How to Decide if You Should Invest in Real Estate or Stocks?
Deciding on Real Estate or Stocks
When it comes to investing, a big and common question is whether one should invest in real estate or stocks, and the answer changes depending on whom you ask. That’s because there really is no right answer. What is good for one person is not necessarily good for another.
Sometimes, real estate performs better and sometimes stocks do. Choosing either real estate or stocks is something that must be done by comparing the two options and determining which fits you best.
Investing in Real Estate
Most people are comfortable with the idea of investing in real estate. At the very least, they are familiar with the idea. They tend to feel less comfortable with the stock market even though it has historically been a great way to wealth. So why is real estate more comfortable for people?
I could be off on this, but I think our views toward the stock market are due to fears passed down through our families. My great grandmother lived during the Great Depression, and she lived in fear of losing everything for the rest of her life. This is an understandable feeling and I know she is not the only one. It is hard to live through something so traumatic and not be affected.
Invest Wisely. The Wealthry Store Can Help.
Her fears passed down to my grandmother which continued to pass down. Eventually, it was not fear so much anymore but more a learned behavior. I feel as though our fears and discomfort with the stock market are due to this learned behavior.
Regardless of where the feelings come from, the truth is that when faced with the choice of real estate or stocks, people are just more comfortable with real estate. This does not necessarily make it the best choice, though. Let’s take a look at the pros and cons of investing in real estate:
Pros of Real Estate Investing
1. Real Estate is a Tangible Asset
There is just something about being able to see and touch your property. Sure, it might be awesome to own a giant chunk of Starbucks or Walmart, but you cannot really see that. You see numbers on paper or your screen, but you cannot see or touch the actual stock. Having a piece of real estate is different. You actually have a physical item that you can say, “Yeah, I worked hard for that,” and feel good about yourself. You can show it off to friends if you want. You can even paint it neon green if you are so inclined. Real estate is an asset that you can actually engage with.
Additionally, you can use your property for personal use if you need to. Let’s say you decide to move out of your current home for whatever reason, or you need to move out while repairs are done. As long as it is not currently rented, you can live in your investment property instead of having to find an entirely different place. This is not something you can do with stocks, of course.
And, unlike stock, a piece of property does not simply vanish if the market tanks. You will still have that piece of property.
2. Lower Risk of Fraud
As long as you do your research, there is a much lower chance of you getting scammed with real estate than with stocks. Unlike buying stock which you do online, through various financial management tools, or through a third party, with real estate you actually show up in person at the property.
It is pretty hard to scam someone that can see the place for himself or herself and get an inspection of it. That is not to say that no one has ever been scammed on real estate, but if you do your due diligence, the chances of it decrease significantly.
3. Typically Appreciates
Unless you let your real estate property fall into disrepair, it should continually appreciate throughout ownership. Real estate is usually considered a long term investment because the longer you hang onto it, the higher your profits should be. You can pretty much count on a well-kept home increasing in value over time. The same is not necessarily true with stock.
4. Highly Recommended By Wealthy People
Many well known wealthy people recommend investing in real estate, claiming that it is the best way to wealth. These recommendations come from people like the late Andrew Carnegie and Franklin D. Roosevelt, Warren Buffett, Suze Orman, and so many more. When you want to become something, in this case a wealthy investor, it is wise to take advice from wealthy advisors.
5. A Source of Passive Income
Real estate rentals provide a passive income. Yes, they do require some work, but passive does not necessarily mean you never mess with it. Passive more so means that it mostly runs on its own but still requires some maintenance. If the property is occupied and the tenants are paying their monthly rent payments, you are receiving a passive income.
6. You Are In Control
With real estate, you are in control. Granted, some things may occur that you cannot control, but the property is yours to make decisions about. There are steps you can take to improve the property’s value and increase the profits you make.
With stocks, your control is very limited. In fact, most control you have is what stocks you invest in and how much you put into them. You cannot raise the value of the stock yourself. You are simply at the mercy of the stock market as a whole.
7. Deductions
Most of the time, any maintenance and renovations done on the rental home can be written off as a business expense. You still have to come up with the money to fix it upfront, but tax deductions can help level it out some. And though you will likely have to pay capital gains tax, you can usually take steps to minimize the rate you must pay.
8. Investing With Money You Do Not Have Yet
One of the cool things about investing in real estate is that you can start with money you have not yet earned. If you see a $80,000 property you want to purchase but only have $20,000, you can take out a mortgage for the rest. You do not have to wait until you have the additional $60,000 from your income before you get started. While this is helpful for those wanting to get started, remember that this means you are taking on debt. If you get a mortgage, you only need to do so after careful consideration.
9. Timing the Market
It is pretty much a lost cause to even think about trying to time the stock market. One second it can be great, the next terrible, and the next back to great. There is virtually no way to tell. All it takes is one ill-timed rumor spreading for everything to go haywire. Due to this, there is just no way to time the market as it is at the mercy of some many different people and factors.
The housing market, on the other hand, can potentially be timed. First, there are certain times of year that are better than others for buying and selling homes. Second, trends tend to move from one area to another, so you can usually see changes coming before they reach you. Also, it usually takes a while for changes in the housing market to take their full effect, giving investors time to make any changes if they want or need to before the effects hit them.
Cons of Real Estate Investing
1. Requires More Work
Real estate requires more work than stock does. There is the process of leasing, maintaining the property and repairing problems, occasional evictions, and more. When you invest in stocks, it is really a set it and forget it type of thing. What you could do, however, is consider hiring a property manager, which can lessen the amount of work you personally have to do.
2. Higher Initial Investment
An initial investment for real estate is much higher than an initial investment for most stocks. Most mortgages require a 10 to 20 percent down payment, though you can sometimes get by with lower. Even if you do not take out a mortgage loan, you are easily looking at tens of thousands of dollars for the initial purchase. That, of course, is not including any money that must go into advertising, leasing, renovating, and more to get that property making you money.
3. Costs You When Empty
Whether you have tenants occupying your space or not, it is still costing you money. If you have a mortgage on the property, you will have to cover that, but it does not stop there. There are still taxes, insurance, utilities, and maintenance if anything goes wrong. If you do not have a mortgage, it will impact you a little less, but there are costs regardless.
When your property is empty, though, that is an even harder hit on your personal finances. The monthly rent is intended to cover the mortgage payment. If you are not receiving that payment, you are going to have to cover the mortgage yourself. And sometimes homes sit empty for months at a time.
4. Not Easily Liquidated
If you find yourself in need of quick cash, your real estate is not going to help you out. The process of listing and selling a house- which can take weeks, months, or years- takes way too long for it to be able to handle any emergencies. Your investment in real estate should not be considered an emergency fund at all.
Investing in Stocks
Now, let’s talk for a minute about stocks. They seem scary but they really are not so bad. With stocks, you are buying a piece of the company. When that company makes money, so do you. When it loses money, you do as well. You want to buy the stocks at a low price and sell them at a higher price. That, my friends, is Stocks 101.
Obviously, there is more to it, but that is the basic concept. Since you need more information to make an educated decision, let's look at the pros and cons of choosing this route:
Pros of Stocks
1. You Own a Piece of a Company
As I said, when you purchase stock, you are buying a piece of a company. As a co-owner of the company, you benefit when the company benefits. Let’s say you have stock in Apple. When they introduce a new device and millions of people buy it, the portion of the company that you own gets a piece of that.
2. Easily Liquidated
If you have an emergency and need money fast, stocks can be easily liquidated. This is a great thing, but it is best if you have your emergency fund elsewhere. You do not want to have to rely on the stock to cover emergency situations.
You make money through investments by buying low and selling high. If an emergency hits on a day that your shares are below the price you paid and you have to cash them out, guess what? You just lost part of your investment. Still, it is nice to know that you can easily liquidate your stock if you need or want to.
3. Lower Initial Investment
You can start investing in stocks with as little as $5- a much lower required investment than real estate. It is important to note, though, that while $5 can get you started, it does not buy you a ton of stock. It can start you off, but that’s about it. To make real money in the stock market, you will have to put more money in.
4. Dividends
When companies make profits, they either reinvest those profits into the business or pay dividends to their shareholders. If you have stock in a company that pays out dividends, you will have some extra, passive income. The amount of those dividends depends on the amount of profits and several other factors, but it is still an income.
Cons of Stocks
1. Riskier
The stock market is an ever-changing thing, so predicting how much you will earn or even whether you will gain or lose is not possible. This is a big reason people are scared of the stock market. When choosing either real estate or stocks, it is understood that even if the housing market tanks, you still have the property. This means that you will at least be able to recoup some of your money. With stock, you can literally lose most of or your entire investment.
For instance, say you buy stock in a company for $10. As that company grows, your $10 stock increases in value, so it is now worth $100. You can either sell it now for a $90 profit or you can hang onto it and see if the value increases more. Whether you choose to keep it or sell it, you are taking a risk. If you sell it now, there is a chance it could be worth $200 in a week. If you keep it, there is a chance it will only be worth $1 tomorrow. The stock market is risky, but it can also produce amazing rewards.
Most often, new beginners make the mistake of cashing out too soon. If the value in a company drops, they decide to sell their stocks before they lose all their investment. Unfortunately, this is not how to handle money you invest in the stock market.
Remember when I said the way to make money through stocks was to buy low and sell high? Well, selling stocks the second the value drops is the opposite of that. When these investors sell their stock, they are selling it low. Someone swoops in and buys it, and down the road, they reap the rewards.
Many businesses recover from losses, and if you can leave your stock alone for a while, you will also reap the rewards. While stocks decreasing in value can be scary, it is normal. To make you feel more confident in your investments, choose stock in companies that have a history of bouncing back.
2. No Utility
With stock, the only thing you get is the value of the stock itself. There is nothing you can do with it besides hold it or sell it. You cannot sleep in it if you find yourself in need of a place to crash like you can a home. Stocks only value is as an invisible piece of a company.
How Do I Choose Between Real Estate or Stocks?
As you can see from this article, choosing either real estate or stocks is not such a simple question to answer. Instead, you have to consider the following:
Which option suits your goals better: Real estate or stocks? Were you hoping to be active in your investing or just looking for passive income? Is your goal to run a business as a property owner? What are your goals exactly and which option will fit best?
Here is a simple one. Which do you have the money to start with right now: Real estate or stocks? Are you on a tight budget? Do you have a down payment for a house? Can you get approved for a mortgage loan? Your financial situation can help you determine if you should purchase real estate or stocks, at least for now.
You can always invest in the other later, which is actually a good move to make. Start with one investment. Eventually, invest in the other option as well.
You have the potential of losing whether you choose real estate or stocks, but the level of risk is different. How much risk can you emotionally and physically tolerate?
Answer those questions and you should know which option to choose.
Conclusion
No matter if you choose real estate or stocks, there are both risks and rewards, but that is how life goes. The most important thing is that you make an informed decision that is based on your goals and your personality, and financial status. In order to start investing at all, you need to first save up some money. You can do that in many different ways, but we would suggest opting for a savings account. It’s an easy and very convenient option, that will allow you to create a habit of saving and also help you build your wealth. Below you can find some of our favorite options:
In addition to learning about these investments on your own, consider speaking to a financial advisor who can help you create a path to reach those goals.