETF (TQQQ, 40%)
254,050
Real Estate (3%/yr, accelerated depreciation)
94,000
Includes rental + depreciation − recapture − interest
Real Estate (5%/yr)
105,675
Looks like as long as you can manage market downturns, LETFs could possibly provide a better return under these assumptions.
Thoughts?