When we look for somewhere to invest, the main aim is usually to make our wealth grow and stay relatively safe for some time. However, the way in which we invest might be different according to our various needs and situations.
Some might say that investing in real estate is the best way to go. Others advocate investing in stocks and making a working portfolio while keeping an eye on the stock market at all times.
Certain individuals manage to invest a bit of their money in both real estate and stocks. Not everyone is able to go down this path while some others might want to double-down on one kind of investment. Whatever the case, you might have thought about investing in real estate vs. stocks at some point.
The two kinds of investments are obviously different but one isn’t necessarily better than the other. Let’s have a look at the pros and cons of each choice, and then, decide where to make the investment:
Is it Better to Invest in Stocks or Real Estate?
The discussion below will hopefully be useful in deciding whether to spend money in one way or the other:
Investing in Real Estate
If you’re considering real estate the transitional way, there are two major categories to consider.
The first category of investment is that of residential properties. These include your home, any homes that you buy for flipping purposes, and rental properties. The second category of investment is that of commercial properties; think strip malls, office buildings, apartment complexes, etc as the commercial property.
One possible alternative to investing in traditional real estate is to go for REITs. This acronym stands for real estate investment trusts. These are companies that operate and own real estate which produces income. The real estate might include malls, hotels, warehouses, offices, and apartment complexes.
If you decide to go along this route, keep in mind that a reliable REIT will have a stable record of paying up large dividends. These dividends will ideally be growing every year, which is necessary if we want to keep up with the inflation rates.
You can find several online brokers that offer REIT mutual funds and publicly-traded REITs as well. For traditional real estate, though, do consider the following pros and cons:
The Advantages of Investing in Real Estate
Putting some money into real estate is theoretically simple as far as the basics go. The actual buying might include a lot of complications; on paper, however, all you have to do is buy a real estate property, see to its upkeep, perhaps make a few upgrades, and resell the place for a higher price.
You might also want to buy the real estate property and keep it for a rental income. This is only possible if you have properties in addition to your current residence.
Having a physical real estate asset in hand gives you the advantages of feeling like you’re in control of the money you’ve invested. Stocks might allow you to own just a little percentage of a company which doesn’t give any proper control.
What’s more, if you have to find something to invest in, real estate is usually the safer option. If you buy stocks with debt, on the other hand, this is a risky experience. It’s also known as margin trading but it’s best left to the traders who have a lot of experience.
With inflation rates continuously on the rise, it’s also considered wise to purchase a real estate property for the long run. Owning some real estate makes a nice buffer against inflation since rent rates and home values usually increase right alongside this phenomenon.
There are also some possible tax advantages for those who buy any real estate property. As a homeowner, you might be able to qualify for certain tax deductions. However, this situation might vary from time to time.
Yet another tax break could be applicable when a homeowner sells a principal residence. Some exclusion could be allowed to the individual to avoid the capital gains taxes when the proceeds are within $250,000 for a single person or $500,000 for a married couple who are filing jointly.
When owning and selling any commercial property, it may also be possible to avoid any capital gains using a 1031 exchange. This means that the profits are invested right back into a similar property.
Finally, investment properties might be able to earn you tax break due to depreciation. If nothing else, look into the possibility of writing off any loss due to wear or tear for your property.
The Downsides of Investing in Real Estate
One major reason why someone might hesitate before they conduct business in real estate is the amount of work it takes. When you purchase stocks, keeping an eye on the stock market is what’s important. With actual real estate property, the maintenance can be a burden on one’s budget and strength.
Maintaining any kind of property requires that you stay alert and have a backup source of money on hand. Rental properties can be especially draining as tenants will be wearing out the facilities on a regular basis. When a rental property is empty, the deterioration factor is even worse as there’s no rental income to help out.
In a nutshell, owning your properties means sweat equity. This is much more so than if you go for stock investments such as mutual funds purchase stocks from the stock market.
Furthermore, real estate is expensive in itself. It’s also very illiquid. If you decide to go for this type of investment, it requires a lot of cash up front which you can manage if you have mobile homes for sale. On the other hand, getting actual money out of the investment, whether it’s through resale or rents, is a difficult, long, and cumbersome process.
Buying or selling stocks, on the other hand, usually requires just a point and click of the cursor or even your finger with the technology we have these days.
You have to be wary of the transaction costs for real estate as well. Closing costs can be significant for the seller, as this could mean 6 to 10 percent of your sale price. That’s a huge cut, especially when compared to stock trades. The latter have almost no fees these days.
If you’re looking to diversify investments, that’s also difficult if most of your wealth is tied up in real estate. The location really matters here while sales could go down in one place and shoot to the skies in another (without much warning). If you want to diversify your properties according to types and location, your pockets should better be deep and well-lined.
Finally, it’s important to note here that getting a definite return on your investment in real estate isn’t always a done deal. True, property prices usually rise with time, selling your property is always risky. You might suffer tremendous losses; for example of this, just take a look at the financial crisis of 2008. However the same is true for stocks; we have several stock market crashes as a warning.
Investing in Stocks
Buying and investing in stocks has its pros and cons as well. When you get shares, you’re buying some pieces of a company or organization. No matter how minuscule that piece is, it still means that you get some sort of benefit from holding the shares if a company gains success.
Of course, it also means that you stand to lose some money if the value of the shares goes down due to the company facing losses, going bankrupt, or downsizing.
Shares will also give you certain cash dividends. The exact amount of money you get from them depends on the kind of shares you have and what the board of directors for that particular company has decided to give out. The same board also decides how much of the company’s profit that year is to be invested back for expansion, operating costs, etc.
It’s quite easy for any kind of stock to increase or decrease in value. Before you start investing in this department, make sure to study the company you have in mind and see how much of their profits are distributed as dividends.
Be careful in this regard; if any company pays above 60 percent of their profits to shareholders, there might not be enough cash left for dealing with unexpected market changes. The stock market is a risky business in its own way. Here’s what you need to know before taking this step:
Advantages of Investing in Stocks
The first major advantage of investing in stocks is that they’re very liquid. Purchasing or selling public company shares is done in a matter of minutes. You can also look at the exact value of your investment at almost any given time.
Next, it’s easier to have a diversified investment with stocks. Not many people have enough time or money to buy real estate properties in several locations. However, it’s fairly common to purchase stocks in several companies and build up an investment portfolio in that way. One can also purchase shares in index funds, mutual funds, and exchange-traded funds.
Transaction fees are low to none when it comes to stocks. You might have to open your brokerage account for such translations. But discount brokers have waged a price to the extent that stock trading costs are down to 0 most of the time. Your broker may also offer you several index funds, ETFs, and mutual funds with no transaction fees.
Finally, it’s possible to grow your investment within retirement accounts with tax advantages. An employer-sponsored retirement account such as a 401(k) can be used to purchase shares. You can also use an individual retirement account for this purpose. Such purchases can allow the investment to increase in value without incurring taxes or with deferred taxes.
The Downsides of Investing in Stocks
The main downside of investing in stocks is that they’re very volatile. Their prices can go up and down in the short term. So, one needs to have a long view for the stocks they want to acquire. This means that they should purchase with the intention of holding on deposit the volatility.
If you sell your stocks, a capital gains tax might apply. On the upside, though, someone who has held this stock for over a year might qualify for lower tax rates. In any case, there might be more taxes on the stock dividends for every year.
Moreover, stocks might result in one making emotional decisions. Wavering markets might make investors sell even if a strategy to hold on usually gives better returns.
Investing in Stocks or Real Estate?
There's really no final or simple answer to the question of whether one should make an investment in real estate or stocks. The best choice for any individual will depend on their personality, their comfort level with risks, their desire to hold actual property, and lifestyle preferences.
The issue of investment and acquiring property also depends a lot on timing. For instance, if you manage to buy beachfront property within California after the 1960s and cash in a couple of decades later, the return would be extremely lucrative. Stocks wouldn’t have come close in this example. On the other hand, getting early shares of Wal-Mart, Apple, Amazon, and Microsoft would certainly have made for a booming investment portfolio.
Timing is not very predictable when you’re deciding on your investment choices. The first step is understanding the types of investment that are open to us. Being more informed in this manner will help you make better financial decisions to ensure that your money grows and stays secure.
The Takeaway
If you’re confused about deciding between real estate vs. stocks, keep in mind that you’re not limited to just one choice. There’s always the option of purchasing shares for real estate investments. This will also give you the benefit of investing in real estate without the hassle of managing, selling, or buying up actual properties.
At the end of the day, it’s also important to remember that both kinds of investments will require a lot of effort in order to be fruitful. If you’re investing your money in stocks, staying abreast of updates in the stock market is a must. With real estate, one has to face a lot of red tape and other hindrances. Both investments also carry their fair share of risk. The best bet is to be prepared for all foreseeable situations, and then, decide accordingly.
Benzinga's Related Links:
- 6 Best Real Estate Investment Companies in 2021 • Benzinga
- 6 Ways to Start Investing in Real Estate: Step-by-Step • Benzinga
- What is Passive Real Estate Investment? Pros & Cons • Benzinga
- NYCE Launches 'Robinhood Of Real Estate' On App Store
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