Investing is one of the best ways to supplement income, boost savings, and ultimately achieve your financial goals. Instead of losing money to inflation by letting it sit in a savings account, it can be exponentially more lucrative to put money to work in the form of a sound investment. Fortunately, there are various investment opportunities to choose from that offer different risk and profitability levels. There’s an ongoing debate between two of today’s most attractive asset classes: real estate vs stocks. Both real estate and Wall Street equities have a proven track record, but which is right for your portfolio?
While you can add both investments to your portfolio, many people start with one before moving on to the other. As two of the most long-standing investment types, both real estate and stocks can be worth the investment. With the advent of technology and advancements in real estate exit strategies, both stocks and real estate are more approachable than ever before. Anyone can choose either strategy, which begs the question, where exactly do you start?
The answer is simple: the beginning. To know which asset wins the real estate vs. stocks debate, investors must first identify what each asset class is.
Investing In Real Estate Vs. Stocks
Real estate and stocks can both yield high profits, though they operate in completely different ways. The biggest difference is that real estate is a tangible asset, while stocks are not. Real estate investments involve acquiring a physical property and choosing an exit strategy to make money. Stocks involve purchasing shares in a company, which cannot be physically represented. This difference makes stocks much more liquid when compared to real estate, meaning stocks are easier to buy and sell at a faster pace.
Another key difference when looking at these investment types can be found by looking at their required management strategies. Real estate often demands a more hands-on approach, especially if you opt to rehab or flip houses for a profit. While there are some ways to get around this responsibility, such as working with property managers or a hands-on business partner, there is a certain level of involvement that comes with real estate investments. Stocks, on the other hand, typically require long waiting periods and low levels of involvement.
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Returns Of Real Estate Vs. Stocks
Unfortunately, there is not a clear answer on whether investing in real estate vs stocks will result in higher returns. The profit potential of each investment type depends on several factors — market risk, investment size, management strategy, time, and more. Given these variables, it can be difficult to predict which investment will result in higher profits for you. Instead, it can be helpful to look at how profits will be distributed to better judge the return potential.
With rental real estate, investors generate income every month through rent payments. These payments are protected against market changes, though the property value could still fluctuate over time. Stocks pay out as dividends, which are typically distributed quarterly. While stocks have shown to provide consistent returns, market factors could undermine these gains at any time. We know for sure that both investment vehicles have proven to be profitable throughout history.
Risks Of Real Estate Vs. Stocks
Both real estate and stocks are exposed to a certain level of risk, though it varies based on your strategy. Stocks are famously associated with the risk of crashing markets, economic fluctuations, and inflation. Depending on the company, they can also be subject to certain political or global events. Investors are often told to diversify their holdings to counteract this volatility.
Real estate is an interesting investment type because it is a necessary good, meaning there will always be a demand for housing. However, this does not make real estate immune to other risks. For example, when flipping houses, investors risk encountering unexpected costs or even losing funds to holding costs. Real estate can also carry a level of risk if the market does not grow as predicted. For these reasons, real estate investors are often required to research each step of the process, an approach that can be time-consuming.
Pros & Cons Of Real Estate Vs. Stocks
The best way to decide between real estate vs stocks is by looking at the pros and cons associated with each. Consider the financing options, management styles, leverage, risk, and profit potential associated with both investments. The right investment decision will be different for everyone, but the following list aims to help.
Real Estate Investing Pros
There are several reasons why real estate can make a good investment choice. not the least of which include:
Real Estate Is Tangible: Real estate gives investors the ability to buy and hold a tangible asset. While some investment opportunities are more or less intangible, owning and acquiring real estate vs stocks gives investors something they can actually touch. That’s not to say stocks aren’t tangible assets, but rather that real estate is more tangible, and therefore easier for many to comprehend. Visiting a property allows many investors to fully understand what they own; the same benefit can’t be extended to stocks.
Invest With Other Peoples’ Money: The financial barrier to entry isn’t nearly as steep as many assume. In fact, new real estate investors don’t even need any money of their own. Instead, they can use money from a private lender to fund their deal. Provided they are able to convince the lender that they are worth the investment, real estate investors can secure funding for a project in as little as a few days. Subsequently, using debt to secure a deal allows investors to remain more liquid and perhaps even acquire several properties at once.
Real Estate Can Hedge Against Inflation: While not always the case, real estate tends to increase in value in an inflationary environment. Whether its home values or rents, real estate investors can expect their profits or equity to increase in an inflationary environment.
Real Estate Is A Tax Shelter: Outside of the profits themselves, the tax advantages associated with real estate may be the single best reason to buy a physical property. Whether it’s accounting for depreciation or writing off rental property purchases, real estate investors can save thousands of dollars a year if they manage their portfolio well. The money a real estate investor can save in taxes and potential profits can make real estate one of the best investments out there.
Passive Income: It is entirely possible to invest in real estate passively. With the right rental home and property manager, you can generate consistent passive income, which can be used to grow an investment portfolio beyond a single home.
Real Estate Investing Cons
Despite its numerous benefits, there are some cons to be aware of before purchasing real estate:
Investing In Real Estate Takes Time: Real estate can be highly profitable, but not without a significant time investment. Investing in real estate vs stocks requires more time than simply signing up for a brokerage and buying equities. Instead, real estate investors need to do everything from studying the entire industry to closing mortgages and negotiating with sellers, and everything in between. The amount of time it takes to close a real estate deal is much longer than buying and selling stocks.
Real Estate Is Expensive: Real estate is one of the most expensive asset classes. Relative to stocks, in particular, real estate is much more capital intensive when working with a single asset class. If for nothing else, investors can buy stocks for literal pennies. Homebuyers, however, will typically spend tens of thousands of dollars to acquire a home.
Real Estate Is Relatively Illiquid: In addition to being expensive, real estate assets are relatively illiquid, meaning investors can’t tap into the capitol of their real estate at a moment’s notice. Instead, the home must be sold to liquidate the money, which can take anywhere from weeks to months.
Real Estate Has High Transaction Fees:Investing in real estate vs stocks means homebuyers will come across larger fees. Today, many stock brokerages offer free trading, but the same can’t be said about real estate deals. Instead, buying a home comes with significant closing costs and fees, upwards of thousands of dollars.
Stock Investing Pros
Investing in stocks vs real estate may coincide with several advantages, not the least of which include:
Stocks Are More Liquid: Equities are highly liquid investments. While you likely need to leave your funds in for a while to allow them to grow, the ability to sell your shares quickly can be beneficial if you face any unexpected financial obstacles.
Stock Portfolios Are Easy To Diversify: Investors can purchase shares from a broad range of companies, allowing them to minimize certain market risks. One of the most common ways this is done is through the best mutual funds and index funds.
Transaction Fees Are Being Phased Out: While not entirely gone, most fees have been taken out of the equation. The same online brokerages that have democratized investing in Wall Street have removed many fees that scared away new participants. In fact, it’s entirely possible to trade commission-free.
Unique Tax-Advantaged Accounts: Money placed into a retirement account like a 401(k) can grow tax deferred, or perhaps even tax free. As long as account holders don’t take the money out before they are allowed to, the capital they place in select retirement accounts can avoid being taxed for the most part.
Low Barrier Of Entry: With the help of SoFi, Acorns and other online brokerages, many more investors can start buying and trading stocks right from their phones. This perk allows investors to manage their portfolios more directly and earn profits with little involvement. In addition to access, investors can start with as little as a few dollars.
Stock Investing Cons
Certain cons are associated with every investment type, and stocks are no different. When investing in stocks vs. real estate, investors need to keep the following drawbacks in mind:
Volatility Is Normal: The stock market is very volatile. World events and the state of the economy are constantly influencing which direction stocks head. That said, volatility can be hard to stomach for some; for others, it’s actually a benefit. If for nothing else, the stock market usually drops faster than it rises, but it usually rises more than it drops. Those with long-term investment horizons can actually use volatility to their advantage.
Capital Gains Taxes: Stock investing can open investors up to substantial capital gains taxes. When you sell your shares, you may be taxed at high rates depending on how much your initial investment grew and for how long. While there are certain strategies to help reduce capital gains taxes, most investors face some form of capital gains tax after selling their stocks.
Real Estate Vs. Stocks: Which Is Right For You?
Both real estate and stocks can yield impressive profit margins — but how do you get to that point? A great place to start is often by considering which investment type you are already more familiar with. You must be comfortable with any investment you make. Start by considering which investment type you already understand and ask your network for more information. This starting point can help guide your initial research, and potentially reveal where to make your first investment.
It is also important to consider how much capital you have to make your initial investment. While you can finance most of a property, you will still need a lump sum of cash to make the initial down payment. When it comes to stocks, there are ways to get involved with significantly less cash. Keep in mind that although real estate can require more capital up front, it also results in more leverage.
Real estate investment trusts (REITs) are another option to consider when looking at real estate vs stocks. REITs offer investors the chance to benefit from real estate’s profitability without actually purchasing properties themselves. Essentially, they are companies that own or operate income-generating properties. Investors can purchase shares in these companies, and receive returns in the form of dividends. This is a great way to combine the benefits of both stocks and traditional real estate investing.
How To Invest In Real Estate Vs Stocks: The 5 Best Ways
The real estate vs stocks debate is alive and well, and for good reason: both vehicles award patient investors the ability to improve their financial positions through sound decisions. However, those who have decided to invest in real estate must first choose an exit strategy that meets their needs. Not unlike how stocks give investors the ability to invest in several equities and commodities, real estate grants investors several ways to make a return on their investment. With that in mind, the five best was to invest in real estate are:
Real Estate Investment Groups (REIGs)
Real Estate Investment Trusts (REITs)
Online Real Estate Platforms
One of the best ways to invest in real estate vs stocks is to own a rental property, or an entire portfolio of rental properties. As their names suggest, rental properties allow investors to buy physical real estate assets and hold them for long periods of time. While holding, however, the owner rents the unit out to a tenant. In doing so, the property owner will be able to offset their mortgage with cash flow being generated from the renter. This is a particularly great investment strategy because the property owner will ultimately be able to pay down the mortgage with someone else’s money. At the same time, the investor will also be able to take advantage of significant real estate tax benefits.
Real Estate Investment Groups (REIGs)
A real estate investment group provides investors with an option to own a portfolio of rental properties without requiring them to maintain the asset. In fact, investing in a real estate investment group is a lot like investing in today’s best mutual funds. A real estate investment group, for example, is a business which buys and maintains a portfolio of real estate assets. Individual real estate investors may then pay to join the group and share in its profits. In return for investing capital in a REIG, investors will be given a unit relative to their investment which determines any returns. Real estate investment groups will charge a fee for their management. The fee covers all of the work the portfolio manager does: handling maintenance, advertising vacancies, interviewing tenants, etc.
Otherwise known as rehabbing, house flipping has grown into the most popular reason to invest in real estate vs. stocks. As its name implies, house flipping will witness real estate investors acquire a home (preferably below market value), rehab it quickly, and sell it for a profit. The term “flip” implies the process is quick, as investors will need to carry out their plan in a relatively short period to avoid holding costs. When flipping houses, investors will typically borrow money from a private money lender to fund the deal, with interest rates coming in around 12%. Borrowing private money sounds expensive up front, but if the investor is able to complete a deal successfully, the loan will be incredibly short term and well worth the cost of admission.
Real Estate Investment Trusts (REITs)
Real estate investment trusts own, finance, and/or operate a wide variety of income-producing real estate assets. Some REITs, for example, will own and operate office buildings (and nothing else). Others may diversify a bit more and own everything from malls to hotels or entertainment properties. Regardless of the physical real estate itself, REITs have developed a reputation for owning physical real estate assets and generating income by leasing them. Investors, on the other hand, may invest in REITs on Wall Street, not unlike traditional equities. In fact, REITs trade a lot like stocks. Investors simply need to find the REITs they want to invest in and add them to their portfolios.
Online Real Estate Platforms
The advent of technology has enabled many investors to make money in real estate online. Specifically, select online real estate platforms allow investors to pool their money together in order to invest in larger commercial deals. Not unlike crowdfunding, online real estate platforms allow investors with more modest access to capital to invest in lager projects.
Investing in stocks or real estate can accomplish your financial goals, but investors need to know where and how to get started. Both real estate and stocks offer beginner-friendly strategies, though they will require some research on your part. If you are torn between the two, the best advice is to assess your financial goals in relation to your risk tolerance. More importantly, investors don’t need to choose a side in the real estate vs stocks debate, but instead can invest in both asset classes.
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FortuneBuilders is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”), or any state securities regulatory authority. The information presented is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing provided shall constitute financial, tax, legal, or accounting advice or individually tailored investment advice. This information is for educational purposes only is not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned.