Investing your hard-earned money is a big deal and successful investing takes care. With real estate becoming all the rage in investments nowadays, many individuals wonder whether real estate is better than the traditional stock market. While stocks are more mainstream, real estate is also considered a solid investment under the right circumstances. That said, without some risk, there is no reward. So, we explore how these investment types are different along with the pros and cons to decide – is real estate better than stocks?
The Basics of Real Estate vs. Stocks
Before answering the question, is real estate better than stocks, it is vital to understand what makes these investments unique. Buying real estate means you obtain physical property. From there, many investors rent that property to generate steady income and returns. Additionally, the ability to leverage real estate means investors can add to their portfolio without paying cash for the entire purchase all at once. That said, buying rental properties does require a substantial down payment.
On the flip side, stocks involve purchasing a small piece of a company. For investors, income generates through stock appreciation and dividends. As a portfolio option, stocks offer the chance to purchase with much less than it would take to procure a rental property. Furthermore, investors can diversify their funds across many different companies with ease. That said, it is not uncommon for stock to become over-or under-valued. So, before investing, study the company carefully.
Is Real Estate Better Than Stocks?
Deciding what to invest in is really a very personal choice. After all, factors such as willingness to take risks, personality, commitment level, timing, and return goals. While investing in the stock market on your own can prove unpredictable at best, managing rental properties requires significant time and effort. So, is real estate better than stocks? The answer is a layered one. Therefore, to help decide what is best for you, continue reading below.
What are the Risks of Real Estate Investing vs. Stocks?
Real Estate – Investing in real estate requires an immense amount of research. That said, this is where a lot of investors miss the mark. Investing in a bad stock means you may lose some money, but you can also sell it faster than real property. So, those who invest heavily in real estate cannot cash out at a moment’s notice. Therefore, having your money tied up is a risk each investor should consider carefully. Additionally, the risk extends beyond simply purchasing the property. Funding and organizing repairs along with managing tenants is an ongoing risk that is not worth it to some.
Stocks – The common fear regarding investing in stocks is a lack of stability. Thus, stock values fluctuate depending on various factors such as economic changes, geopolitical issues, company events, or inflationary risk. Furthermore, stock investments face added regulations, tax implications, and interest rate fluctuation that make independent investors nervous. Additionally, if individuals try their luck in the market without expert advice or the help of a qualified financial advisor, the risk of losing money is quite high.
The Pros of Real Estate as an Investment
Straightforward Processes – Although real estate investment requires a lot of due diligence, the process to get there is easily understood whether you have prior experience or not. Typically, investors will look for an undervalued property to purchase, make repairs, move-in tenants, and collect rent. Also, some rental owners choose to hold onto the property for a few years and then sell at a profit, while others hold onto the properties long term as a source of passive income.
Tax Advantages – Owning rental property is not without its tax perks. Real estate investors can write off things like interest, depreciation, travel expenses, and insurance, to name a few. Learn more about the tax benefits of owning rental properties in our blog.
Safety – Unlike the volatile stock market, real estate is widely accepted as a secure investment. This is primarily because individuals can invest with debt. In other words, buying a property starts with at least 20% down, but the remainder is mortgaged. If you translate this to the stock market, it is “margin trading,” which is very risky for anyone who is not a well-versed expert.
Protection from Inflation – Generally, rent goes up as inflation increases. Therefore, investing in real estate is viewed as a hedge against inflation.
Cons of Real Estate Investment
- Tough to Diversify – Unlike stocks, it is hard to diversify real estate investments. Buying a mix of different property types (commercial, residential, multi-family) in various areas takes a significant amount of capital. So, without deep pockets or partner investors, solely relying on real estate as an investment is risky.
- Cost and Liquidity – Beyond the expensive initial investment required to buy real estate, it is also an illiquid venture. Therefore, if the neighborhood goes downhill, interest rates skyrocket, or your financial situation changes, getting rid of the property could prove difficult.
- Time – Buying and managing rental property takes more time and effort than point-and-click trading through the stock market. Especially when it comes to dealing with tenants, it is not for every investor.
- High Fees – When buying and selling real estate, investors face many different and expensive fees. Stocks have related fees, but they do not compare to the steep realtor commissions, inspection fees, and closing costs other investors deal with.
- Nothing is a Sure Thing – As with any investment, returns are not guaranteed. In the real estate and rental market, prices fluctuate over time. Additionally, things like emergency repairs or unexpected vacancies can have a detrimental effect on overall profits.
Pros of Investing in Stock
Easily Diversified – Using stocks, investors can quickly assemble a diverse portfolio across many industries on any budget. That said, one of the easiest ways to invest is through the purchase of mutual or exchange-traded funds, which instantly provides diversification.
Liquidity – Many investors enjoy that with stocks; they can see the true value of their investment at any given time. Furthermore, if they wish to change aspects of their investment, it is easily done through trades or selling stock. This level of liquidity is not in most other types of investment, such as real estate.
Low Fees – To the benefit of investors, the highly competitive industry of stockbrokers means low to even no fees for simple trades. Typically, brokers also offer different mutual funds or EFTs for no transaction fees. This is a huge saving for investors and allows more money to go towards building your portfolio.
Tax Advantages – Nowadays, many employers offer employer-sponsored retirement accounts like a 401K where individuals can grow their contributions. These accounts offer multiple tax advantages for individuals.
The Cons of Stock Market Investments
Unstable – Anyone familiar with the stock market knows that prices fluctuate and can do so rapidly. Thus, navigating this volatile market is a challenge without professional help. These up and down waves are tough on investors if they are not in it for the long term.
Emotionally Charged – Even if unintentional, the volatility of buying or trading stock can incite an emotionally driven decision process. For example, when stocks start to dive, many investors will dump and run out of fear. So, it is important to remember that navigating this type of investment takes a cool head and the ability to see the bigger picture.
Capital Gains – In some instances, selling stocks could cause the investor to pay capital gains tax. Furthermore, investors must pay tax on the dividends they earn throughout the year. Therefore, always consult your tax professional to see what specific taxes may apply to your portfolio.
How to Maximize Your Rental Property Investments
As you can see, answering the question is real estate better than stocks depends on many factors. The most important one is deciding what your individual investment goals are. If earning passive income through rental properties sounds like the best choice for you, professional property management can help.
Bay Property Management Group is the area’s leading source for all of your rental property needs. Our team of experts starts with a free inspection and rental analysis of your property, so owners understand how to get the most out of their investment. Once we place a tenant, your dedicated property manager handles all daily operations so you can rest easy! Give us a call to schedule your free, no-obligation home analysis today!