Should I invest in real estate or stocks? or Real Estate vs Stocks Probably this is the most asked question out there, and maybe the reason you are here too!
Actually, there isn’t a direct answer to that because a lot of it comes down to your personality, preferences, and style. It also comes down to the specifics of each investment. Whether it’s planning for retirement, saving for a college fund, or earning residual income, you need an investment strategy that fits your budget and your needs. But, determining the best way to invest can be challenging.
That’s why I have created a detailed comparison between the two. Just keep reading to find out…
Table of Contents
Real Estate vs. Stock Investments
Stock Market.
Stocks are an equity investment that represents a piece of ownership in corporations and entities. When you purchase a company’s stock, you’re purchasing a little piece of that company, called a share.
Investors purchase stocks in companies they think are gonna go up in value in the future. If that happens, the company’s stock will increase in value as well. And the stock can then be sold for a profit.
Ready to learn more about stocks? Read this article!
I recommend you read our full guide on how to Invest in stocks for beginners, but for now, here are a few of the routes you can take with stock investing:
Individual stocks
I’d recommend investing in individual stocks once you have a complete understanding of the stock market and how stocks work.
You significantly reduce your diversification and increase your risk by investing in just a handful of individual stocks. The reward can be higher, though, because you become more targeted.
Mutual Funds
Rather than buying one stock, mutual funds enable you to buy a basket of stocks in one purchase. The stocks in a mutual fund are typically chosen and managed by a person or group of people.
These fund managers make the decisions about what stocks the fund holds and how much of each they want to invest in, they also charge a percentage-based fee when you invest in their mutual fund.
Most of the time — this fee makes it difficult for investors to beat the market once they invest in mutual funds. Also, most mutual fund investors don’t actually ever beat the market.
There are pros and cons to this as you can imagine, but some people feel more comfortable having a human managing their money versus an algorithm (created by Robo-advisors).
Mutual funds offer three major benefits:
- Convenience — by investing in a mutual fund you get to own a bunch of different stocks all in one package.
- Diversification — is a strategy that reduces your investing risk by spreading out your eggs.
- They are managed by investment professionals
But, that doesn’t mean mutual funds are 100% amazing. convenience and Diversification are definitely good benefits, but the problem with having professional fund managers is that they charge a lot of fees (usually that charge an annual fee of 1-2%).
Index Funds & Exchange Traded Funds (ETFs)
ETFs are basically a basket of stocks that act as a single stock. You buy it as you would with an individual stock, but it’s basically a fund that encompasses multiple other stocks. For example, you can buy an ETF that has Google, Amazon, and Facebook all in one basket, so you get exposure to all three companies.
ETFs are very similar to Index Funds except for one major difference: with index funds, you can only buy and sell shares once a day. but with ETFs, you can buy and sell your shares whenever the stock market is open. Even though an ETF is not stock, you can buy and sell ETFs as if they were a stock.
Unlike Mutual Funds, Index funds and ETFs are passively managed, which means the fees are much lower.
P.S.: here’s the key point. if you have the time, knowledge, and desire necessary to invest in individual stocks the right way, we absolutely encourage you to do it. If not, there’s absolutely nothing wrong with building a portfolio of low-cost ETFs and mutual funds to take the stock-picking part out of the equation.
Real Estate.
Real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of making money. It generally breaks down into four categories: residential, commercial, industrial, and land.
Real estate can be a very lucrative investment, but it requires huge time, commitment, patience, and most importantly, money.
» Ready to learn more about real estate? Read this article!
I recommend you read our full guide on How to Invest in Real Estate For Beginners, but for now, here are a few of the routes you can take with real estate investing:
Invest In Residential Real Estate
Investing in residential properties is exactly what it sounds like. You buy a house as an investment, usually to rent out and capitalize on the rental income.
Investing in residential properties has been the most common path for a long time. Primarily because investors are drawn to the (almost) guaranteed monthly income it produces. It’s also easier to manage a home than a commercial building.
Fix & Flip
The other side to residential investing you see is “flipping.” Flipping property is when you buy it at a reasonable price, upgrade it, and sell it within a short window of time. often that time ranges from a couple of months up to a year.
Flippers don’t have the intent of having rental tenants or holding onto the property for long periods of time. Flipping homes can produce huge gains, but you’re also taking a big risk, hoping that your home improvements will pay off.
It’s a process and one that requires a solid knowledge of real estate and home improvement. Even profitable flips can seem like money losers for a long time. You have to be patient if you’re going to commit to this business model.
Invest in Commercial Real Estate
Commercial property (retail buildings or office buildings) is an intriguing option for those that want to invest in real estate beyond just residential property. It’s costlier, and you may want to look for partners in this investment.
As owner or part-owner of the property, you can rent it out to businesses in need of space. It is high-risk, high-reward real-estate investing. Income made from renting space to businesses is generally higher than that from residents, and often the contracts to lease commercial buildings are longer than residential ones.
Invest in REITs
REITs, or real estate investment trusts, allow you to invest in real estate without having to do the legwork that you normally do when you invest in physical real estate. often compared to mutual funds. They’re companies that own commercial real estate like office buildings, retail spaces, apartments, and hotels.
REITs only require capital from their investors. Therefore, property investors buy shares of the REIT, while property ownership belongs to the REIT, which splits the profits in exchange for your investment.
REIT investors receive a passive income in the form of dividends depending on the performance of the REIT’s investments. This investment strategy is the best for somebody who is thinking of entering the real estate investing industry but doesn’t have a big capital for purchasing investment property nor the time for owning the property and having to deal with tenants, property management, etc.
In addition, REITs typically own multiple investment properties. Thus, investing in REITs not only means minimal responsibilities for the real estate investor but also a diverse real estate investment portfolio!
Invest in real estate online
Last but not least, don’t forget about all the new companies that are helping investors get involved in real estate without getting their hands dirty.
Websites like Fundrise and Realty Mogul allow you to invest in commercial or residential real estate investments and receive cash flow distributions in return. Investing in these Websites is similar to investing in REITs.
The cash you invest could also be used to purchase residential property, commercial real estate, apartment buildings, and more. Plus, you get the advantage of dividends and distributions and long-term appreciation of the properties you “own.”
While neither company has been around for too long, they’re both performing well so far. Fundraise returned an average of 11.4% on invested dollars in 2017 net of fees and 9.11% in 2018 after all, and you don’t need to be an accredited investor to open an account.
Rent out your spare Space on Airbnb
Airbnb is an online platform that permits property investors to rent out real estate investment properties of all types (whether apartments, vacation rentals, residential homes, or even just a room) for a short time period.
One of the main reasons why Airbnb is gaining popularity is the fact that it’s a great way for almost anyone to become a real estate investor and make money without buying an investment property. As an Airbnb host, you don’t need to own investment properties to rent as an Airbnb! A real estate investor can rent out the basement or even an extra room in his/her own residential home.
Investing in real estate through Airbnb offers property investors more flexibility as well because, as Airbnb hosts, property investors can choose when to rent out, who their guests will be, and the nightly rate price to charge.
Buying investment property to rent it out is not an obligation for Airbnb hosts, they can be part of real estate investing and start making money from the comfort of their own homes!
P.S. If you don’t have the time and downpayment to buy a property or you just don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, which is one of the largest real estate crowdsourcing companies today. Using Fundraise you can invest a relatively small amount, and take part in large-scale residential and commercial real estate projects that you otherwise would have no ability to jump in on.
Benefits and Disadvantages
Both have their pros and cons, and there are several aspects of each that make them unique investments in their own way. Making money with either investment requires that you understand the positives and negatives of both.
Pros and Cons of Real Estate
Pros:
- You have a lot more control of your overall investment success with real estate than with other investing classes.
- Real estate’s unique tax benefits allow investors to grow their wealth over time.
- You can use the power of leverage to quickly grow your real estate holdings and accelerate your wealth-building results.
Cons:
- You need money to make money. While you can buy shares of stock with a minimal cash outlay, real estate investing requires money.
- Real estate should always be bought with a longer-term strategy. You’re buying a tangible asset that you can’t quickly liquidate for cash if you need emergency funds.
Pros and Cons of the Stock Market
Pros:
- Perhaps the biggest draw to the stock market is the potential to make a lot on your investment in a short amount of time.
- Unlike real estate, investors can easily access money in the stock market. Within seconds, you can sell, buy, and trade as you see fit.
- Investing in the stock market can help bolster your entire financial portfolio. You can allocate your funds to your retirement. Best of all, these funds then remain tax-free until you use them.
Cons:
- In the stock market, there are winners and losers. Winners can make money, but those who lose can see all of their investments disappear.
- Investors can expect daily volatility in the stock market, but large failures in the system are less common. However, when they do happen, it can take years to recover.
Final thoughts
Real estate investments offer an alternative to the stock market. Under the right circumstances, they may be low risk, may yield better returns, and generally offer greater diversification.
If you’re trying to decide between investing in the stock market and investing in real estate, your best option may be to buy shares of a real estate investment trust (REIT). A REIT combines the benefits of stocks with some of the benefits of owning real estate.