Reasons to Invest in Real Estate and Stocks

Many investors traditionally exchange As a place to put their investment dollars. While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right conditions, real estate It can be an alternative to stocks that offer lower risk, provide better returns and generate more returns. diversification.

Whether planning for retirement, saving for a college fund, or generating residual income, individuals need an investment strategy that fits their budget and needs. A good starting point is to compare real estate investing to buying stocks.

Overview: Real Estate vs. Stocks

Investing in real estate or stocks is a personal choice that depends on your financial situation, risk tolerance, goals and investment style. Since buying stocks doesn’t require a lot of time or money, it’s safe to assume that more people are investing in the stock market. If you are purchasing real estate, you will need to save and invest a significant amount of money.

When you buy a stock, you buy a small piece of that company. Generally speaking, you can make money with stocks in two ways: appreciation and dividends as the company’s shares increase.

When you buy real estate, you acquire physical land or property. Most real estate investors Make money by collecting rents (which can provide a steady stream of income) and appreciation as the property increases in value. Additionally, because real estate can be leveraged, it is possible to expand your assets even if you cannot afford to pay cash directly.

For many potential investors, real estate is attractive because it is a tangible asset that can be controlled with the advantage of diversification. Real estate investors who purchase real estate have something tangible for which they can be accountable. Attention real estate investment trusts (REITs) are a way to invest in real estate and are bought and sold like stocks.

There are a number of issues that investors should consider when choosing between investing in stocks or purchasing real estate as an investment.

Returns: Real Estate vs. Stocks

Investing in the stock market makes the most sense when paired with benefits that increase your returns. company matching In a 401(k). However, these benefits may not always be available and there is a limit to how much you can benefit from them. Investing in the stock market independently can be unpredictable and return on investment (ROI) is often lower than expected.

Comparison of returns Comparing real estate and the stock market is an apples-to-oranges comparison; The factors that affect prices, values ​​and returns are very different. But we can get a general idea by comparing the total returns of the SPDR S&P 500 ETF (SPY) and the Vanguard Real Estate ETF Total Return (VNQ) over the last 17 years:

As the chart shows, both real estate and stocks can take a big hit during a recession. Note the big declines that occurred in 2008 Great Recession and 2020 COVID-19 crisis.

Risks: Real Estate vs. Stocks

housing bubble The banking crisis of 2008 led to a collapse in the value of real estate and stock market investors, and the COVID-19 crisis is doing so again, albeit for different reasons. However, it is important to remember that stocks and real estate generally have very different risks.

Real estate

Here are some things to consider when it comes to real estate and the risks associated with it. Most important risk What people overlook is that real estate requires a lot of research. This is not something you can casually enter into and expect instant results and returns. Real estate is not an asset that can be liquidated easily and converted into cash in a short time. This means that you cannot convert money into cash when you are in a difficult situation.

for home fins or those who own rental properties, there are risks that come with dealing with repairs or rental properties. Some of the main problems you will face are costs, not to mention the time and headache of having to deal with tenants. And you may not be able to postpone them when there is an emergency.

As an investor, you may and may need to consider hiring a contractor to repair and renovate your gate or a property manager to oversee maintenance of your rental. This may reduce your earnings, but it reduces the time you spend monitoring your investment.

stocks

The stock market is subject to several different types of risks: market, economic and inflation risks. First, stock values ​​can be extremely volatile as their prices depend on market fluctuations. Volatility can be caused by geopolitics and company-specific events. For example, let’s say a company operates in another country, this overseas division is subject to the laws and rules of that country.

But if there is a problem in the economy of that country or a political problem, the shares of that company may be damaged. Stocks are also subject to the economic cycle as well as monetary policy, regulations, tax revisions and even changes in interest rates set by a country’s central bank.

Other risks may arise from the investor himself. Investors who choose not to diversify their assets also expose themselves to greater risk.

Consider this: dividend paying stocks It can generate reliable income, but a significant investment in a high-yield dividend stock is required to generate enough income to sustain retirement without selling additional securities. Relying solely on high-yielding dividends means an investor may miss out on higher growth investment opportunities.

Pros and Cons: Real Estate

Real estate investors have the opportunity to gain leverage on their capital and enjoy benefits. significant tax advantages.Although real estate is not as liquid as the stock market, it provides long-term cash flow, passive income and the promise of appreciation.

Despite this, it is important to consider the amount of money spent on real estate investments. Unless you’re doing an all-cash deal, you’ll need to have the ability to get a down payment and financing.

Because real estate is not that liquid, you can’t rely on selling your properties right away when you need them. Other disadvantages include the costs associated with property management and the time investment spent on repairs and maintenance.

Pros and Cons: Stocks

For most investors, it doesn’t require a huge cash flow to get started in the stock market, making it an attractive option. Unlike real estate, stocks liquid and are generally easily bought and sold, so you can rely on them in emergencies. With so many stocks and ETFs to choose from, it can be easy to create a well-diversified portfolio.

However, as mentioned above, stocks tend to be more volatile, leading to a riskier investment, especially if you are investing. panic selling. Selling your stocks may result in capital gains tax, making your tax burden heavier. And unless you have a lot of money in the market, your assets may not grow much.

Additional Factors to Consider

Buying a property requires more startup capital than investing in stocks, mutual funds, or even REITs. However, when purchasing real estate, investors have more leverage over their money, allowing them to purchase a more valuable investment vehicle.

Putting $25,000 in securities buys $25,000 in value; Assuming you don’t use margin. Conversely, the same real estate investment could purchase a property for around $125,000 with a mortgage and tax-deductible interest.

The cash generated from the rent is expected to cover the mortgage, insurance, property taxes and repairs. But a well-managed property also generates income for its owners. Additional real estate investment benefits include depreciation and other tax write-offs.

Real estate that provides monthly rental income can increase with inflation even in a region where rent is controlled, which provides an additional advantage. Another consideration is taxes after the sale of the investment. Selling stock usually results in capital gains taxes. Real estate capital gains may be deferred if another property is purchased after the sale. 1031 exchange in the tax law.

In conclusion

Real estate and stocks offer both risk and reward. Investing in the stock market is of great interest as a retirement investment vehicle, especially for those who contribute regularly to a tax-advantaged account such as a 401(k) or 401(k). individual retirement account (IRA). But diversification is important, especially when it comes to long-term savings.

Investors should choose various asset classes or sectors to reduce their risk. Investing in real estate is an ideal way to diversify your investment portfolio, reduce risks and maximize returns. Remember that many investors invest money in both the stock market and real estate. And if you like the idea of ​​investing in real estate but don’t want to own one and manage propertiesa REIT may be worth a second look.