The stock market has long been a popular area for investors to put their money. The emergence of online trading platforms has made stock trading even more convenient. While stocks are a well-known investment choice, people are unaware of the income potential of purchasing real estate. Real estate can be a viable alternative to stocks with proper research and professional guidance, giving lower risk and higher returns.
All individuals looking to invest to retire, save for a college fund, or pay off debts require an investing strategy that meets their budget and needs. A smart place to start is comparing real estate investing with stock investing in assessing which option is suitable for you. Let’s explore the pros and cons of investing in real estate and stocks to determine which investment option is better.
Real Estate Investment
There are two main categories of real estate investment. The first category comprises residential properties like your home, rental properties, or buying homes to flip and resell for a profit. The second category includes commercial properties, such as apartment complexes, strip malls, and office buildings.
- Passive Income: A major purpose of investing in real estate for most individuals is to have a consistent stream of incoming cash that rental income provides. This steady stream of revenue is a powerful motivator to get started and purchase your first rental property. Depending on the location of your property, you might be able to earn enough money to meet your costs and generate some additional money on the side.
- Build equity for retirement: You gain equity as you pay down your mortgage payment or the value of your home improves, which you can cash in later. This could include selling the house for retirement, using it to buy another property and expand your portfolio.
- Provides inflation hedge: Home values and rents usually increase with inflation; therefore, owning real estate is considered a hedge against the decreasing value of a currency.
- Option of mortgage payment: You can invest in a new property with a very minimum percentage and finance the remainder of the cost with a “mortgage,” sometimes known as a “loan”. The option of a mortgage makes real estate investing possible for even those individuals who do not have the money required to buy a house. On the contrary, margin trading or investing in stocks using borrowed money, is dangerous and should only be done by skilled traders who can afford to take risks.
- Tax Advantage: When you invest in real estate, you gain access to multiple tax advantages. Depending on how you manage your business, many of your expenses become deductible business expenses. Additionally, you may even be able to avoid paying self-employment tax on your rental income, and you can deduct your mortgage interest.
- Appreciation of capital: Investors must be aware that real estate is not a short term strategy, and one of its major benefits include the appreciation of capital assets over time. In other words, the value of your house will probably be much higher in the next 20-40 years, which is why investors are in it for the long haul.
- Loss of liquidity: It gets more challenging to access your money when you invest in a property. Before you see a cent of equity, you must repair the property, advertise it, sell it, and wait for the mortgage to close. While this isn’t a significant concern in most cases, if you’re in a financial emergency and need money fast, your real estate assets may make it harder to receive the money you need.
- Time Consuming: Researching, buying, repairing, finding tenants or selling real estate is a lot of work. Additionally, fulfilling the role of a landlord is not easy, as it requires a lot of time and effort.
- Regular maintenance: Individuals planning to rent out properties should understand that they require additional funds for the maintenance and upkeep of the property. This includes correcting any issues with the property or its systems, performing seasonal maintenance and cleaning and repairing the home if the tenants change.
Buying stocks has some significant pros and cons that you might have to consider before putting your funds at risk.
- High in terms of liquidity: Stocks have a high level of liquidity. While real estate investment funds can be tied up for years, buying or selling public company shares can be done anywhere, anytime from the comfort of your phone. With stocks, it’s also easier to know the worth of your investment at any time, unlike real estate.
- Minimal transaction fees:Investors enjoy low transaction fees. The price war among discount brokers has lowered stock trading charges to nothing in the majority of cases. For example, the Binomo trading platform charges no commission.
- Tax-advantaged retirement accounts allow you to increase your money: Investing in stocks through a 401(k) plan or an individual retirement account can allow your money to grow tax-deferred or even tax-free.
- High-Risk: You could end up losing all your investment if a company fails and goes bankrupt or stock prices collapse. Additionally, stock prices can fluctuate more frequently than real estate, which may be disastrous for individuals planning to not hold the stocks for too long.
- Emotional decision-making: Stock values increase and fall frequently, and individuals tend to buy high and sell low out of greed and fear without implementing any stock picking strategies. The smart thing to do is to check in regularly rather than continually looking at stock price swings.
- A capital gains tax may apply if you sell stocks: You may have to pay capital gains tax if you sell your investments. However, if you have owned the stock for more than one year, you might be eligible for a lower tax rate.
Reasons to Invest in Real Estate vs Stocks
As mentioned above, real estate and stocks investments both have their pros and cons. Investing in stocks is relatively riskier if compared to investing in real estate. Analyze what kind of investor you are and carefully check the pros and cons so it can help you decide which one is the best investment for you.