What’s the better investment strategy? Is it stocks? Or real estate? Most investors consider the stock market a go-to option for their investment dollars. However, under ideal conditions, real estate can be a viable alternative, offering lower risk, better returns, and greater diversification.
We’ll compare the two investment strategies in this article
Real estate investing
Most real estate investments can be grouped into two categories: commercial properties, like office buildings, apartment complexes, and strip malls, and residential holdings, like family houses and rental properties. Investors looking to enter this market will choose one of these strategies depending on individual preference.
The benefits
It’s easier than stock trading.
Real estate investing is relatively easy to grasp (this isn’t to say that it is child’s play, but it is a lot more straightforward than stock investing)
The home buying process can be a little challenging, but the basics are simple. Buy a property, maintain it, and then try reselling at a higher level. Owning tangible assets such as these is more reassuring than purchasing tiny pieces of publicly traded companies.
Debt financing is safer if you’re doing real estate
You can own a property with as little as 20% down payment or less, then finance your outstanding debt. A similar strategy, known as margin financing, exists for stocks. However, it is very risky and is employed only by experienced traders.
Less risk of inflation
Investing in real estate can protect your savings from the effects of inflation since property values and rent fees tend to increase with growing inflation rates.
Tax benefits
Home owners usually receive tax deductions on mortgage interest. There are also incentives for when individuals sell principal residences, such as the exclusion policy (U.S. only) that allows property investors to avoid capital gains taxes on net earnings of $250,000 if they’re single or $500,000 if they’re married. Investment properties can also qualify for tax breaks in specific circumstances like depreciation and wear and tear.
Disadvantages
It requires a more significant time investment.
Real estate investing may require more work than stocks. Some parts of the investment process, like property acquisition, may be easy to understand. Others can be more challenging. Purchasing and maintaining a property will often require that you have a trustworthy team of realtors, contractors, and real estate agents, among others.
Transaction fees
Real estate sellers can pay as much as 10% off final prices. This will cut into your profit margins and may seem prohibitive, considering that most stockbrokers do not charge for trades.
Returns aren’t guaranteed.
Although property prices typically increase over time, there is always the chance that you could sell at a loss. The 2008 financial crisis is an excellent example of this. Needless to say, stocks are just as vulnerable (if not more) vulnerable to this risk.
Investing in stocks
Stock investing has several benefits and some significant drawbacks
The benefits
Liquidity
The cash you invest into a property can be locked up for years. In contrast, you can sell or purchase publicly traded shares at any time of your choosing. Furthermore, it is easier to know the value of a stock investment at any time than for a real estate asset.
Fewer transaction fees
Although you will need a brokerage account to trade stocks, the competition among discount brokers has reduced stock trading fees to almost nothing. Most brokers also offer various no-transaction-fee mutual funds, ETFs, and index funds.
The drawbacks
Volatility
Stock prices are subject to a much higher amount of volatility than real estate. Stock prices often move up and down a lot faster than real estate prices. The molality can be prohibitive if you don’t have a long-term stock investment plan.
Possible capital gains tax
You may have to pay taxes when you sell your stocks. You may also have to pay taxes on any stock dividends issued by your portfolio throughout the year.
Higher potential for emotional decision making
Although you can buy and sell stocks more easily than real estate, that doesn’t mean it’s a good decision. When markets tumble, investors often rush to sell – even when holding onto their assets would provide greater returns.
Real estate vs. stocks
Investing in the stock market is ideal if it’s paired with additional benefits that can boost your returns, like 401(k) matching in the U.S. or share incentive programs in the U.K. Unfortunately, those benefits aren’t always accessible, and there is a limit to how much you can profit from them. Investing in the stock market on your own can have unpredictable results, and in many cases, there are lower returns than expected.
Note: It is impossible to compare the returns of real estate and stock market investing because the two are fundamentally different. The factors that control their values, prices, and returns are unique.
However, it is worth noting that both real estate and stocks suffer significant declines in profitability during economic downturns, as evidenced by the financial recession of 2007 and the ongoing COVID-19 pandemic.
Risks
The housing bubble and banking crisis of 2007 resulted in declines in value for investors in the stock and real estate markets. As previously mentioned, the covid-19 pandemic has had the same effect. Regardless, it’s important to remember that stocks and real estate have different overall risks.
Stocks
The stock market is vulnerable to several kinds of risk—economic, market, and inflationary. Besides volatility, which we’ve already covered, they are subject to economic cycles, monetary policy, regulatory changes, tax revisions, and changes in the interest rates set by a country’s central bank.
Other risks may result from the investment style used. Investors who prefer not to diversify their holdings will expose themselves to a more significant amount of risk. Dividend-paying stocks can generate a consistent income, but it takes a considerable investment in high-yielding stock to generate enough for substantial profitability. Also, relying on high yield dividends alone means the investor will miss opportunities for higher growth investments.
Real estate
There are a few things to consider when it comes to real estate and its associated risks. The most important consideration for prospective real estate investors is that it requires a significant amount of research. It is not the type of campaign where you can expect immediate returns and results. For rental property owners and home flippers, some risks come with rental management and repairs. Some of the main challenges you will experience will be costs, not to mention the difficulties of dealing with tenants.
You may consider hiring a contractor to work on renovations and repairs. It will cut into your proceeds but reduce the time you spend managing your investment.
Verdict
Real estate and stock present risks and rewards. Stock market investing is favored as a retirement investment strategy, especially for individuals who make regular contributions to a tax-advantaged account. However, it is essential to diversify investments, particularly when saving for the long term. Real estate investing is an excellent way to diversify, minimize risk, and ensure maximum profit. If you like the idea, we’ve got several insightful courses on real estate investment to get you started.
