Real Estate vs. Stocks

When you’re ready to invest, you might join the long-running debate: real estate vs. stocks. Potential investors always want to know whether real estate vs. stocks is the better investment. 

Since 2011, Gallup Inc., the multinational analytics and advisory company, has been involved in the debate, asking Americans to choose the best investments among real estate, stocks, gold, savings accounts, bonds and cryptocurrency (added in 2022). 

Real estate has consistently beaten out stocks in the minds of investing Americans for the last decade. However, here’s a comparison of real estate vs. stocks to help you decide whether you want to include either asset in your investment portfolio.

Investing in Stocks

Stocks, also known as equities, are company ownership shares. Buying a company's stock makes you a shareholder with certain rights, such as voting, receiving a share of profits (dividends) or staking a claim on assets if the company goes bankrupt.

The type of stock you hold determines your rights. If you own common stock, you can vote on certain company matters and may receive dividends. With preferred stock, you don’t vote, but you hold a priority on dividends and claims to company assets.

Companies issue stock to pay for expansion, launching new products, paying off debt and more.

You can buy and sell stocks on stock exchanges, where supply and demand determine prices. Market volatility can cause stock prices to rise and fall and company news can also impact stock prices.

Pros

• Capital appreciation
• Dividends
• Tax advantages
• Diversification
• Liquidity
• Potential high returns

Cons

• Market volatility
• Company performance
• Geopolitics
• Inflation
• Interest rates

Investing in Real Estate

Real estate investing is buying property you manage, rent or sell to earn a profit. Buying real estate could include purchasing residential property to be used as your primary residence, a rental property or a vacation home. You could also buy commercial property, such as office spaces, retail centers, industrial sites, multifamily housing, hotels or special-purpose facilities.

Pros

• Rental income
• Property Appreciation
• Tax benefits
• Diversification
• Inflation hedge
• Potential to build capital

Cons

• Market fluctuations
• Maintenance costs
• Negative cash flow
• Interest rates
• Politics and regulations
• Illiquidity

Comparing Real Estate vs. Stocks

When you compare investing in real estate vs. stocks, you can see the pluses and minuses of investing in either asset. You can also better understand which asset fits your investment strategies and goals by closely examining the cost of ownership, returns, liquidity, accessibility, taxes and risks.

Cost of Ownership

The total cost of ownership (TCO) is the cost to buy an asset plus the cost of operating and maintaining it over its lifetime. This data point can help investors compare homes for sale or decide which company stocks to buy. 

Knowing an asset's TCO can help a business in many ways, including beating a competitor’s price when it has a lower TCO for the same product or service. Investors often choose businesses with low TCOs and more investors buying a stock can boost its price. 

In real estate, you can compare more than the purchase price of a property by looking at all costs, including maintenance, depreciation, cleaning and renovations. One property may have a lower purchase price but a higher TCO than another. 

Returns

A return is the total gain or loss on an investment that you experience over a specific period. It’s typically expressed as a percentage of your initial investment. It measures the investment’s total capital gains (price appreciation of a stock or property) and any income (stock dividends or rental income) from a property. 

Many factors, such as the economic climate, market conditions, and interest rates, can significantly impact stock returns. Real estate and earnings growth may be the most significant factors impacting stock returns.

Liquidity

The liquidity of an asset refers to how fast it can be sold and turned into cash. For you as an investor, the ease or lack of ease of selling an asset can be an advantage or disadvantage, depending on your investment goals. 

If you’re considering liquidity when comparing real estate vs. stocks, stocks are typically more easily converted to cash than real estate. You can sell a stock in a few seconds, whereas selling a piece of real estate – finding a buyer and meeting legal requirements – can take weeks or months.

Accessibility

Neither real estate nor stocks has a particularly high barrier to entry, but the barrier to investing in stocks may be easier to cross. You can purchase a company's stock with a small amount of capital. Even a down payment of 3.5% – and the usual 20% – when buying real estate can require investing a lot of up-front capital. 

You also can find more centralized information about company stocks than you will find about properties. From annual reports to daily news coverage, stock information is more readily available than real estate information, which requires knowledge of local real estate markets, searches of records and more.

Taxes

Regarding taxes, real estate gets the edge, especially if your investment is your home. You can deduct interest on your mortgage, property taxes and property depreciation on your tax returns. 

If your stock appreciates and you sell it, you must pay capital gains tax. However, that’s not necessarily bad. The tax you pay is based on whether you held the stock for a year or less and you might be able to avoid paying the tax by offsetting the gain with a capital loss, which is called tax-loss harvesting.

Risk

Choosing between investing in real estate and stocks may depend on your risk tolerance. All investments have risks, but stocks and real estate risks differ. 

As an asset class, stocks tend to be volatile, with prices of stocks and values of companies rising and falling based on economic news and earnings reports. The risk in investing in real estate comes with putting a large amount of capital in a property up front and not knowing what additional costs you might have later.

Consider Whether Investing in Real Estate vs. Stocks Is for You

Investing in real estate and stocks comes with risks and benefits. You can choose which better aligns with your investment strategies and goals or realize that you don’t have to choose. Adding real estate and stocks to your investment portfolio can improve diversification, lessening your overall investment risks.

Frequently Asked Questions