Investing in Stocks Vs. Real Estate
I’ll admit, I may be bias since I love working in real estate and I think it’s a phenomenal asset class. But for the sake of impartiality, I will do my best to remain neutral. Investing in real estate and building a portfolio of stocks are both popular investment options, but they each have their own unique advantages and disadvantages. In this article, we will explore both investment strategies in depth, and discuss the pros and cons of each, in order to help you make an informed decision about which investment strategy is right for you.
Real Estate Investing
When it comes to real estate investing, there are several different types of investments to consider, including buying rental properties, flipping houses, and investing in real estate investment trusts (REITs). Buying rental properties involves purchasing a property and renting it out to generate income. Flipping houses involves buying a property, renovating it, and then selling it for a profit. REITs are companies that own and operate income-producing real estate and are traded on stock exchanges like regular stocks.
The Pros of Real Estate Investing
One of the main advantages of investing in real estate is that it is easy to understand the basic principles. While the homebuying journey can be complicated, the basics are simple: Purchase a property, manage upkeep (and tenants, if you own additional properties beyond your residence), and attempt to resell for a higher value. Additionally, owning a tangible asset can make you feel more in control of your investment than buying slivers of ownership in companies through shares of stocks.
Another advantage of real estate investing is that it allows you to invest with debt. Also known as your “mortgage,” you can invest in a new property with a 20% down payment or less and finance the rest of the property’s cost. Investing in stocks with debt, known as margin trading, is extremely risky and strictly for experienced traders.
Real estate investments can also serve as a hedge against inflation. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation.
Finally, there can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $1 million in mortgage debt. There also are tax breaks when you sell a principal residence, such as an exclusion that may allow you to avoid capital gains taxes on net proceeds of $250,000 if you’re single (or $500,000 if you’re married and filing jointly). If you own and sell commercial property, you may be able to avoid capital gains through a 1031 exchange (if you reinvest proceeds in a similar type of property). And investment properties can earn tax breaks through depreciation, or writing off wear and tear on the property.
The Cons of Real Estate Investing
While investing in real estate has many advantages, it also has some significant drawbacks. One of the main cons is that real estate investments can be more work than stocks. While purchasing property is easy to understand, that doesn’t mean the work of maintaining properties, especially rental properties, is easy. Owning properties requires much more sweat equity than purchasing stock or stock investments like mutual funds.
Another disadvantage of real estate investing is that it can be expensive and highly illiquid. Investing in real estate, even when borrowing cash, requires a large upfront investment. Getting your money out of a real estate investment through resale is much more difficult than the point-and-click ease of buying and selling stocks.
Additionally, real estate has high transaction costs. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. That’s a hefty cut compared with stocks, especially now that most brokers charge no fees for stock trades.
The Stock Market
When it comes to investing in the stock market, there are several different types of investments to consider, including buying individual stocks, mutual funds, or exchange-traded funds (ETFs). Mutual funds are a collection of stocks and bonds managed by a professional fund manager, while ETFs are a type of investment fund that tracks an index, such as the S&P 500.
The Pros of Investing in the Stock Market
One of the main advantages of investing in the stock market is the ease of buying and selling shares. With the advent of online trading platforms, it has become very easy to purchase and sell stocks from the comfort of your own home. Additionally, the stock market offers a wide range of investment options, allowing you to diversify your investments and spread your risk across different sectors and industries.
Another advantage of the stock market is that it generally has lower transaction costs compared to real estate. Most online brokers charge no fees for stock trades, which can save you a significant amount of money in the long run.
The stock market also tends to be more liquid than real estate. You can easily buy or sell shares at any time during market hours, whereas with real estate, you may have to wait for a buyer or a seller to come along.
The Cons of Investing in the Stock Market
While investing in the stock market has many advantages, it also has some significant drawbacks. One of the main cons is that the stock market can be more volatile than real estate. The value of individual stocks can fluctuate greatly in a short period of time, and the stock market as a whole can experience significant downturns.
Another disadvantage of the stock market is that it is less tangible than real estate. When you own a stock, you own a small piece of a company, but you don't have a physical asset. This can make it difficult to understand and value your investments.
Additionally, stocks are not a hedge against inflation as real estate is. Inflation can cause the value of stocks to decrease, unlike real estate where the value of the property may increase with inflation. Also, stocks don't offer the same tax benefits as real estate, such as the mortgage interest deduction or the capital gains exclusion.
Both real estate and the stock market are viable investment options, but they have different characteristics and require different levels of involvement and risk. Real estate investing can provide a steady income through rental income, while stock market investing typically generates returns through capital appreciation and dividends. Real estate investments can serve as a hedge against inflation, and it can provide tax advantages such as mortgage interest deduction and capital gains exclusion. However, real estate investments can be more work than stocks, it can be expensive and illiquid, and it has high transaction costs. On the other hand, stock market investments offer ease of buying and selling shares, ability to diversify investments, and lower transaction costs. However, the stock market can be more volatile, and it is less tangible than real estate. It's important to consult with a financial advisor before making any investment decisions.
