05 Oct Investing: Real Estate vs. Stock Market
Investing in stocks today may bring monetary gains for you in the future. It is why the iconic investor, Warren Buffet, said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” But it is not just the stock market that turns fortunes!
Real estate investment is another avenue that can promise a windfall.
But as any seasoned investor would know, both are risky. If we consider real estate investing vs stock market, both have their highs and lows.
So, if you are smart, you’d first weigh upon them, diligently. Because money is not the only currency – be it real estate or stocks. It is the right knowledge that takes you forward, far more than the money you have to spare. But what is better? Real estate investing or stock market?
Now, let us learn more.
Investing in Real Estate vs Stock Market: the What and the How
Real estate investing essentially means purchasing, managing and selling the real estate property for a profit. The value of the property is affected by the market, improvements made to the property and the management of the same if you rent it. Know all about real estate investment from the experts here.
Investing in the stocks market, on the other hand, means investors buy a share of a publicly traded company. If Company ABC has 1 million outstanding shares of stock and if investor purchases 10,000 shares, then he/she will become the owner of 1% of the Company ABC. An investor may buy the stock at a certain price, better known as market price, hoping that the company performs well enough to increase the value of the previous market price for profit.
Now, let us learn it in detail.
Real Estate Pros and Cons
There are various types of real estate investments such as home, rental properties or flipping homes — and commercial properties like office buildings, apartment complexes and strip malls. While the property buying process can be seen as complicated due to documentation and such, the basics are simple in real estate.
The Pros in Real Estate Investment: In comparing real estate vs stock market investment, the major pro in the former is the familiarity. You purchase the property, manage the maintenance and tenants and may attempt to resell for a higher profit.
Also, owning an asset such as real estate makes your ownership more tangible and that makes you feel more in control of your investment than buying seemingly imaginary ownership in companies through shares in stock.
Also, another pro is investing with debt is considered safer in real estate. With their “mortgage”, investors can invest in a new asset with a 20% down payment or less and then finance the rest of the cost.
Investing in Real estate can serve as a security – a hedge – against inflation as home values and rents typically increase with inflation.
There are tax benefits as well. If you sell your commercial property, you could avoid capital gains via a 1031 exchange, if you reinvest the proceeds in a similar property. Real estate is also highly tax efficient with depreciation offsets to income.
There is a tax break when you sell a principal residence, like an exclusion that may let you avoid capital gains taxes on its net proceeds of $500,000 if you’re married and filing jointly and $250,000 if you’re a single individual.
The Cons in Real Estate Investment: Real estate investments require more work than stocks. Maintaining properties requires continuous energy and effort. Owning real estate properties requires more sweat equity than buying stock or stock investments such as mutual funds.
Real estate can be expensive and quite illiquid. Also, investing in real estate when borrowing cash, requires a big investment. Moreover, getting the profit out of a real estate investment with resale is more difficult than the click-ease of buying and selling stocks online.
Additionally, it becomes difficult to diversify your investments in real estate. Location is everything when it comes to real estate. Sales may nosedive in one area, while values may explode in another location.
Real estate also requires high transaction costs. For instance, a seller may have to pay large closing costs that may be as much as 7% off the sale price. In stocks on the other hand, most brokers now charge no fees for stock trades.
Stock Market Pros and Cons
Unlike real estate investment, the process is easy, but it has different advantages and risks too.
The Pros in Investing in the Stock Market: Stocks are liquid. Unlike in real estate where investment cash can be tied up for years on end, buying and selling of publicly-listed company shares can be done at a moment’s notice. Also, it’s easier to know the value of your investment as well.
It’s also easier to diversify investment in stocks. In stocks, one can build a large portfolio of companies at a fraction of the time and money. One can easily buy shares in index funds, mutual funds or exchange-traded funds. These funds purchase shares in a wide variety of companies, which provide investors instant diversification.
There are less transaction fees in stock investment. The price war has lowered the stock trading costs to almost $0. And as mentioned, brokers often offer a no-transaction-fee mutual funds, ETFs and index funds.
This too has a tax benefit. Investors can grow their investment in tax-advantaged retirement accounts as well. Buying shares via an employer-sponsored retirement account such as a 401(k) or via an individual retirement account lets your investment to grow tax-free or tax-deferred.
Do you want to start investing in stocks? Learn more about the online brokers for stock trading here.
The Cons of Investing in the Stock Market: As compared to real estate, stock prices are more volatile. The stock prices can rise up and take a nose dive much faster. This volatility can be nail-biting unless investors plan to buy and hold despite the market volatility.
Also, it is a possibility that selling stocks end up racking up sizeable capital gains taxes. If investors hold on to the stock for over one year,the long-term capital gain tax applies which is lower than the short-term capital gain tax. Keep in mind that investors may have to pay taxes on stock dividends their portfolio paid out during the same year.
Another con is that markets waver easily, so investors often sell when a buy-and-hold strategy produces greater returns.
Which One is Better?
As BD Capital analyzed, the pros and the cons in real estate investing vs stock market, it can be said that the return of your investment isn’t set in stone for both. The 2008 financial crisis is a reminder that property prices may rise over time, but risk of selling a property at a loss is always there. This holds true of stocks, as well, except the time window is shorter in the latter. Choose wisely!
Learn more about real estate investment through these case studies from BD Capital.