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Growing your wealth is imperative, especially at today’s inflation rates, but what’s the best way? Stocks are great but risky, and real estate is expensive, or at least most people think it is.
So which is better when comparing real estate vs stocks? We cover both sides of the equation below.
Real Estate vs. Stocks: Which Is a Better Investment For You?
So which is better when comparing real estate vs stocks? We cover both sides of the equation below.
Real Estate vs. Stocks: What Are They?
Investing in real estate or stocks are both great options. Deciding between the two (or diversifying and choosing both) comes down to your financial goals. Do you want to own a physical asset (a house), or would you rather own a piece of a company (stocks)?
Spoiler alert – you can do both if you use your money right. Knowing which one is right for you initially is the first step.
What Is Real Estate Investing?
Real estate investing means investing in any real estate (residential or commercial), and there are many ways to do it.
Here are a few ways:
- Buy a home and rent it out – Homes people rent are often owned by investors, aka individuals. You could be one of them. You buy the home, make sure it’s livable, and meets what people want. Then you find renters. You manage the property, collect the monthly rents, and enjoy the cash flow and home appreciation.
- Buy and home, fix it and flip it – If you’d rather not own a home but want the capit
- al gains you can earn, a fix and flip may be a good option. With a fix and flip, you buy an undervalued home in less-than-perfect condition. You renovate it, increasing its value, and sell it for much more than you bought it for, realizing the profits.
An emerging fintech called Roofstock allows you to buy single family rentals outright in 70 US markets. Roofstock Marketplace has a large selection of homes available, making it easy to find the home that’s right for your first investment.
What Is Stock Investing?
When you invest in stocks, you buy a piece of the company. You can buy full shares or partial shares and realize a portion of its profits as a stockholder.
Stocks pay you in two ways:
- Appreciation – As stocks increase in value, so does your investment. Let’s say you bought shares of stock for $1, and in two months, it appreciated to $5 a share. You earned an increase of
- $4 per share. If you sold 20 shares today, you’d walk away with an $80 profit.
- Dividends – Some companies (not all) pay their shareholders dividends or a portion of their profits. Dividends occur sporadically but increase the return on your investme
Pros and Cons of Real Estate Investing
Like any investment, real estate investing has its pros and cons. Here’s what you need to know.
Pros
- Low investment requirement – Investing in real estate requires little capital upfront. You can borrow money in a mortgage and realize the gains investing in real estate offers. Some loan programs allow down payments as low as 20 percent for an investment home. You can find homes at all price ranges on Roofstock Marketplaceto get you started.
- Tax write-offs – Owning real estate as an investor offers many tax breaks, including the mortgage interest paid, expenses to maintain the home, and the home’s depreciation.
- Like-kind exchange tax deferral – If you own commercial real estate or even residential real estate as an investor (not your primary residence), you can take advantage of the 1031 like-kind exchange. If you sell one investment property and immediately buy another with the funds and it’s similar, you may defer paying taxes on the sale’s capital gains. Talk with your tax advisor about this option before using it, as there are several stipulations you must meet.
- Hedge against inflation and stock market risks – Stocks don’t appreciate with inflation as real estate does. Property values usually increase with inflation, and landlords often increase rent too. It’s excellent protection against inflation, ensuring your buying power is still high.
- Cash flow – Stocks don’t provide a stock cash flow like real estate. The monthly rents you receive are your cash flow. Once you pay the mortgage and any expenses to maintain the property, the remaining cash is yours to save, invest, or spend.
Cons
- Being a landlord is hard work – Investment real estate (buy and hold) is a time-consuming investment. You can’t invest and forget it. You’re in charge of everything from maintaining the property, making repairs, finding and keeping tenants, collecting rents, and dealing with vacancies.
- It’s not a liquid investment – Investing in real estate ties up your money until you sell it. If you buy and hold, your money may remain tied up for many years. You’ll earn the monthly cash flow, but not the large gains you’d earn in the home’s equity.
- It’s expensive to start – Even with low down payment requirements, real estate transactions cost as much as 5% in closing costs, which on $200,000 is equal to $10,000.
- Hard to diversify – Diversifying real estate requires a lot of capital. Many investors have only enough money to invest in one property, which leaves them vulnerable to that particular market.
Pros and Cons of Stock Investing
Stocks are a great option for some, but like real estate has its pros and cons.
Pros
- Stocks are liquid – You can buy and sell stocks multiple times a day. While buying and holding is often the best strategy, you have the option, if you find a reason, to buy or sell stocks. You’ll pay commission fees in most cases, but the fees are much lower than transaction fees in real estate.
- Cash flow is possible – If you buy dividend stocks, you may earn cash flow several times a year. If you set up your dividends to automatically be reinvested, you grow your investment without adding any money from your bank account.
- Easy to diversify – Diversifying in stocks is as easy as choosing multiple industries, companies, or types of stocks to purchase. You can split up even small investments into multiple stock purchases if you use an advisor that offers fractional share purchases.
- Good long-term strategy – If you can buy and hold, you should see an average return of 8 – 9% as that’s the historical stock market returns over the last few decades. But, if you need to bail for a financial emergency or other important reason, stocks are incredibly liquid.
- Low barrier to entry – Robo-advisors and online discount brokers make investing in stocks possible with little money and low fees. Some don’t have a minimum investment requirement AND charge $0 commissions.
Cons
- Easy to get emotionally involved – The worst thing you can do is sell a stock when the market crashes, yet many people do. It’s human nature to panic and sell. But, if you wait and see, oftentimes, the stocks rise back up even higher than they were before, which means you sold at a loss and missed out on the appreciation.
- Tax consequences – When you sell stocks and earn a profit (capital gain), you’ll pay taxes on the gain that tax year. This could eat away at your profits unless you have a solid tax-loss harvesting plan in place.
- Stock prices change a lot – The price of a stock could fluctuate multiple times in a day. If you watch the prices too often, it can make you an emotional wreck watching your investment increase and decrease so often.
- Complicated – Buying and selling stocks isn’t for the faint of heart. Some online brokers make it easier, but there is still a lot to learn and understand, or you could lose your entire investment.
Real Estate vs. Stocks: What’s the Difference?
Investing in real estate vs stocks is a personal decision, but understanding the differences can point you in the right direction.
Investment Types
When you invest in real estate, you own physical property. Even if you buy, flip, and sell, you own a physical piece of real estate. You put the money into it to fix it up and sell it for a profit.
Stocks don’t provide the tangible asset. You own a piece of paper that symbolizes your piece of ownership in a company. You can buy and sell stocks much easier than you can buy and sell real estate, but you never have that tangible asset to show what you own.
Risks
Real estate and stocks have different risks.
Real estate’s risks include:
- You must do a lot of research to ensure you’re making a good investment, such as buying in the right area or buying the right type of property.
- Buying a fix and flip requires you to know what the home needs and to be able to forecast its costs while ensuring you’ll see a return on your investment.
- If you rent properties, you risk vacancies, difficult tenants, or dealing with damages tenants make, decreasing the property’s value.
Stock risks include:
- Stock prices are volatile. They can change multiple times a day, creating many highs and lows.
- If you don’t diversify your portfolio, you risk a total loss if a particular company or industry struggles.
- Stocks don’t change with inflation, giving you inflationary risk. Your dollar may not be worth as much as when you invested the funds.
Returns Over Time
Real estate has a history of performing better than inflation, giving investors an average 5.5 percent annual return on their investment. The stock market has a historical return of 9 – 10 percent over ten years.
Other Things to Consider About Stocks vs. Real Estate
- Investing in stocks is an excellent addition to your 401K or other retirement accounts. You can diversify your investments, but including real estate can be a great way to further the diversification.
- You can’t compare real estate vs stocks without looking at their differences. They aren’t an apples-to-apples comparison. Diversifying and investing in both often provide investors with the most significant returns.
- The stock market has many types of risks, including market fluctuations, inflationary risks, and economic risks (such as we are dealing with during the pandemic).
- You need a lot more money to invest in real estate than you do stocks. You could invest in stocks with as little as $1 in some cases. To invest in real estate, you’ll need a decent size down payment and enough money to cover the closing costs and housing expenses.
- If you invest in real estate, you must price the rent high enough to cover not only the mortgage costs, ƒappbut maintenance, too, while having enough money left over for your cash flow.
- If you sell stocks, you’ll instantly create a tax liability unless it’s in a tax-deferred account (retirement account). You may be able to offset real estate gains with a like-kind exchange.
- You can leverage real estate if you need money. A cash-out refinance, or home equity loan gives you access to your equity without forcing you to sell your investment.
Who Should Invest In Real Estate or Stocks?
Deciding if you should invest in real estate vs stocks is a big decision. If you want the best of both worlds, diversify in both investments.
If you have a retirement portfolio, such as a 401K or even an IRA, include stocks, but diversify in other investments as well. Investing in real estate won’t be a part of your retirement fund, and it won’t have the same tax advantages, but it has its own advantages, including hedging against inflation.
Real Estate vs Stocks: What Should You Choose?
Look at all your options to see which one is right for you. Can you afford to invest in both stocks and real estate? If you invest in stocks, you may be able to save enough money to buy real estate properties, too. Check out the options on Roofstock Marketplace to see how you can get started. Then set your financial goals and the budget you need to meet them.
