Real estate vs Stocks: Which Is The Better Investment?

Which asset is best for you to invest in depends on a variety of factors. Your personality, bank account, risk tolerance, goals, and investment style will all influence whether or not you’re going to go with stocks, property, or some combination of the two.

Real estate vs stocks: which is the better investment
Real Estate vs. Stock Investments – What’s the Difference?

Owning stock entails purchasing a portion of a company and making your income based on how well that company does in the short or long term, as well as by collecting dividends, which is a portion of a company’s profit paid to stockholders on a quarterly basis. Owning real estate means either flipping a property or holding onto it long enough to make an income by renting it (as well as your property appreciating in value

How do Returns Compare Across Stocks vs. Real Estate

Historically, stocks provide a greater return on investment if you’re in it for the long haul. With real estate, however, you can have a regular monthly income. Stocks may provide a regular income thanks to dividends, but that income would come on a quarterly basis at best. Real estate, meanwhile, may provide income in the form of rent on a monthly basis.

What are Investment Strategies Between Real Estate and Stocks?

There are three common strategies you can use to invest in both stocks and real estate.

Long Only

This strategy entails making an investment and sticking to it. With real estate, you’d buy a single property and put it up for rent; with stock you’d buy an index like the S&P 500 or the Dow Jones Industrial Average. Then, in both cases, you just ride it out.

Alpha Capture

This strategy entails making a purchase when you hear good news. When Burger King introduced the Impossible Whopper, their meat alternative sandwich, you could have bought BK stock, for example. Or when New York City’s repair plan for the L Line was shutting down that particular train, you could have bought up real estate in Williamsburg, Brooklyn as people fled the area.

Distressed

This is when you make intentional steps to improve your investment. You could buy a property and fix it up or invest in a company and put up advertising to help get the word out.

What are the Risk Between Real Estate vs. Stock

Stocks and real estate are two of the most common forms of investment, both with their own unique set of pros and cons, risks and benefits, and advantages and opportunities.

Real Estate

Real estate requires significant research, especially when considering how hard it is to liquify your investment if you need to. Whether you’re flipping houses or in for the long haul, management and repair are on you. You can have an emergency in the middle of the night that requires your immediate attention, which is why having a contractor or property manager on call is so important. All this and more may eat into your profit.

Stock Market

Stock prices can go up and down with little forewarning for reasons as diverse as world politics and interest rates to industry or company specific events. The stock market is also very much contingent upon the intelligence and financial reach of the investor. If the investor makes a poor decision but doesn’t have the funds to diversify, then they may lose all their funds if the company or sector goes south.

Benefits and Disadvantages

When choosing between stocks and real estate, you need to weigh the pros and cons of each to decide which is the most suitable investment for you. Or, if you have the capital, in what proportion you should invest in each.

Pros of Real Estate

When you buy physical real estate you are the CEO of that property. You make all the decisions! When you invest in stocks, you put your faith in someone else’s decision making abilities. There’s plenty of times when management will make poor decisions that cost you money, but at least when you’re managment you can make course corrections right away.

Property also comes with a lot of tax advantages. As of 2019, you can deduct up to $750,000 in mortgage indebtedness on your primary home. And, if you wanted to, you can sell your primary home tax free on profits up to $250,000 if you’re on your own and $500,000 if you’re married (so long as you lived in the home for two out of the last five years). Not only that, but if you belong to the 28% or greater tax bracket, it’s actually in your best interest to own property! Thats because all of the costs of managing your rental properties are deductible! Sure, there are income limits, but that limit is roughly $166,000 per year!

So long as you have the money to do it, real estate is something you can get involved in right away. If you can get a mortgage at a low interest rate and your rent has a return greater than that interest, then, kablamo, you;re making profit. And, in general, the amount of research you have to do to find good real estate to invest in is less than the amount of research it takes to find a good stock. And, keep in mind, when you research real estate you’re getting direct information, whereas when you research a stock you have to be aware of the fact that you’re being presented a narrative about a company.

Real estate is also a tangible asset that you can use, see, touch, and put to use. Stocks are just ideas! If things go bad for society (like really, really bad), at least you have a property you’re entitled to. Stocks are just ideas! You can’t live in an idea.

Cons of Real Estate

Investing in real estate takes significant income. You need to be able to cover the down payment, maintenance, and property taxes. That’s all assuming that your credit score is good enough to get a mortgage in the first place. You’ll need time as well even if you end up hiring a property manager. Real estate is also lacking in liquidity, so it would take you a while to convert your investment into cash.

Pros of Stock Market

Over the last 60 years, the stock market has provided roughly a 7 to 9% return on investment year relative to the 2 to 4% that real estate provides. Stocks also have more liquidity, meaning that they’re easier to convert to cash than real estate. The stock market also has less fees associated with it. When it comes to online trades, for example, you can get your costs down to $5 irrespective of how much you’re trading! Real estate, meanwhile, can come with a commission as high and 5 to 6%!

Real estate may require less research, but the stock market requires less work. Stocks don’t need maintenance! Stocks are also less cost prohibitive. You can have a tight budget but still hold stock in a variety of companies across different sectors. Owning multiple properties in different regions, meanwhile, requires significant wealth!

If you’re stock market savvy and are able to make the majority of your income from dividends, then you could lower your marginal tax rate by as much as 20% (depending on current legislation). And if you’re holding your stock for that long you don’t have to pay any additional taxes or fees, whereas holding real estate requires paying property taxes and maintenance.

Real estate vs stocks: which is the better investment

Cons of Stock Market

It doesn’t take a lot to get started in the stock market, but if you don’t have a lot you also have more to lose. Stocks have high liquidity, but your profit may come with capital gains tax, which increases your tax burden.

What are Real Estate Investment Options?

There are many choices when it comes to how you can generate income using real estate.

REITs (Real Estate Investment Trusts)

A Real Estate Investment Trust(REIT) allows individuals to invest in multiple properties at once by buying shares of a real estate portfolio. A REIT may include properties such as data centers, hotels, infrastructure (cell towers, energy pipelines, fiber cables), retail centers, timberland, self-storage, warehouses, apartment complexes, retail centers, and office buildings.

REITs off set many of the setbacks associated with real estate because they’re bought and sold on public exchanges. As a result, REITs have much higher liquidity than any other real estate investment. You also don’t have to worry about most of the other factors associated with investing in real estate, like maintenance or property taxes. Unlike real estate, however, you’re less likely to reap the rewards of asset appreciation since 90% of the portfolio’s income goes back to investors.

Joint/joint and several ownership

There are several forms of joint ownership that are all variations of the same idea: multiple people holding a stake in a real estate investment. There’s being a joint tenancy with rights of survivorship (JTWROS). That’s when there are two or more investors, one investor dies, and the surviving investors continue to hold the investment. The deceased investor will need to have their name removed from the asset, which entails showing a death certificate during the recording of the new deed. Then there’s tenancy by the entirety (TBE), which is JTWROS where the property is owned by a married couple. Lastly, there’s community property, which means that any asset that’s owned by the married couple during their marriage is owned equally by both spouses. This form of join ownership is the law in nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Rental properties

Rental properties are a good investment because the income they generate increases along with the cost of living. Property investors can increase rent to keep up with inflation, the value of the property will appreciate enough to make up for inflation, and, best of all, the mortgage payments remain the same and actually go down (in so far as the indebtedness becomes less severe given that the value of the debt has depreciated). 1Additionally, the income generated will be tax-free while the associated taxes and expenses are all tax deductible!

Direct revenue

Direct revenue is when you buy property that you then use to generate revenue yourself, such as a store front, a farm, etc.

Property flipping

Property flipping entails fixing up a property and selling it soon afterward, as opposed to fixing up a property and renting it.

Rental Properties: Low Risk, High Returns

Rental properties become less risky with time as you pay off more of the debt and they appreciate in value, assuming that they are properly maintained and managed. Meanwhile, while the stock market has a historic upward trend, the volatility over the short term remains. So, it’s always possible that your stock investment will drop. As they say, past performance does not guarantee future performance.

Bottom Line

Ultimately, both stocks and real estate properties come with their own unique sets of pros and cons. There are ways to make both accessible to even entry level investors, while an investor with more resources is likely to invest in both. At the end of the day, what makes both accessible is knowledge, so make sure you know what you’re getting into before you go in at all!

Real estate vs stocks: which is the better investment

Leave a Reply

Your email address will not be published. Required fields are marked *

Ready to learn more? Schedule a call