Stocks and Real Estate have been in everyone’s mouths lately. Some of your friends have recently invested in a property while others enjoy watching the daily ticks of their favorite companies. So you wonder, where should my money go? In this article, we’ll go over the pros and cons of both forms of investing.
To begin with, it’s crucial to know that these forms of investing are not mutually exclusive. Both have their specific advantages that many investors have benefited from for the last decades.
Buying Real Estate
Buying houses and selling them when their value rises. That’s what first comes to mind for most people when investing in real estate is mentioned. While this is a large part of what the real estate market is, there’s much more to it.
- Passive income: Apart from benefiting from the property’s appreciation, you’ll also be receiving monthly rent payments from the tenant or tenants that are utilizing the property.
- Hedge against inflation: Real estate tends to keep up with the prices of everything around it. In other words, the income generated by your property rises along with consumer prices.
- Tax Advantages: “Section 1031 allows investors in business properties to defer taxes on the profits of properties sold in order to raise cash to purchase other properties.” (Kagan, 2021)
- Illiquid: Selling a property isn’t as instantaneous as selling stock since someone needs to assume ownership.
- More work: Owning a house or a strip mall comes with several responsibilities. Nevertheless, these could all be passed on to a hired contractor.
Real estate provides much more than steady passive income for many new investors. Investing in a tangible asset that you get to drive through on your way home offers a sense of control and satisfaction that digital stocks lack.
While managing property is more work than owning stock, the feeling of having complete control over your investment (financing, profits, and maintenance) is unique to real estate. Another upside to owning real estate is that you can make use of your investment while you wait for appreciation. If the market goes through a rough patch, you can still make use of your backyard and TV room while you wait for the right moment to sell.
The stock market is the primary place where investors take their money. It’s readily available for every American and requires much less capital than buying real estate. With mobile applications like Robinhood, stocks could be bought and sold in seconds.
The stock market offers unparalleled liquidity and the ability to diversify investments. You could buy stock in the energy sector and diversify your portfolio by investing in healthcare, thus minimizing risk altogether.
- Liquidity: You can buy and sell at the time of your choosing.
- Diversification: There is no limit to the economic sector that one can invest in. Building a diversified portfolio is a key factor in becoming a successful investor.
- Low Transaction fees: With free mobile apps inviting first-time investors, brokers’ fees have almost become something of the past.
- Highly volatile: The stock market is affected by an innumerable number of factors. War in Ukraine, Covid outbreaks, and beliefs of a recession have all recently brought the market to a plunge. These are all things that the investor has little-to-no control over.
- Emotionally-driven investments: Due to this volatility, investors tend to panic-sell their investments when they see the market is trending for a dive. The most recent occurrence happened in March 2020 with the pandemic’s start.
- Spark big taxes: “When you sell your stocks, you may have to pay a capital gains tax. If you’ve held the stock for more than a year, however, you may qualify for taxes at a lower rate. Also, you may have to pay taxes on any stock dividends your portfolio paid out during the year.” (Voigt, 2021)
Investing in the stock market is an accessible, liquid way of making a long-term profit. However, the lack of control and high volatility scares off a lot of potential investors. Stocks “manage themselves”, which is key for investors who don’t have time to take care of a property. Nevertheless, this means that a group of people are in charge of the company’s, and consequently the investment’s, success.
Where to invest comes down to a couple of factors. Research and investor personality. If you’re an investor with: a limited amount of capital, the ability to manage volatility, and the discipline to not sell (or buy) in times of emotional distress, then stocks could be for you. On the other hand, if you: prefer tangible assets, stability, and take pride in having control and owning property, then real estate is where your money should go.