Real Estate and Stocks: An Overview
Over the years, we have heard debates about which investment is better: real estate or stocks. Both have their advantages and disadvantages, and each has several aspects that make them unique investments in their own way. To make money from any kind of investment, you need to understand the advantages and disadvantages of both.
- For decades, real estate has created continuous wealth and long-term appreciation for millions of people.
- By holding stocks, you will acquire ownership of a company. When the time is right, you will make a profit.
- When deciding to invest in the stock market and real estate, a good compromise may be to own a REIT.
Real estate is something you can touch and feel for yourself-it is a tangible commodity, so it feels more real to many investors. For decades, this investment has created continuous wealth and long-term appreciation for millions of people. Depending on the location of your real estate, you can enjoy a considerable return on investment.
There are two main types of real estate: commercial and residential. Although there are other types (mobile home parks, open-air malls, apartment buildings, office buildings, storefronts, and single-family houses), they are generally divided into these two categories. However, making money in the real estate industry does not happen overnight. Some people take the route of “renovating houses”, looking for dilapidated properties, renovating them, and then selling them at a higher market value for profit. Others look for properties that can be rented out to generate stable income.
Generally speaking, a down payment of up to 20% of the purchase price can be paid, and the rest can be financed through a mortgage.
Advantages of investing in real estate
There are many positive benefits of investing in real estate, including depreciation (write off the wear and tear of commercial properties), tax cuts, and finally, you can sell the property through the so-called 1031 exchange and there will be no capital gains tax, as long as you invest your funds in Similar property types.
Disadvantages of investing in real estate
Like all investments, real estate has its drawbacks. Most importantly, investment lacks liquidity. When you invest in a property, you usually cannot sell it immediately. In many cases, you may need to hold the property for several years to realize its true profit potential. In addition, transaction costs can add up to thousands of dollars, including taxes, commissions, and fees.
In addition, real estate prices tend to fluctuate. Although long-term prices usually rise, sometimes prices may fall or stay flat. If you borrow too much money on the property, you may not be able to pay with a property whose value is less than the borrowed amount.
Finally, if you invest in real estate, it is often difficult to diversify. However, real estate diversification is possible, provided that you do not focus on the same community and own different types of properties. Having said that, you can also diversify your real estate through a real estate investment trust (REIT), in which case you can buy a trust that invests in a large real estate portfolio and provide you with dividends as a shareholder. However, in general, stocks provide more diversification because you can have many different industries and sectors throughout the economy.
When deciding to invest in the stock market and real estate, a good compromise may be to own a REIT, which combines some of the benefits of stocks with some of the benefits of real estate.
Using the Standard & Poor’s 500 index as a benchmark to illustrate the performance of stocks, from 1970 to 2016, the average annual return of the stock market was 10.31%. It is important to use this figure only as a benchmark for the performance of US stocks, as there are several other major indexes around the world.
By holding stocks, you will acquire ownership of a company. When the time is right, you will make a profit. During difficult economic times, you may see a decrease in capital as the company’s earnings decline. Compared with real estate, taking a long-term approach and keeping balance in many areas can help you build your net worth at a higher rate.
Like real estate, equity financing allows you to use margin as leverage to increase the total amount of stocks you own. The downside is that if the stock position drops, you may receive a so-called margin call. In this case, the net asset value associated with the borrowed amount has fallen below a certain level, and you must add funds to your account to restore that amount. If you don’t do this, the brokerage company can sell the stock to recover the amount lent to you.
Advantages of stocks
The stock is very liquid, fast and easy to sell. They are also flexible and can even be redistributed to retirement accounts-tax-free-until you start withdrawing money. In addition, many stocks may perform much better than real estate in a year. Due to the volatility of some stocks, it is not uncommon to see companies grow by an average of 20% or even 50% a year.
Disadvantages of stocks
Stocks can be very volatile, especially when the economy or the company is facing challenges. In addition, stocks are usually emotional investments, and your decisions in the market are usually irrational. In the end, bankruptcy is always the idea of active stock investors, as it should be, because in this case your investment will be dissolved.