As a budding investor, one often wonders, “How do I make money investing?” The stock market has traditionally been relied on to help investors grow wealth. However, many agree that investing in real estate is also a reliable way of making money.
If you had a 100K for investing, would you invest it in real estate or stocks?
Well, researchers posed this question to a group of Americans. The survey showed that more Americans preferred investing in the stock market. This may be a popular opinion, but what do the facts say?
This article considers investing in real estate via the traditional model; buying and owning property. However, to compare two apples, we show how the S&P500 performed against the FTSE NAREIT – an all-equity Real Estate Investment Trusts(REITs) index. The article also highlights the pros and cons of investing in either asset class and you can decide which is the better investment.
How do the asset classes compare historically?
Pictures are worth thousands of words. The line graphs below show how the two asset classes have performed since 2015
Data obtained using Bing AI on March 5th 2024
The chart shows the two asset classes can vary significantly in performance at any period. It also shows the effects of disruptions such as the COVID-19 pandemic, the slump and the rebound are also vivid.
Regarding the assets’ performance, the two classes are different. The S&P500 has had an edge in recent years. However, Real Estate Investment Trusts have traditionally outperformed the S&P500 over prolonged periods. For example, REITs delivered higher annual returns in the last 25 to 50 years.
Whether to invest in the stock market or real estate boils down to your preference, risk orientation, and capacity to manage your investments. You must consider the pros and cons of investing in each asset class to inform your choices.
The upside of Investing in the stock market
Investing in stocks is an easy way into the investment world. Investors can get started with just a couple of dollars. One only needs to open a brokerage account and start buying and selling stocks, bonds and mutual funds. On the other hand, owning real estate is elaborate and expensive.
It is easier to turn stocks into cash. An investor can quickly sell their stocks (in real-time) when they are on their brokerage account. On the other hand, buying and selling real estate units can be an elaborate and lengthy process.
It is easier to diversify investments in the stock market. An investor defines the mix and buys and sells to make up their diversified portfolio. On the contrary, buying and selling real estate is lengthy and expensive. Moving from one asset type (residential to commercial property) is also cumbersome.
You could earn dividends. Regulations stipulate that companies should transfer a portion of their taxable income to shareholders after the business period. Dividend stocks pay out regularly to their shareholders and this payment could be a source of passive income.
Investing in the stock market – the downsides
Investing in stocks exposes you to more volatility than real estate. Investing in stocks exposes you to higher risk. Before investing in stocks, seek advice and counsel about the type of stock and what to expect. Blue-chip stocks are usually less volatile and could be a safer choice.
Investing in stocks also attracts more taxation than real estate. Investors who buy and sell stocks are subject to various taxes including capital gains tax. Besides, an investor pays tax at their prevailing rate for additional investments held for less than a year.
The investor does not have direct control. Although you are a part owner of the company, you will not have direct control over its affairs. This leaves the investor at the mercy of the leadership that directs the company. On the other hand, if you invest in a piece of real estate, you will influence over its performance.
Investing in real estate – the pros
Investing in real estate is less volatile. Whereas home prices can change, they generally don’t experience as much or as frequent fluctuation as in the stock market. Unless there is a significant disruption in the market, most real estate investments change value gradually.
Investing in real estate is an opportunity to benefit twice. You can earn double; a passive income plus equity gains. Investing in real estate means you can receive a regular, passive income, in the form of rent, and also benefit from the equity gains on your property.
It’s easier to invest in real estate on debt. Although owning a home or commercial property costs more, one doesn’t have to come up with the entire amount at the point of purchase. Most investors finance their real estate ventures using mortgages. A down payment on the mortgage gives one full access to the entire value of the asset. A similar approach in the stock market is known as margin investing and is considered highly risky.
Investing in real estate opens one up to several tax breaks. One can factor in several costs including maintenance, mortgage interest, property taxes and many others when calculating tax deductions. For instance, you may deduct the interest from the first $750,000 of your mortgage.
Investors in real estate maintain control. When you buy and own a property, you have control over its management. On the contrary, investing in the stock market means you will not have control over the asset.
Investing in real estate – the cons
Investing in real estate requires more work. Unless you plan on investing in REITs, investing in traditional real estate requires more effort and diligence from the investor. You will sort out more paperwork, spend more money, and do more running up and down than investing in the stock market.
Real estate investments require money upfront. Before being certified as a property owner, you must come up with a deposit of about 10% of the value. That often translates to thousands of dollars. In contrast, one can begin investing in the stock market with just a few dollars. There is no need to save up or borrow a deposit.
Real estate investments are relatively illiquid. Besides requiring a high initial deposit, liquidating real estate assets is cumbersome. The process requires real estate agents, prospective buyers, property lawyers and a lot of paperwork. Liquidizing stock market assets on the other hand is easy; you only need to log in to your brokerage account.
Investing in the stock market vs. real estate, here’s the bottom line
Choosing between investing in the stock market or real estate is not easy. One must carefully consider the pros and cons of each asset class against your goals and preferences. The performance indices show that each asset class has its share of ups and downs. Therefore, your goals and expertise should guide the choice, not just how the index performed.
