The Ultimate “Real Estate vs Stocks” Showdown:
Who’s the Clear Winner?
When it comes to building wealth, which is the better strategy: real estate investing or building your stocks portfolio?
There is no simple answer to this real estate vs stocks debate.
The strategy you choose depends on various factors, including your lifestyle preferences, personality, and comfort with risk. Plus, it also depends on the timing.
A few stocks would have offered the profits that the debt-ridden Californian beachfront property of the 70s provided after 20 years. And, no real estate can compete with the returns that investors earned from buying shares of Walmart, Amazon, and Microsoft early in their journeys.
While timing is key, understanding each investment type will help you choose the best strategy to grow your money so you become financially secure.
Real Estate vs Stocks: A Comparison
When you purchase stocks, you are buying a piece of a business. If an organization has a million shares, and you own 10,000 of them, you own 1 percent of the organization.
Your stock value grows with the growth of the organization’s shares. A board of directors (B of D) elected by shareholders, like yourself, keeps a close eye on the management. The B of D also decides how much of the company’s profits will be reinvested every year and how much gets paid out as cash dividends.
Real estate investing, on the other hand, involves purchasing a physical property or a parcel of land and then using it to generate income. These properties incur expenses, like maintenance and taxes, as you manage them or hold on to them as you wait to sell to a developer.
Some investment real estate properties that generate cash include rental homes, strip malls, and apartment buildings. You must pay for property management expenses, receive rent from tenants, and keep the difference as profit.
Investing in Stocks
Purchasing stock shares exposes you to significant benefits and some important demerits you need to remember before taking the plunge.
Merits of Investing in Stocks
- Longevity - Despite several unprecedented market crashes, purchasing stocks, dividend reinvestment, and holding them for years has been one of the best wealth creators in history. Plus, a stock offers part ownership of a company.
- Dividends - Good stocks increase profits annually, and this manifests in increasing cash dividends. This means you get bigger checks with the business’s growing earnings.
- Minimal work - Owning stocks does not require much input from yourself, apart from researching the company you are about to invest in.
- Access - You do not need to have a large sum of liquid cash to start your journey towards stock market investing. Some individual stocks and mutual funds are available for as little as $100 a month. Plus, micro-savings apps allow you to start investing with as little as $25!
- Borrowing - It is easy to borrow against your stocks.
- Liquidity - You can sell your position many times during regular market hours and in a matter of seconds.
Demerits of Investing in Stocks
- Short-term volatility - Stock prices experience pockets of extreme market fluctuations, which can work against you if you are hoping to make money fast.
- Emotional investment - Investing in stocks requires discipline and taking emotion out of the equation.
- Stagnation - Your stocks can remain stagnant when the companies you have invested in have little room for growth or innovation.
Investing in Real Estate
Is real estate investing the right vehicle for you? Here is what you need to know.
Merits of Investing in Real Estate
- Cash flow - An important aspect for some investors when considering the “invest real estate or stocks” debate is cash flow. Investing in rental real estate properties provides you with a reliable, steady cash flow each month.
- Comfort - Real estate is a comfortable investment vehicle for people in the lower and middle-income classes. This is because they grew up exposed to it, compared to the upper-income classes who often learn about securities, such as bonds and stocks.
- Limited fraud - Being defrauded in real estate is much more difficult to happen, as you need to show up, inspect the property, run background checks on tenants, make sure the property exists, and carry out your own repairs. On the other hand, you leave everything to a management company and auditors when you invest in stocks.
- Ability to use debt - It is easy to structure leverage (debt) in real estate. And, you can do this in a safer manner.
- Safety - Real estate investment returns are traditionally a great inflation hedge to protect against loss in the dollar’s purchasing power.
- Tax benefits - Homeowners might qualify for a tax deduction on the mortgage interest they are paying up to a limit of up to the first $1 million of mortgage debt. You also stand to benefit from more tax breaks when selling your primary residence.
Demerits of Investing in Real Estate
- More effort and time requirement - Real estate involves a lot of hands-on work. You are constantly dealing with phone calls about gas leaks, sewage in the bathroom, the possibility of getting sued, and much more.
- Slowly-increasing value - Apart from a few exceptions, real estate value hardly increases when you account for inflation-adjusted figures.
- Continued running costs - You must pay for expenses, such as insurance, utilities, maintenance, and taxes each month. A high vacancy rate can lead to a loss of money every month.
Other Factors to Consider
Purchasing a real estate property requires a higher initial capital compared to stocks investment, real estate investment trusts (REITs), or mutual funds. However, it provides you more leverage over your money, so you are buying into a more valuable investment vehicle.
For example, investing $30,000 in securities offers you $30,000 in value. The same amount in real estate can buy you $140,000 in a property when you consider tax-deductible and mortgage interest.
The cash you get from rent can also cover expenses, such as property taxes, insurance, mortgage, and repairs. Overall, well-managed properties generate more income for owners and property investments companies alike. The rental income can also increase in tandem with inflation even in rent-controlled areas, which is a big bonus benefit.
Who Is the Winner?
Both stocks and real estate offer you long-term financial gains, but both come with risks. While weighing your “real estate vs stocks” options, remember to keep your risks low by opting for a variety of sectors or asset classes. Investors are putting money into both real estate and stocks. If you love the idea of investing in a property, but don’t want to deal with ownership and management issues, a REIT is worth a second look.