People often look for solid investment options with reasonable returns when saving for college, a retirement fund, or passive income. New investors tend to gravitate toward the stock market, often because they don’t know many other options exist.
Under the right circumstances, investing in real estate can give the stock exchange market a run for its money (or returns). While both options have positives and negatives, understand that neither is a one-size-fits-all situation. In the following article, we will consider each option and let you decide what strategy — or combination — may work best for your investment goals.
Overview
Most often, the question of growing wealth comes down to two options — investing in property or buying a stock portfolio, as these are the two classes of assets most readily available to investors. Data shows that Americans tend to do a bit of both.
According to the U.S. Census Bureau, 64.4% of households in the country are owner-occupied, meaning that for many Americans, the most significant investment is their home. In the same vein, 56% of American adults invested in the stock market in 2021, and the figure has so far remained steady.
This analysis will guide you whether you have money in different investments and are looking to further diversify or if you're looking to start investing from scratch.
Investing in Real Estate
Real estate refers to a landed property you can feel and touch. Because it is a tangible asset, many investors feel more comfortable with it. Traditional real estate investments belong to two categories: residential properties like rentals, private homes, or flipped houses for resale and commercial properties like office buildings, malls, and apartment complexes.
Active real estate investors or entrepreneurs typically make money from rents or upgrading the property to help it appreciate. Sometimes, investors buy land to build new properties, and because real estate is a physical asset, it will typically always retain some value, even in the middle of a financial crunch.
Pros of Investing in Real Estate
#1. Real Estate is Tangible and Gives You More Control
The process of buying property may be complicated, but the basics are straightforward — buy a property, fix it up, then sell it at a higher value. Owning this type of asset may make you feel more in control, unlike stocks that are mere symbols on a computer screen.
As the property owner, you call the shots on improvements, rents, tenant choices, and more. Since it is a tangible asset, it gives you double benefits for the price of one — you make money off rents and still make money when you flip it, unlike stocks you can only enjoy when you sell.
#2. Relatively Safer Investment
A real estate investment may better protect your equity from the fluctuating global economy, as a crisis in one part of the world will not affect your property. As an asset class, it can make your money work for you, whether there is inflation or not.
While people generally do not like inflation because the prices of basic things like food and gas go up, it is often one of the best cycles to be a real estate investor. During inflation, demand for property tends to soar, increasing its value.
Since the pandemic, people have spent more time at home, increasing the demand for housing and homebuying. Evidence shows that even in times of uncertainty, real estate still holds its value and even becomes more affordable in some situations. This is often the best time to buy, hold, or flip.
You don’t even have to pay unlimited cash to buy an investment property; instead, you can make a down payment of the total purchase price and finance the rest with a mortgage agreement.
#3. Tax Advantages
Real estate investments attract tax breaks from depreciation, but the kind of incentives you get depends on your classification: whether you are an active real estate investor or a passive investor. Active real estate investors spend many hours flipping or building properties, handling responsibilities like construction, management, property development, etc.
The income that comes from these activities is classified as active income. As an active investor, you can use losses from your investment to offset other bills like wages and salaries and even avoid net investment tax for properties that generate income, such as rentals. But if your real estate investment is a passive activity, such as investing in fractional shares of residential loans, you cannot use losses from your rental properties to clear other bills.
#4. Steady Cash Flow
Rents from your real estate properties can be a steady source of monthly income. Some properties like apartment buildings, store sheds, malls, and rental homes may generate enough money to maintain the property, pay the fixed mortgage, and keep the excess as profit.
An easy way to make money from real estate is to buy property and rent to others who will pay the mortgage in the form of rent payments, as well as pay for other services, appliance rentals, etc., as a way to make passive income
Cons of Investing in Real Estate
#1. Real Estate is Not Liquid
Liquidity is one of the drawbacks to real estate investments, as you may not be able to sell off your property immediately. Selling takes time, involves paperwork, and even in a strong seller’s market, it can take up to a month to list a property, negotiate, and close the deal.
#2. Fluctuating Prices
Real estate prices may be unstable, and while prices generally increase long-term, they can also stay flat for some time. If you took out a loan to finance the property, you might have trouble paying for a property worth less than the loan.
#3. Diversification May be Difficult
Location is everything when making a real estate investment, as sales may fall flat in one part of town and go up in another. Diversifying your investment by buying property in different areas is an excellent way to deal with this, but this requires you to have large cash reserves or a diverse capital stack to fund multiple properties at once. Of course, this is why many real estate investors turn to companies like Fund That Flip, which can help them scale and finance more properties simultaneously.
Investing in Stocks
A stock, otherwise called equity, is a corporation’s security portion, entitling holders to profits and a fraction of the corporation’s assets, depending on the worth of the stocks. Trading in the stock exchange market involves buying bits of a publicly-traded company and holding units of their shares.
With thousands of companies listed on the stock market, you have various best-performing companies to select. Every year since 2018, the New York Stock Exchange (NYSE) has seen an increase in domestic companies listed on the market.
In Q4 of 2020, the number of companies on the NYSE spiked to 2,363; as of March 2021, 2,529 local and international companies were listed on the exchange market. All these put together makes stocks a viable investment. Let’s analyze some of the associated risks and advantages of stock investments below:
Pros of Investing in Stocks
#1. Stocks are Flexible and Liquid
Stocks are easy to sell, and if you have an emergency, you can sell your stock holdings for cash in no time. They are also flexible, as you can buy shares from a retirement account, allowing the investment to grow tax-free. Liquidity is an important factor to consider in investments because high liquid assets generally have lower risks. Thus, the chances of a liquid stock retaining its value when traded are high.
#2. Easy to Diversify
With stocks, you can build a broad portfolio and own bits and pieces of the best companies. It can often take a significant amount of money to buy enough real estate for such diversification, but with stocks, you can buy more for a fraction of the real estate investment price. If a company takes a hit, you can still make money from the others.
#3. Fewer Transaction Fees
The brokerage or management fees you pay to a mutual funds manager are a small fraction of the cost of maintaining a house or some other real estate investment property. Most online transactions are now free, and the price war between brokers has reduced trading costs to the barest minimum.
#4. Potentially Less Work
Owning bits of a business through shares requires less hands-on effort from you, and unlike managing a property, nobody will call you in the middle of the night over a leaking bathroom. The only work required to buy stocks is to do your research and due diligence; otherwise, you reap a company’s rewards without going to work.
Cons of Investing in Stocks
#1. Volatile Prices
Bankruptcy is always at the back of an investor’s mind because the investment can dissolve in a flash. Stock prices move faster than real estate prices, which are volatile when the company or the economy goes through a rough patch.
#2. Selling Stocks Attract Capital Gains Tax
For every stock you sell, you may have to pay capital gains tax unless you held the stocks for more than a year, qualifying you for lower taxes. However, the stock dividends paid from your portfolio during the year attract separate taxes. Make sure you understand how stock taxes work before committing to it.
#3. Less Control
As an investor, you are a minority shareholder with little power to influence the company’s decision-making process. Unlike real estate investments, you are not in control of your stocks but at the mercy of the economy and company management. Sometimes, the company may make wrong acquisitions, or managers commit fraud, putting investors’ money at risk.
Conclusion
The choice to invest in real estate or stocks is a personal one, depending on your finances, goals, risk tolerance, and preference. However, it’s typical for seasoned investors to choose both as a means of diversifying their portfolios. The reason is that neither real estate investing nor the stock market is going out of vogue anytime soon, and they both appeal to institutional and traditional investors.
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