Real estate vs. stocks, what’s the difference? If you ask a hundred financial advisors about the best two types of investments, you will get the same answers over and over again: real estate and stocks, stocks and real estate.
But ask the same advisors which of the two is better and they are unlikely to reach consensus. That’s because both real estate and stocks are high quality investments that are almost certain to make you successful. However, they each have unique advantages and disadvantages and are highly dependent on the circumstances.
For example, if you bought Apple stock in the 1980s, you are likely pretty happy with your investment, while if you put your savings in Pets.com stock in 2000, you likely got angry when you read that sentence . Same goes for real estate: homes in Logan Circle, DC, that sold for four or five figures in the early 1980s are now at least $ 2 million, while there are people who bought condos in 2007 with their mortgages still underwater to have.
So which is better? It depends on. Let’s round up the pros and cons of each type of investment so you know exactly what you’re getting into with real estate versus stocks.
Invest in stocks
At the base, a stock is just part of a deal. So when you buy a stock you are buying an interest in that business that entitles you to a profit share. That said, if you choose wisely and get in early, stocks are one of the most explosive ways to build wealth.
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Of course, nobody would argue that determining the winners is easy, but when you do, the potential payouts are huge. Look at Apple stock, which sold for 91 cents a share in 1996. A hundred shares would have cost you less than a hundred dollars. The same hundred stocks would be worth more than $ 25,000 today. Even Manhattan real estate hasn’t grown that much.
Benefits of investing in stocks
There are many positive aspects to buying stocks: let’s look at some of the biggest benefits.
History is on your side
In the past century, nothing has created more wealth faster than a solid portfolio of stocks. According to one recognized metric, housing construction achieved an average annual return of 3.7% between 1928 and 2013. Over the same period, the stocks generated an annualized return of 9.5%.
Even if you shorten the length of time to 1975-2013, the stocks returned more than three times the rate of return than the real estate.
Stocks are easy
Once you’ve bought a stock, sit back and wait. If you chose wisely, you will get annual dividend checks when you literally do nothing. Being a landlord, on the other hand, can be a full-time job and a lot more.
Diversification comes naturally
Any decent stock portfolio will contain a number of different stocks, which results in a significantly reduced risk. With one tank in stock, the others can keep the ship afloat.
On the other hand, consider the risks of real estate investing, especially if you are starting out and only own one or two properties. If the value of your property goes down, you will be in a difficult position.
The disadvantages of investing in stocks
But we don’t want to convey an unrealistically rosy picture of equity investments. There are many risks involved in buying stocks. Here are some of the most worrying ones.
It takes tremendous discipline
Buying and selling stocks isn’t a game of chance, but it can feel like it. Ideally, you would buy your stocks and let the market do the work, but many investors find it difficult to defy the practical approach. From the highs of a successful purchase to the lows of a lost investment, these micromanaged investors ride a constant emotional roller coaster ride. Worst of all, this approach almost never pays off. If you’re an emotional investor, stocks can be as much a trap as they are a blessing.
Stock prices fluctuate – a lot
When you buy real estate, you see a steady upward curve over the years or decades. Stocks, on the other hand, can sometimes appear to be flat for years before skyrocketing within days. The opposite is also true: a lucrative stock can fall overnight and lose almost all of its value. This can test the patience of even the thickest-skinned investor.
Invest in real estate
Real estate will always be a first class investment. As the saying goes, they don’t make any more land. Real estate pairs unparalleled security with a great return; If you had invested $ 100 in real estate in 1975, it would have grown to $ 500 by 2013. For a low risk investment, that’s an excellent return.
Benefits of investing in real estate
Let’s take a look at some of the greatest benefits of buying and owning real estate.
When you buy a property, you have bought something physical that has been shown to have a limited supply limit. This type of core value can be tremendously reassuring when the market fluctuates. Conversely, if you own stocks, you will always know that you only bought one line in someone else’s general ledger at any given level.
Real estate is useful
Houses are inhabited, office buildings are used by companies. The fact that your real estate investments have real benefits means that there is always a high floor to their value.
Incidentally, this also means that you can live in the property that you are buying. Given that rent or mortgage payments are the largest expense in the typical American budget, being able to live in your investment can equate to a 20% increase in your salary.
Disadvantages of investing in real estate
While real estate is a low risk investment, there is no such thing as a risk free investment. Real estate is associated with significant risks and disadvantages.
Buying a selection of different stocks is one way to spread the risk. When a stock goes down in value, it doesn’t make your entire portfolio go down. That’s not so if you have all of your money tied up in a property or two. A price bubble, natural disaster, or other bad luck could decimate your wealth almost instantly.
It takes a practical approach
Being a landlord is hard work. You need to screen tenants, perform repairs, or maintain a relationship with a contractor, and keep track of leases and taxes. And if you do choose to hire a property manager to do all of this for you, you will have to give up a high percentage of your rents so that your life is not completely taken over by maintaining the investments.
Illiquid and expensive
If you have money in stocks, you can sell in a day and get a check from your broker. Selling a home takes weeks or months. When you need quick cash, real estate is almost useless.
It can also be incredibly expensive. If you own a multi-unit building and many of those units are vacant, you will need to deposit your own money to cover the cost. After a few months, you might start questioning the wisdom of buying a property.
A note on the 1031 Exchange
Real estate has a special tax break that can allow investors to raise their investments at a ridiculous marginal interest rate. The 1031 exchange is a provision in the tax code that essentially lets you sell your investment property, defer capital gains taxes (which can be up to 40%), and put all of that money into a more expensive investment.
This way, real estate investors can repeatedly turn a property into a more expensive property without Uncle Sam getting his debt until much, much later. There is no equivalent mechanism for stocks. With that in mind, real estate might be the better investment for the ambitious, brave investor.
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