If you come into any substantial amount of money, it’s a good idea to invest it. For most investors, the obvious solution will be to invest in stocks.
However, real estate also makes a great investment when it comes to getting your money to grow.
This article will look at both real estate and stock investment options so you can find a solution that’s right for you.
What Does Investing in Stocks Mean?
When you invest in stocks, you are essentially buying a little piece of a company. You make money when the value of the company increases. You can also make money in dividends.
How Do You Invest in Real Estate?
Properties tend to increase in value so any real estate purchase can make you money once you sell it. However, investors that are looking to make money on an ongoing basis will want to use their property for rental purposes. They can rent it out as a residence to tenants or they can rent it as a vacation home.
Investors can also make money by flipping properties. In this case, they will acquire the property, make improvements and sell it at a higher value than they paid for it.
The Convenience Factor
Most people go with stocks because they are easy to buy and they require less capital. For instance, if you want to buy a house, it can take months to find the right property and it will require a hefty down payment.
Once you own the property, you may have to deal with ongoing maintenance. If you choose to rent to tenants, you will also have to deal with managing payments and personality issues.
Stocks, on the other hand, can be bought and sold at any time. Depending on the stock you invest in and how much you are buying, they can also be quite affordable.
Stocks are also low maintenance. Even though it’s important to keep your eye on stocks to figure out the best times to buy and sell, they don’t require a lot of leg work.
But which investments will actually make you more money?
Stocks can provide benefits that boost your returns. For instance, some investors can take advantage of company matching which occurs when companies make deposits into your 401k to match your own.
However, these benefits are unpredictable, and they are not always available. In fact, the ROI is usually lower than expected.
In the case of real estate, it can also be difficult to determine returns. Here too there are several unpredictable factors that come into play in terms of the prices you can expect to pay and the returns you are likely to get. Recession can greatly affect your financial situation as an investor in either situation.
One of the best references may be to compare the total returns of the SPDR S&P 500 ETF (SPY) and the Vanguard Real Estate ETF Total Return (VNQ) for the last 20 years. You will find very similar trajectories for both with real estate coming out slightly ahead.
Both real estate and stocks also come with their share of risks. When it comes to real estate, one of the biggest downsides is that you can’t cash out when things are looking bleak. The returns are not immediate.
Another risk comes in the guise of maintenance costs if you are renting a property. If you are flipping a property, construction fees can always be higher than what you anticipated.
Stocks are risky as well. The three main risks you will face are market, economic and inflationary risks.
Stocks are very volatile with prices changing with fluctuations in the market. This can be due to geopolitical or company specific events.
Other factors that come into play are monetary policies, regulations, tax revisions and fluctuations in interest rates that can be a factor if the company you invest in has overseas business partners.
Investors who don’t diversify their portfolios are also at higher risk. For instance, dividend paying stocks can generate reliable income, but you may also consider investing in a high-yielding dividend stock to generate more income.
It is worth noting that real estate can be a preferable investment option due to more opportunities for diversification. This is due to the fact that it brings in regular income and appreciates over the long term.
Pros and Cons
Now that we have looked at the risks and returns involved in real estate and stock investing, lets’ break it down to some simple pros and cons.
Real Estate Pros
- Passive Income: Although real estate may take some leg work when issues arise, for the most part, after the initial investment is made, you can count on bringing in money without lifting a finger.
- Tax Advantages: Homeowners get tax breaks on mortgage payments and other expenses.
- Hedge Against Inflation: Investing in an asset that is expected to maintain or increase value over time can help protect you from inflation.
- Ability to Leverage: In real estate you can use borrowed money to buy a property instead of having to come up with the full amount yourself.
Real Estate Cons
- A Lot of Work: Finding the right property and maintaining it can be a lot of work, especially as compared to buying and selling stocks.
- Expensive and Not Liquid: Buying real estate takes a lot of capital and you can’t just cash out when times are tough.
- High Transaction Costs: On top of buying the property, you will also have to spend money on closing costs and other transaction fees.
- Appreciation not Guaranteed: Even though most real estate is expected to appreciate over time, this isn’t always the case.
Stock Investing Pros
- Very liquid: Stocks are easy to buy and sell so you can cash in and get out of a financial bind easily.
- Easy to Diversify: Although real estate instantly allows for diversification, it is easy to diversify in stocks by investing in multiple types of stocks.
- No High Transaction Fees: You don’t need as much money to invest in stocks and once you invest, you will not need to deal with hefty transaction fees.
- Easy to Add to Tax Advantage Retirement Accounts: Even though stocks don’t give you as many tax advantages as real estate does, you can easily cash them out and add them to retirement funds that have tax advantages.
Stock Investing Cons
- Volatility: Although both stocks and real estate values are affected by changes in economy, stocks are also affected by company policies and developments. What’s more, they could be up one day and down the next.
- Selling Stocks Can Increase Taxes: When you sell a stock, you are responsible for paying taxes on the profits.
- Stocks Can Move Sideways for Years: Some stocks remain stable for years offering no real profit from the purchase.
- Risk of Emotional Investing: Many people make investment decisions based on emotions like greed or fear. This causes them to underestimate risks and make potentially unsound investment decisions.
If you are looking to make the most out of your money, stock and real estate investments are both good options. While each comes with its share of risks, the decision you make may come down to your financial situation, your risk tolerance and your investment style. Good luck finding the opportunity that works best for your situation.