Anyone looking to make an investment would traditionally look to the stock market as a place to invest their dollars. That should come as no surprise because stocks are a well-known and understood investment option.
More recently, however, an increasing number of people have been looking for alternative investment opportunities. One you might not have considered before is investing in real estate.
Real estate investment can be a great alternative to stocks in the right circumstances. When you compare investment property vs. stocks, real estate investors benefit from a low-risk investment that yields better returns and provides for greater diversification.
Looking for an investment strategy that fits your budget and needs is essential, whether you’re saving for a college fund, earning a residual income, or planning for retirement.
Making a comparison between investment property vs. stocks is an excellent place to start.
Investing in the Housing Market: The Pros and Cons
Basically, there are two types of real estate investments:
- Residential properties: these include properties like your home, rental income properties, or a property you buy and then flip for a profit
- Commercial properties: this type includes apartment complexes, strip malls, and office buildings
If you’re new to investing in the housing market, there are several benefits you need to be aware of. Understanding the pros and cons will make it easier to compare investment property vs. stocks and decide which is best for you.
Easy to Understand
When you compare investment property vs. stocks, the first is easy to understand. Many people think the home buying journey is complicated, but it’s straightforward. Of course, the most challenging part is finding the right property, but many useful tools can help you hone in on the best investment or rental property for your needs. Tools such as Mashvisor’s Property Finder, and Property Marketplace, for example.
Real estate is much safer when you’re investing with debt. With the help of a mortgage, it’s possible to invest in a new property with just a 20% downpayment. Investing in stocks with debt, on the other hand, is very risky and really only for experienced traders.
Hedge Against Inflation
Buying an investment property can be a great hedge against inflation. This is because the value of properties tends to increase alongside inflation.
You can take advantage of certain tax advantages such as a tax deduction for mortgage interest paid on up to the first $1 million in mortgage debt. In addition, if you’re selling a principal residence, there are tax breaks such as exclusion. This may allow you to avoid capital gains tax in net proceeds.
Similarly, if the property you’re selling is commercial, you might also be able to avoid capital gains tax through a 1031 exchange. Buying an income property might also mean you can earn tax breaks through writing off wear and tear, or depreciation on the property.
Property Appreciates in Value
Over the long term, there is an increasing demand for property. Real estate is always a good investment because there’s an inherent demand for it. It might be land that produces coffee or is home to an apartment or retail place, but whatever the business, there is always a need for land.
You Can Add Value to Your Investment
When you invest in stocks you have no control over factors that can increase their value unless you’re one of the decision-making executives in the company. With real estate, on the other hand, you’re the one in charge.
If you want to, you can play an active role in increasing the value of your property. For example, you might decide to make it more attractive and improve its market value. The point applies whether you’re a property flipper or a would-be landlord.
You have the opportunity to purchase an undervalued property, fix it up, then rent it out or sell at a good profit. However, when you compare investment property vs. stocks in terms of adding value, the best you can do with stocks is speculate and make an educated guess whether a share’s value is going to go up or down.
Real Estate Creates Predictable Passive Income
If you own a rental property, you’ve got a source of immediate, predictable income from monthly rental fees. Your cash flow will be what you’ve got left from the rent you collect after you’ve paid operational expenses. Ideally, you want a residential property that produces rental income year-round. It’s also important that you understand all the associated legal fees and are prepared for unexpected costs. Realistically, most investors target a return on their investment of 8-12%.
Stocks also provide a recurring income in the form of dividend payments. However, these returns are often just a little above inflation.
Real Estate is a Tangible Asset
One of the main reasons people feel safer investing in real estate is that it’s a tangible asset. It’s not going to disappear overnight if the market crashes. Real estate prices may fluctuate, from time to time, but’s it’s still something you can see, touch, and physically use.
There’s a much smaller chance of you falling victim to hacking or fraud because you can personally inspect it before buying. Also, if you rent it out, you can ensure your property is well taken care of by doing background checks on tenants.
Real Estate is Insurable
Whenever you invest your money, there’s always an element of risk. For this reason, you can’t insure investments in the form of stocks, mutual funds, or bonds. If the market crashes and you suffer significant losses, there’s nothing you can do about it.
Real estate, on the other hand, despite being an investment, can be insured against elements that damage its physical value. For example, you can take insurance policies against floods, fires, sewage, and other hazards.
Industry-specific property insurance is also available. For example, people renovating vacant properties can take builders’ risk insurance. In addition, you can get cover for worker injuries, property damage, and vandalism. In some cases, it’s even possible to get insured for loss of rental income.
Real Estate in Transferable
For many investors, being able to create multigenerational wealth is essential. For example, it’s easy to transfer real estate properties to your family members or friends without having to pay exorbitant taxes.
Landowners can create trusts to hold their real estate assets. Upon the grantor’s death, ownership is automatically transferred. If the heirs decide to sell immediately, they won’t pay any capital gains tax.
The process of purchasing a property is easy to understand, but the work involved doesn’t stop there. Buying income property involves a certain amount of sweat equity in maintaining the property.
Illiquid and Expensive
Property investment requires a large upfront investment, even when you’re taking out a mortgage. Getting your money out through resale is also a little more difficult than the ease that comes with buying and selling stocks. In many cases, for example, all it takes is a few clicks online.
There are significant closing costs to pay when investing in real estate. They might, for example, take as much as 10% off the top of the sale price. When you compare investment property vs. stocks in relation to transaction costs, there’s a huge difference, as many brokers charge minimal or no fees for stock trades.
Diversification is a smart thing to do with your investments, but there are fewer opportunities in real estate investments. You would have to diversify in terms of location and type, which would require much deeper pockets than an average investor has access to.
Return on Investment
It’s not unreasonable to expect property prices to rise over time. However, you’ve only got to look back at the 2008 financial crisis to be reminded that they can also drop with the risk of selling a property at a loss. Although, it has to be said that this is also a risk with stocks, of course.
Investing in Stocks: The Pros and Cons
Now it’s time to look at the pros and cons of investing in stocks. All of which are important to consider before you take the plunge.
You can lock your investment up for years in real estate. On the other hand, stocks can be bought and sold at the drop of a hat whenever you decide it’s the right time to act. It’s also easier to calculate the value of a stocks portfolio.
Diversification is Easier
You can quickly and easily build a broad portfolio of companies and industries with stocks. One of the easiest ways is to purchase shares in mutual funds, exchange-traded funds, or index funds. You get instant diversification because the funds buy shares in a wide range of companies.
Fewer Transaction Fees
You’ll need to open a brokerage account to buy and sell shares. Because the industry is so competitive, you’ll find a large number of brokers have reduced stock trading costs to zero in many cases. Many of them also offer no-transaction-fee index funds, ETFs, and mutual funds.
Tax-Advantaged Retirement Accounts
It’s possible to purchase shares via an employer-sponsored retirement account such as a 401(k) or an individual retirement account. This allows your investment to grow tax-free or at least tax-deferred.
Share prices can go up and down much faster than real estate prices. For the stock investor, this can lead to some very stomach-churning moments. The only way to get over these moments is to take a much longer view of your portfolio. What this means for you is that you buy and hold despite volatility.
Risk of Capital Gains Tax
You may have to pay capital gains tax when you sell your stocks. However, if you’ve held the stocks for longer than 12 months, you might qualify for a lower rate of tax. Don’t forget as well that you’ll have to pay taxes on any stock dividends during the year.
Emotions Can Get in the Way
The stock market is very fluid, and when the markets waiver, investors often rush into selling when a buy-and-hold strategy would have produced more significant returns.
Investment Property vs. Stocks: The Risks
Stocks and real estate have very different risks overall.
The risks involved in real estate investment include:
- It requires a lot of research. So you can’t go into it casually and expect immediate results and returns.
- Real estate is not an asset that you can easily liquidate or cash in quickly.
- For home flippers or rental property owners, some risks come with handling repairs or managing rentals.
The risks involved in stock market investments are very different, for example:
- Stock values are incredibly volatile.
- The volatility can be caused by any number of things you have no control over.
- Stocks are subject to the economic cycle, as well as regulations, tax revisions, monetary policy, or changes in the interest rates set by a central bank.
- Choosing not to diversify is a considerable risk.
Investment Property vs. Stocks: Final Thoughts
So which is better? Investment property vs. stocks? That’s something you’ll need to decide for yourself. It’s possible to make money with both options, as long as you know what you’re doing.
For many investors, the best option encompasses both stocks and shares along with real estate. In this way, the investor’s portfolio is diversified, which means they are protected from any fluctuations that would be felt more directly if they were overly exposed to one rather than the other.
That being said, investing in real estate is one of the safest options. It;’s also a tried and true practice for building wealth. It can be done as simply as owning your home rather than renting or by holding property purely for investment purposes. In addition, real estate is a physical asset, which makes it a safe investment. The property will retain value even during dips in the economy or crashes in the stock market.