Investing in stocks vs real estate is a great way to grow your money.
But which should you choose?
This article breaks down the similarities and differences between the two, so you can make an informed decision about where to put your money to work for you.
Which is more profitable Investing in Stocks vs Real estate?
Investing in stocks or real estate? Both offer a degree of investment security and relatively low risk, so which one is right for you?
The truth is, there’s no right answer to that question because it depends on your personal investment goals and how long you plan to hold your investments.
If a quick return on your money is what you want, then stocks might be better suited for you. But if a longer-term investment with room for appreciation is what you’re after, then real estate might be worth considering as well.
Before deciding which avenue to pursue, consider these key differences between investing in stocks vs. real estate and decide what works best for your situation.
Pros and Cons of investing in Stocks vs Real estate
Pros of investing in stocks
It’s accessible (almost) everyone can invest in stocks: All you need is a little bit of money, and most brokerages don’t charge trading fees for casual investors.
It’s lucrative: historically, stocks have returned about 7% more than bonds and about 5% more than real estate over periods of 30 years or more.
There are tax advantages: Depending on your income and portfolio size, you may be able to avoid paying taxes on certain types of stock returns until you sell your investment.
Passive investing is possible with index funds: By buying an index fund that tracks a broad market or economic sector (like small companies), it’s possible to get market exposure without having to make any changes as trends change or new opportunities arise.
Investing in stocks allows us to invest passively like that.
When combined with other investments, it can help diversify your overall portfolio: if you hold stocks from several different sectors—such as health care, technology, energy, and financials—your investments will likely behave differently when various sectors perform well or poorly.
That means they’ll also help reduce some of the risk inherent in holding only one type of asset class—say just bonds—in your portfolio (that’s another benefit).
Because owning multiple assets reduces risk and makes investing easier.
Cons of investing in stocks
There are three downsides to investing in stocks that you should be aware of:
1) Volatility – Stock prices can fluctuate significantly and are sometimes driven by a bad story on CNBC.
2) Uncertainty – Markets can take years to climb back to previous highs after market crashes.
3) Trading Costs – If you trade your stocks frequently, you’ll pay hefty trading costs (commissions and bid/ask spreads).
Pros of investing in real estate
1. Positive cash flow – buying real estate almost always generates positive cash flow because rents are greater than mortgage payments
2. Appreciation – although there is no guarantee that home prices will increase, history tells us they generally do so over time
3. Long-term stability – people need shelter and if you own a home or commercial property, you’re more secure against unemployment and/or other unforeseen negative events
4. Diversification – most investors rely heavily on stocks for their returns, but some investors may have a higher appetite for risk and benefit from adding other asset classes to their portfolio
5. Capital gains tax break – if your income is below certain thresholds and you sell your property at a profit, your taxes are usually lower.
Cons of investing in real estate
The advantages of investing in real estate are numerous, including appreciation of value and income generation through rental properties.
Unfortunately, real estate also has several disadvantages:
High entry costs: To buy a property, you have to pay legal fees, property taxes, and insurance.
Low liquidity: If you decide to sell your property, there’s no guarantee that you’ll be able to find a buyer or that they’ll meet your asking price.
Location-specific risks: A great investment opportunity isn’t always right around the corner.
Home values can plummet when local industry shuts down or when natural disasters strike (and when it comes to picking locations, it’s not all about location).
Property manager issues: When you invest in real estate, you still need somebody to manage it.
Investing in stocks gives you more flexibility and less hassle because shares can be bought from anywhere with an internet connection.
So if your chosen property manager is no longer doing a good job (or just isn’t showing up), nothing is keeping you from hiring someone else who will do better.
How to choose between investing in stocks vs. real estate
There are countless options out there when it comes to choosing between investing in stocks vs. real estate, but there are a few key points you should consider before you do so:
1) How long are you planning on investing?
2) What is your financial situation?
3) How much risk are you willing to take on to grow your portfolio?
4) Are you ready for commitment in both time and money?
Once completed, weigh your options based on what’s most important to you, what resources and know-how you have access to, etc., and decide how best to invest accordingly.
Tax implications for each form of investment
If you’re looking to diversify your investment portfolio, real estate and stocks can both provide you with significant growth potential.
It’s important to understand that any gains you make are taxable. If you own a rental property, for example, every year your income from that property will be subject to state income taxes (and possibly local taxes as well).
When it comes to stocks, on the other hand, gains may be subject to capital gains tax when they’re sold; however, depending on how long you hold onto your investment, those gains may not be taxed at all.
This can be beneficial because it means your assets will retain more of their value.
3 Tips to make it work
1) Stick to your area of expertise. If you know nothing about real estate, it makes sense to invest in stocks.
If you’ve mastered one but not both, go with whichever is more exciting and fun for you right now!
2) Do your research. Know what you’re getting into before putting any money down, whether that’s a few hundred or a few thousand dollars.
3) Hone your skills at both (or either!) as much as possible.