Real Estate Investing vs. Stocks: One or Both?
About the author: Diana Eastman is a professional freelance writer from Orlando, Florida who writes content for dozens of real estate, property management, travel, and finance companies across the country and internationally. She has also helped well-known motivational speakers, authors, and self-help professionals create web content and blogs that are meant to inform and inspire.
Real estate investing can be one of the most exciting and profitable investment ventures you can get into. Whether you’re a seasoned investor or just starting out, real estate investing is an excellent way to diversify your portfolio. Many seasoned investors who have experience investing in stocks wonder how stocks and mutual funds compare with real estate investments—and how they can benefit from investing in both. So which investment plan makes sense for you? Real estate or stocks?
What is real estate investing?
Real estate investing can be done in a variety of different ways. Some investors choose to go the long-term rental route, where they buy a home and rent it out to tenants and receive a rent check each month. Others choose to buy a property and use it as a short-term or vacation rental, offering their home to travelers and receiving rental revenue for each guest that reserves the home. And then there are house flippers: investors who purchase a distressed property, fix it up, and resell it quickly to make a profit. Each real estate investment strategy comes with its advantages and disadvantages, but, if done correctly, can all be an excellent source of passive income.
8 benefits of investing in real estate vs. stocks
Investors who are familiar with stocks and mutual funds know that these types of investments can be unpredictable, unstable, and risky. Because of their volatile state, it is smart for investors to spread their assets across many different investment options, and one of the most popular is real estate. If you’ve ever asked yourself "is investing in real estate worth it?", read below to understand why many investors choose real estate vs stocks.
1. Real estate is flexible
Investing in real estate allows you to work your investment around your schedule, and change up your strategies as you see fit. You can dabble in long term investments, then change your mind and offer your home as a short term vacation rental. Another example of how real estate investing is flexible is all of the different ways you can earn a passive income using this strategy. There are REITs, private equity funds, crowdfunding, and opportunity funds that do not require you to buy a physical property. Investing in real estate gives you the freedom and flexibility to be as hands on (or hands off) as you want.
2. Tangible investment
When you own an investment property, it is an investment that you can use. If you needed to use it as a primary residence for some reason, you could. If you wanted to use it as a vacation rental and stay in it during the summer, you could. You can’t do those things with stocks. A real estate investment is an actual, tangible investment that you can use and enjoy.
3. Build equity for the future
Unlike other investment strategies, real estate allows you to build equity for the future. As you pay down the mortgage, hopefully your property value is increasing and you earn equity. This can then be withdrawn and used to finance other investments, pass on to heirs, or whatever else you need the extra money for.
4. Fewer chances of fraud
Regardless of which investment strategy you choose, it is important to be informed and educated about your investment and know the red flags to look out for that could indicate fraud. Investors who do their homework, study up on real estate laws, and research the contractors and other professionals that they work with have a decreased chance of being a victim of fraud. This is because they are able to stop by the property, keep an eye on what is going on, and have a physical, tangible investment to inspect. It can be harder to know what is going on behind the scenes with stocks because there is nobody to call, nowhere to go, nothing to see. Real estate allows you to be present, hands-on, and proactive against fraud.
5. Passive income
One of the most significant benefits of investing in real estate vs. stocks is the passive income it generates. You put the work into getting the property ready to rent out or sell, and then can practically sit back and wait to make money. If you invest in multiple properties, you can eventually earn enough to not just cover the cost of maintaining the properties, but earn money to the live the life you’ve always wanted.
6. Cash flow for retirement
The passive income generated by real estate investments can improve your life drastically. One of the most popular reasons investors choose real estate as an investment strategy is to help them live comfortably during their retirement. Investors who get started investing in real estate early in their life spend years learning the ins and outs of real estate, and reap the benefits of decades of hard work once they retire.
Retirees often choose to invest in a property that is in a location that they enjoy visiting. Seniors who invest in short term vacation rentals earn money to cash flow their retirement when their home is occupied, and then have a secondary residence ready and available when they are ready for a vacation.
Done correctly, real estate investing can result in a steady and lucrative stream of passive income. As you enter the season of retirement, you can use the consistent money flowing in from your investments to serve as a steady cash flow during retirement.
7. Hedge against inflation
Inflation can be a scary term for some investors, but not for real estate investors. Real estate investing serves as a hedge against inflation. This means that when the prices of homes rise, so does the amount you can charge for rent.
8. Tax benefits
This is another significant reason why real estate investors can be so successful. The tax benefits for real estate investors are too many to name. In addition to selling a property through the 1031 exchange in which investors don’t have to pay capital gains taxes as long as they invest in a similar property, here are some of the most common tax deductions:
Interest
Interest can be one of the biggest expenses a property owner can pay. Real estate investors can write off the interest that they accrue from mortgage payments and interest from credit card purchases for goods and services related to the investment.
Depreciation
The cost to buy your investment property can not be deducted in full, but instead real estate investors earn back the cost of depreciation over a period of time after the initial purchase.
Repairs
Investing in real estate means putting money towards making it clean, safe, and livable for whomever will be living it in. This costs money, but thankfully real estate investors can write off the cost of routine repairs and maintenance as a tax deduction. This could include routine and emergency repairs such as fixing leaks, installing new flooring, or replacing broken windows.
Travel
The beautiful thing about real estate investing is that you do not have to live in the same area as your investment properties. However, you will be required to make frequent visits to the property to ensure everything is running smoothly, and the farther away you live, the more expensive these visits can get. However, property owners can write off the travel expenses associated with managing their investment as a tax deduction. This includes expenses like airfare, hotel bills, and meals.
Independent contractors and employees
Some investors choose to hire management companies or independent contractors to help them oversee their property when they are not in the area. The costs to pay these people for their services are also tax deductible.
3 Risks of investing in real estate vs. stocks
Just like any other investment strategy, there are risks associated with real estate investing. Some of the most common drawbacks of investing in real estate stem from the start up costs and capital required to get started.
1. Illiquid
Real estate is an illiquid asset, meaning it is often very difficult or impossible to buy this type of asset and turn right around and sell it. It also means that selling real estate can be harder than exchanging stocks, because buying a property requires a greater commitment than simply purchasing a stock.
2. Closing costs
With stocks, the price of the stock is the price you pay. When you invest in real estate, there are usually many fees and other expenses on top of the price of the investment, often requiring the investor to spend significantly more on the investment than the sale price.
3. Requires work
After doing the initial research and buying your stock, you can pretty much sit back and have the investment work for you. Real estate is not the same way. Once you purchase an investment property, the work has just begun. Real estate investments are long term commitments that require time, money, and attention in order to be successful.
What are stocks?
Investing in stocks is like owning a small piece of a company. When the company does well, stocks rise and you make money. When they don’t do well, you lose money. The more shares you own, the higher the percentage of their profit you earn. There are millions of books, websites, and videos dedicated to understanding and mastering the stock market, but it can be a risky and unpredictable investment strategy.
3 Benefits of investing in stocks
1. Own part of the business without working there
Owning stocks in a successful company allows you to cash in on their profit without quitting your day job. By investing in a company that has has a profitable history, you up your chances of cashing in when they cash in. As the economy grows, so do corporate earnings. Understanding the business cycle can be helpful in analyzing the stock market.
2. Easy to buy and sell
There are many simple ways to buy and sell stock. Some investors choose to work with a broker or financial planner, and others choose to do it online. However you do it, it is a much shorter and simpler process to buy stocks than it is to buy a property. Transaction costs are low for stocks, so you can buy and sell quickly without wasting much time. This is a significant benefit for investors who need access to their money quickly.
3. Investment Gains
One of the most significant advantages to investing in the stock market is the ability to make major financial gains. The ease of investing in the stock market means you can invest in a variety of different stocks and give yourself multiple opportunities to generate wealth. While price of individual stocks fluctuate daily, the overall the price of the stock market tends to rise in value, increasing investors’ chances of making money.
3 Risks of investing in stocks
1. Extreme fluctuation
Stock prices can experience extreme fluctuation from day to day, rising or falling dramatically based on the news or changes in the economy. This volatility makes stocks much riskier than other types of investments. But the numbers aren’t the only thing that go up and down when investing in stocks. The rapid and unpredictable fluctuation of stocks can be emotionally exhausting, sending investors from moments of excitement and hope to nervousness and disappointment all in the same day. Investing in stocks can feel like you are on a roller coaster, both financially and emotionally.
2. You can lose it all
The exciting part about investing in a company is that when they do well, you do well. However, businesses are run by imperfect human beings, things happen, and when a business fails and sells its stocks, you could lose your entire investment. This is a huge risk to take, a risk that you have no control over.
3. Hard to analyze
When investing in stocks, you’re competing against professionals who only have one job: analyze, buy, and sell stocks in order to see the biggest ROI. Mastering the stock market, learning how to understand trends, and analyzing stocks can be time consuming and overwhelming, and just when you think you understand it, things can change. Picking the wrong stock results in losing the value of your investment.
Who should invest in real estate?
How and where to invest your money is a very personal decision and should be based on your particular situation. In order to be successful, you must invest in a way that makes sense for your lifestyle. Real estate is a great option for both new and seasoned investors, but some common characteristics of people who may prefer investing in real estate over stocks include:
- People who know where they want to be living in five years. Your primary residence plays a big role in the types of real estate you invest in. If you move around a lot, it could be difficult to successfully manage properties in many different places.
- Real estate is a popular option for investors who like to be in control. They like to know what they are getting, what they are paying, and do not like surprises. Slow, steady, and predictable growth on their initial investment helps them feel in control and allows them to take time making decisions.
- Real estate is a people-centered business. It involves building and maintaining relationships with people, from property management companies and contractors, to tenants and landlords. Investors who enjoy interacting with people often enjoy real estate investing.
- If the idea of taking big risks does not appeal to you, real estate may be the investment strategy for you. Compared to constantly fluctuating stocks, real estate is relatively safer and more predictable. Because it is a tangible investment and you can actually see the status of your investment at any time, real estate often gives investors peace of mind that stocks can not. This is a good option for investors who want to feel in control and safe about how and where they invest their money.
Who should invest in stocks?
Investing in stocks is a lot different than investing in real estate, and is often a preferred investment strategy for investors who have limited capital to start with. People who enjoy investing in stocks usually:
- Enjoy the studying and watching of the stock market. They enjoy the rush of the risk and appreciate the challenge that come with analyzing the stocks, playing the numbers game, and taking chances.
- Stock investors also typically crave flexibility. They appreciate that they can buy and sell shares quickly and do not have to commit to a long-term investment.
- Stocks are a great option for investors who are satisfied with a more unemotional approach to their investments. Stocks don’t usually involve getting emotionally attached, so they are easy to buy and sell without investing a lot of emotion into it.
Should you invest in both?
One of the best way to maximize your investments is to diversify them. Spreading your money out over different types of investments helps create a steady stream of passive income. If the stocks let you down, you have your real estate to fall back on. If your rental properties aren’t doing well, you have your stocks to help fill in the gaps. Diversification reduces your overall risks, helps to preserve capital, and gives you the ability to hedge your portfolio.