Is it Better to Invest in Stocks or Real Estate ?

When it comes to investing, stocks and real estate are two of the most popular choices. Is it better to invest in stocks or real estate? As a prudent investor, you should know the pros and cons of both before you make an investment decision.

Pros and Cons of Stocks vs Real Estate Investments

Understanding pros and cons of stocks investment will help you have a better idea it is better to invest in stocks or real estate. According to data from the federal reserve’s consumer survey,  the US stock market has returned an average of 10% every year, over the last 200 years. Yet, only 15% of Americans own individual stocks. Most Americans who invest in the stock market make these investments only through their 401(k) funds.

Pros of investing in the stock market

1. Stocks are easy to buy

Stocks are easy to buy. This is an important consideration as you are trying to decide whether to invest in stocks or real estate. Today, you can easily open a brokerage account with a company such as Robin Hood, Weibull and so on. These accounts will allow you to buy stocks minutes after signing up. The best part is that there are no trading fees for most companies. 

Some companies like Robin Hood also allow you to buy fractional shares. This means even if you have only five dollars to invest, you can buy fractional shares of large companies such as Amazon and Microsoft.

You do not need a financial degree in order to invest in stocks. If you do not feel comfortable picking stocks yourself, you can subscribe to one of the reputed stock investment services such as Motley fool and follow their recommendations.

2. Exponential growth:  

E-commerce, self driving cars, 5G, 3-D printing, artificial intelligence, genetic engineering are some examples of the amazing innovations that surround us today. With stocks, you have an opportunity to participate in the amazing exponential growth of the companies that are leading the way in these innovations. While real estate investments do appreciate, they tend to appreciate more slowly than stocks. This is something to keep in mind as you make your decision on whether to invest in stocks or real estate.

3. Liquidity 

 Liquidity is a big advantage of stocks. Whenever you need cash, you can easily sell your stocks to raise cash. However, you should note that selling any type of assets will have tax repercussions. If you sell a stock within one year of purchasing it, you will need to pay a short term capital gains tax . Short term capital gain tax can be as high as 35% in line with your regular tax rate. However, if you hold on to your stocks for at least one year and sell them after a year, then you will have to pay the long term capital gains tax which is usually lower than the short term capital gains tax.

4. Easy maintenance

While some people trade stocks on a daily basis, the investors who make the most money in the stock market have a long-term view. If you do your due diligence and buy stocks of great companies, you can just buy the stock, then leave it alone for several years, let it grow and compound your wealth. Real estate on the other hand, requires a lot of maintenance and you should remember this while deciding whether to invest in stocks or real estate.

5. Become a millionaire

It is no secret that the top 10% of the wealthiest Americans invest in the stock market. If you would like to join the millionaire club, you should invest in the stock market is a good way to achieve that goal. For instance, if you had invested $1000 in Amazon 10 years ago, it would be worth $18,000 today despite the stock market downturn happened during the COVID-19 pandemic.

You can use the investment calculator to have an idea how much you can make from the return of stocks investment. Assuming that the average stock market return average of 10% and $0 initial investment, you can see the return from the table below:

Cons of investing in the stock market

1. Market volatility

If you look at the stock market on a daily weekly or even monthly basis, you will notice that it keeps going up and down. Investors who have a short investment time horizon have a high chance of losing money in the stock market

2. Market crash

In 1929, the stock market took a severe downturn. It lost close to 90% of its value and took close to 15 years to recover. In 2008, in what is now called the great recession, the stock market plunged by over 30%. It took a long time to recover. In March 2020 when the world realized that it was in a pandemic,  markets tanked by over 30% again. No one knows when the next market crash is going to happen, but sooner or later, it will crash at some point. However every time the market crashed it has always recovered over the last 100 years.

Pros and Cons of Real Estate vs stocks investments 

Owning Real Estate has always been part of the American dream. Over 90% of the properties in the United States are owned by individual investors. The data shows that over the last 10 years real estate properties have appreciated by over 40% across the United States.

Pros of investing in real estate 

1. Less volatility

Real Estate is less volatile compared to stocks. Investors who cannot stomach the ups and downs of the stock market the real estate market can be a more stable option to consider. It has been shown that buying and holding a property for at least five years will result in significant appreciation of the property value. Even when the real estate market crashed in 2008 during the great recession,  the real estate market eventually bounced back. And It went on to attain new all time highs. 

2. Cash flow

Rental properties are a great way to generate steady cash flow. When you buy a rental property in a great location, plus, your rental income exceeds the mortgage payments, you can make a nice profit which you can take to the bank. Your renters help you make your mortgage payments while you get to enjoy the nice benefits of property appreciation. Check out the real estate investment calculator  to get a general idea on the return on investment that you can expect with real estate. Note that the appreciation of property value will depend upon multiple factors such as location, property type, and market conditions. It also depend on how well you maintain your property.

3. Tax benefits

The US government provides a lot of tax breaks for real estate property owners. If the property is your primary residence you can deduct the mortgage interest and property taxes from your taxes. If you own a rental property, you can deduct most expenses such as the mortgage interest, the property taxes, and depreciation as well as any expenses which you incurred to maintain your property. These deduction reduce the taxes that you need to pay on your rental income. This is an important point to note while deciding to invest in stocks or real estate.

4. Leverage

Leverage means using borrowed money to buy assets and compound your wealth. When you are buying rental property, you need to make a down payment of 20% of the property value and borrow the rest from the bank. If you are planning to live in the property and make it your primary residence, you can get away with putting down only  5% and finance the rest. Check out the article which has more tips on how to buy property with less money.

Cons of investing in real estate

1. Down payment

While you can start investing in the stock market with as a little as five dollars, you would need to be prepared to spend thousands of dollars as down payment to invest in the real estate market.

The down payment is at least 20% for rental properties and can be as low as 5% or even 0% for your primary residence. Check out the article for how to make money on rental property with less money.

2. Time commitment

Managing rental property takes time and effort. You will need to spend time finding renters.  If something breaks down in the house, the renters are going to call you. Then, you will need to fix the problems. Otherwise, you could hire a property manager to take care of all these issues, but property managers charge a fee which will impact your rental income.

3. Maintenance and vacancies

As a landlord you are responsible for maintaining your rental property. You need to set aside some money to pay for any maintenance expenses for your rental property. In addition, if you are not able to find the renters, you are still liable for making the mortgage payments. Therefore, you need to have buffer cash to pay for vacancies in your rental properties. Or in case, your renters fail to make the payment. 

4. Legal

You are required to comply with a number of legal guidelines and contracts when buying a new property. For instance, you need to be aware of any HOAs regulations and city regulations when buying rental property. Some HOAs do not allow renting properties room by room. Also, some cities do not allow more than 4 renters in any given single-family dwelling. Therefore, you should read all the fine print carefully before you sign any real estate property documents.

If you have bad tenants who damage your property or refuse to make payments,  you may need to incur legal expenses to go through the process of evicting them.

5. Liquidity

Unlike stocks, real estate cannot be easily liquidated. If you need to sell your rental property, you would likely need to give your renters sufficient notice. Then, you put your property on the market and wait to get an offer which could take several months. In some cases, even after you get an offer,  the buyer may back out of the deal for various reasons and you would need to start the process all over again.

6. Market crash

The real estate market is not immune to crashes. In 2008 property values took a tumble and it took several years to recover. However, in the long term over a period of 10 years real estate market has always expanded and recovered from crashes eventually. 

Finally, is it better to invest in stock or real estate? Stocks and real estate both have their respective pros and cons. While some investors choose one over the other, some of the top investors have a balanced portfolio that includes both stocks and investments. In this article, I have shared my personal opinions and should not be taken as financial advice. Please remember to do your own due diligence and consult your financial advisor before making any investments.