With the real estate market on the rise, everybody is talking about real estate investment versus stocks.
Which is a wiser place to invest your money? Real Estate or Stocks?
It really comes down to personal preference and your comfort with the movement of the stock market.
Your best course of action will be to research both real estate investment strategies to see which fits your situation and risk tolerance the best.
Stocks are essentially an investor’s vehicle to owning a piece of a publicly traded company. An investor buys in at a certain price, hoping the company will perform well enough to increase the value of that market price.
Real estate investing is the act of purchasing, managing and selling real estate for a profit. The value of the asset will be affected by the overall market, improvements you make to the property, and how you manage it if you decide to rent it.
Due to the many different options investing in real estate provides and the huge potential ROI, I strongly prefer this type of investing over the stock market. I also prefer R.E. investing as it is a much more tangible strategy that allows one to be directly involved in the success or failure of an investment.
When choosing one investment over the other, you need to be sure to do your research and know what each one entails. You also need to know what type of returns you can expect based on historical data.
Every investor is different and will need to find where they are the most comfortable. Playing the stock market game comes naturally to some, but for the others, real estate investing is a much more tangible strategy that allows you to be directly involved in the success or failure of your investment.
As I mentioned above, I prefer real estate investing and have tried to give you reasons for that preference.
Stocks certainly have their upside though. They are more liquid, have lower transaction fees, are generally less work, and are easy to keep diversified, with that being said they don’t offer same returns or benefits real estate investment does.
Returns in the real estate investing market have been healthy over time. Twenty year returns for commercial real estate outperform the S&P 500 index.
Investors have seen even better returns on residential and diversified realestate investments. Of course, attractive returns lie ahead for intelligent investments, but significant cash flow, rising rents, and maybe most importantly, leverage are all major advantages for taking the real estate route.
Leverage in real estate, is an option to easily obtain funding for investments, where as with other non-leverage type investments, an investor would put up 100% of the money for the investment.
Leveraged investments allow you to pay a modest amount for the full investment. This separates real estate from most other investments, but as any investor knows, leverage carries the risk of a future inability to pay back the leveraged amount.
It should also be noted that investments in real estate carry certain tax benefits that stock market investing does not. Certain expenses may be deductible, and properties can, at times, be traded into other real estate to avoid capital gains taxes.
When investing in real estate directly, the investor has direct control over the asset that has been invested in. When investing in stocks, rarely does the investor have any control in the running of the individual business. With stocks, the investor is a silent partner, relying on the management of the company to increase the value of the investment. With real estate, while the returns may be slightly better over time, more direct involvement of the investor is required.
When done the right way, real estate investing can provide great returns through rental income, tax advantages and the capital appreciation gained from buying below the market value.
However, investing in real estate is not for everyone. It takes time to learn to competently and confidently invest. It takes perseverance and effort to find awesome deals. I have found that real estate is a much better way to invest money than the stock market and real estate offers some unique qualities that make it attractive.
Below are 6 key reasons real estate investing beats the stock market:
- Compounding Growth: If you made a 20% down payment, and the property value rises 5%, you made a gain of 25%. Although the bank owns 80% of your property, you get all the gains, so the 5% rise in overall value is a 25% rise relative to your 20% down.The best part is this is just after year one. The growth compounds significantly after you have held a property for a certain amount of time.There isn’t anything like this in the stock-market.
- Long-Term Returns: Stock index funds can underperform inflation over certain time spans. These time spans can include several decades. Real estate has never underperformed inflation over a decade.
- Taxes for Income: You get to deduct your mortgage interest and depreciate your property on your taxes. This can mean that you effectively break even on your property, even if the rent doesn’t cover the mortgage.The stock market does not have these advantages.
- Taxes for Selling: When you sell a stock, you pay capital gains taxes. However, when you sell real estate, you can put the proceeds in a 1031 exchange, whereby you can defer paying the capital gains tax.Therefore, buying another property within a certain time period helps you compound your growth faster since you have more funds.
- Inflation: If you get a fixed-rate mortgage, you have locked in your biggest expense for 30 years (or less depending on what type of mortgage you get). Thanks to rent increases, your cash flow profit margin should improve year after year.
- Leverage: You can buy stocks on margin. However, margin interest rates are substantially higher than interest rates for loans related to real estate investing. Additionally, margin loans can get called if your stocks fall below a certain level.Real estate loans are only called if you stopped making payments.
In addition to the above in real estate, you have much more control over the underlying asset. That means there are many opportunities to buy low and sell high. When you buy below market value, you can build instant equity. It’s important to note that I pass on many more deals than I invest in.
Many offers I make are turned down by the seller. It is common for sellers to believe their property is worth more than the market will bear. They do not know what repairs are needed or what rehab construction costs. They often do not see the issues that make the property unsalable in its current condition.
That is just a reality of real estate investing. But the deals I have done have performed much better than most stock investments. In addition, there is not another investment out there where you can borrow most of the money to buy an asset and then have that asset produce cash flow that you get to spend and use to pay the debt off. Investing in real estate can also have its setbacks, which is why it is vital for you to do your research.
Below is a list of things that can go wrong if you are not careful: Tenants destroy the house, property depreciates, neighborhoods go bad, cities go bad, the house is a money pit, the bank calls your loan, business partner is bad, tenants don’t pay, wrong location.
Whichever investment you decide on, make sure to do your homework. Research the decision to choose the path that is right for you. While one strategy may work for one investor, it may not work for another. Choose based on your research, skillset and passion.
Nothing is wrong with investing in both stocks and real estate but if you want to be more hands on and have a real impact on whether you make a good return than real estate investing is the right avenue for you.
Real Estate investing consistently outperforms the stock market when one does their due diligence, so I would strongly encourage you to invest in real estate and take advantage of the many benefits it provides but be sure to do your homework and whenever you are investing make sure to buy low as you always make your money on the buy side.
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