Real Estate Vs. Stocks: What Should You Invest In?

Key Takeaways


Investing is one of the best ways to supplement your income, boost your savings, and ultimately achieve your financial goals. Fortunately, there are various options to choose from that each offer different levels of risk and profitability. That being said, deciding between two of the most popular investment types: real estate vs stocks can be challenging.

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 highly lucrative. With the help of mobile apps and falling interest rates, they are also more accessible than ever before. So, where exactly do you start? Keep reading to learn more about the differences between real estate and stock, and decide which will be a better addition to your portfolio.

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. Investing in real estate involves acquiring a physical property and choosing an exit strategy to make money. Stocks involve purchasing shares in a company, something that 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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stocks vs real estate

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. What we do know for sure, is 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 such a good investment choice. To start, with the right rental home and property manager you can generate consistent passive income — which can, in turn, be used to grow your investment portfolio. Real estate is also associated with numerous tax benefits. For example, mortgage interest, rental property depreciation, and even property taxes can count towards deductions. To learn more about the best tax benefits of real estate investing, be sure to read this article.

One of the biggest benefits of real estate investing is that you can get started with little or no money. Often, only a down payment of 20 percent is required to purchase a house. Additionally, with crowdfunding, private money lenders, and even house hacking, you can generate enough money to finance a property faster than you might think. This makes real estate a highly accessible investment to those who can identify the right financing sources.

Real Estate Investing Cons

Despite its numerous benefits, there are some cons to be aware of before purchasing real estate. Most notably, many forms of real estate investment require a high level of initial involvement. You need to conduct a lot of market research to ensure you are making a sound investment. This includes analyzing different locations, reviewing listings, and putting together financing options. Many investors are intimidated by the initial work required to be successful in real estate investing — which can lead them to choose other investment types.

An incident you may already be thinking of is the housing crisis of 2008. Despite being more than a decade ago, this is a recent memory for many aspiring property owners. Real estate is subject to market risks and it is important to be aware of that before buying a property. After all, houses are not cheap no matter what financing method you choose.

Stock Investing Pros

Stocks are perhaps the most well-known type of investment — after all so much of the news cycle revolves around the performance of the stock market. While this form of investing was once quite challenging to break into, the creation of new mobile apps has changed that completely. With the help of Robinhood, Acorns, and 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. To learn more about some of today’s best investing apps be sure to read our guide.

Another benefit of stock investing is how simple it is to diversify your overall portfolio. 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 mutual funds and index funds. As I mentioned above, stocks are also thought to be a highly liquid investment. 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 Investing Cons

There are certain cons associated with every investment type, and stocks are no different. The biggest challenge for investors when choosing stocks is often market volatility. Stocks move very quickly, and if you are not careful can result in substantial losses. This also opens investors up to potentially emotionally-driven reactions. When it comes to your financial health, this can be a risky way to make decisions. One way to avoid these potentially negative effects is by working with a broker or by investing smaller portions of money until you have a stronger understanding of the market.

Stock investing can also 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. Stock market investing can also demand a strong understanding of how markets work to be successful.

investing in real estate vs 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.

Summary

Investing is one of the best ways to accomplish your financial goals, the trick is knowing 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. And remember, when it comes to real estate vs stocks nothing is stopping you from making both investments.

Do you think it is better to invest in stocks or real estate? Share your thoughts in the comments below.


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