Real Estate vs. Stocks: Which is Better for You?
You might not realize it at first, but every decision you make is an investment, simply with varying levels of risk and reward. For example, subscribing to a gym membership is investing in your own health; buying a present for someone is investing in a relationship. Nevertheless, the most discussed form of investment comes in the form of stocks, bonds, commodities, or real estate, where money is invested simply to generate more money in the end, which we refer to as capital gain.
So how do you know which asset class to choose? The answer may be simpler than you think, as long as you take into consideration the following items: your financial needs, goals, risk tolerance, and overall what works best for your personality.
In this article, we'll be taking a deep dive into the differences between stocks and real estate, specifically the advantages and disadvantages pertaining to each asset class so that you could more easily decide which market to invest your money in.
A stock investment essentially refers to the purchase of shares in a company. In reality, it's much more common (and advisable) to hold shares in a portfolio of companies due to the benefits of diversification - diversification is the industry jargon for the saying 'don't put all your eggs into one basket'. Ideally, a well-diversified stock portfolio would include companies of different magnitudes, growth, and industries.
There are two ways to make money while investing in stocks: from an increase in the value of the company's shares, which is the capital gain, or from dividends. A dividend payment is the distribution of profits from a company to its shareholders, and is typically made if the company has recorded a profitable year.
So what makes stocks such an attractive investment that over half of the U.S. population invests in stocks? For starters, most publicly-traded stocks tend to be very liquid. This means that if you need to get your money out of the stock market, it is extremely easy to sell your shares and redeem cash.
In addition to its liquidity, it is much easier to diversify your investments while investing in stocks versus investing in real estate. As mentioned previously, holding a diversified portfolio is highly encouraged not only because it has statistically been proven to generate higher returns, but also because it reduces risk.
Lastly, the initial capital required to invest in the stock market is minimal relative to that of real estate. Even though most companies have a minimum lot size - the minimum number of shares you can buy of a company in one transaction, it is still possible to invest in the stock market with even just $100.
Nevertheless, stocks are not an easy, fool-proof form of investing money, and unfortunately, there is a reason the world doesn't have more billionaires.
Firstly, while stocks are highly liquid, you may not be getting as much profit as you may get in comparison to investing in real estate. In other words, just because you can liquidate your investment into cash quicker, this does not guarantee that the value of your shares would have grown to generate more cash.
Secondly, while it is highly recommended that you diversify your portfolio, it is undisputedly a significant time commitment to learn about all the companies in various industries. Of course, it is also possible to hire a financial advisor, but the fees associated would lower your overall return on investment.
Just as it is important to diversify your stock portfolio to minimize risk and maximize your return on investments, you are also urged to diversify your general asset portfolio as well. This means not investing in just stocks, but in other financial instruments as well, such as real estate.
Real estate can refer to any form of property of any use, and the land and buildings that make up that property. When investing in real estate, you are essentially making a purchase of the property, with the goal of making a profit from it as the value of the property appreciates.
There are four ways to make money while investing in real estate, but we will go into detail on the two more common strategies. (We will discuss tax benefits and loan pay-down in a separate article in the future.) The first is to rent out the property and generate a stream of income from the weekly/monthly rent, while the second is to sell the property for an appreciated, or greater, value than what the property was purchased at.
Now taking a step back and looking at the bigger picture, when you think of investing, you often think about stocks, but in fact, investing in real estate could be a better choice for you for various reasons.
First, participating in the stock market requires a lot of time and knowledge to constantly follow and monitor the financial market. Additionally, real estate generally generates you a more stable and sizable cash flow in the form of monthly rental payments. This can be a quick form of liquid cash, and can also lead to a career as an income property owner, which is a whole other conversation.
Yet, one of the biggest cons to investing in real estate is also the time commitment involved. As an income property owner, you are responsible for maintaining the property, as well as all the pieces that go into renting out your property to tenants. Often times, people aren't able to make this time commitment and, similar to in stock markets, many choose to hire a third-party to manage their investment. In the world of real estate, this would take the form of a property management firm that would be responsible for your income property, facilitating all processes from maintenance to tenant relations.
So Which One's For Me?
In conclusion, there are pros and cons to both investing in stocks and investing in real estate. While holding stocks maintain a higher level of liquidity in terms of your assets, they tend to be more volatile, with stock prices moving substantially within minutes. Meanwhile, real estate tends to be less susceptible to macroeconomic effects and grants you a passive income, but do require a hefty initial investment. Both will require a significant time investment to ensure you understand the market, but when you do, the profits you could potentially generate are substantial.