When looking to grow your wealth through real estate, investors have two options: buying real estate stocks and investing in real estate properties. Many people across the country often do a little bit of both. According to the U.S Census Bureau, over 65% of American households are occupied by the owner.
Many Americans today also have some exposure to both the stock market and the real estate market. However, choosing between real estate vs stocks can be quite tricky. However, if you’re new to investing, it’s essential to have some background knowledge about both investment opportunities.
You should also take your time to research more about the pros and cons of each investment strategy. Read on below for a step-by-step guide on real estate vs stocks investments.
What Is Investing in Real Estate?
Investing in real estate means purchasing a piece of property and using it to bring you an extra source of income. An example of a real estate investor is a landlord. There are two main categories of real estate investing.
These include purchasing residential properties or commercial buildings. Residential real estate includes rental properties, homes, and flipping houses. This means you are buying a residential property and selling or renting it for a profit.
On the other hand, commercial properties may include apartment complexes, strip malls, and office buildings.
Advantages of Investing in Real Estate
Investing in real estate is one of the best ways to There are many advantages of investing in real estate properties in
Real Estate Investing Is Simple and Easy To Understand
Purchasing a home is a hectic and complicated process. However, the basics behind the home buying process are very simple. The strategies include purchasing a property and managing its upkeep and tenants. You can also buy a rundown property, fix it up, do all the major repairs, and then resell it at a higher price.
In addition to the simplicity of the purchasing process, owning tangible and physical assets makes people feel more in control of their investments. For this reason, most people prefer buying real estate properties instead of buying stocks and shares of real estate companies.
Using Debt to Invest Is Safer and Better When Purchasing Real Estate Property
Getting a mortgage to purchase commercial or residential real estate property is a better option than getting a loan to buy stocks. It’s also easier to invest in real estate with a mortgage. That’s because you will only be required to raise at least 20% of the property’s total price.
The rest of the property cost will be financed by your preferred mortgage company. Margin trading, which is investing in stocks and company shares using a loan, is very risky. Therefore, it’s only advisable if you’re an experienced trader.
Real Estate Properties Can Shield You Against Inflation
Purchasing a real estate property is often considered a shield or hedge against inflation. That’s because, during inflation, property rent and home value often increase with inflation.
Instead of keeping your savings in the bank where they are negatively affected by inflation, purchasing real estate property is a wise way of shielding your money against the effects of inflation.
For example, if the price of a movie ticket is $7 in 2001, the same movie ticket may cost $15 by 2021. However, this doesn’t mean that the $7 you have in your bank will grow to $15 as the price of items increases. It only means that if you had $7 hidden under your mattress from 2001, it would only buy you half the ticket in 2021.
Property Ownership Also Comes With Tax Advantages
One of the significant advantages of property ownership is the tax advantages that come with it. You may be eligible for a tax deduction when you’re approved for a mortgage. Individuals qualify for tax deductions for their mortgage loan interest when they pay their first $1 million in mortgage debt.
Additionally, there are also tax breaks that come with selling a principal residence. This includes a tax exclusion that allows you to dodge capital gain taxes on total incomes of $250,000 for single people and %500,000 for married individuals filing jointly.
Alternatively, you can also avoid capital gains if you own or sell commercial real estate properties. The only way to get this tax break is through the 1031 exchange under the condition that you reinvest the proceeds in the same type of property.
Additionally, investment properties often earn tax breaks through property depreciation and getting a tax write-off on the wear and tear on the property.
The Cons of Investing in Real Estate Property
Investing in real estate properties can be more demanding and challenging than you think. While the home buying process is easy to understand, it’s not easy to go through. Below are important disadvantages of investing in real estate you should consider:
Purchasing a Real Estate Property Is More Work
The Home-buying process is relatively easy to understand. However, going through the process is quite challenging and requires a lot of work.
Additionally, maintaining the property is also quite challenging, especially if it’s a rental property. Property ownership and management require much more sweat equity than buying stock investments and shares such as mutual funds.
Properties Are Costly and Extremely Illiquid
Buying a real estate property even with a mortgagee requires a lot of money upfront.
In addition to the high upfront investment, getting your money out of the investment can be very challenging. That’s because reselling a house is not an easy process compared to selling stocks and shares.
Properties Have High Transaction Costs
During the property buying process, sellers often have significantly high closing costs. These expenses may take up to 6% to 10% of the total property cost.
This is a hefty cut compared to the cost of purchasing stocks, especially since many brokers have introduced zero fees for stock trades today.
It’s Challenging to Diversify Your Investment Portfolio
The location of the property is a crucial aspect to consider when buying a real estate property.
It’s easy for the property value to increase in one place while the sales may collapse in another area. Therefore, it can also be quite challenging to diversify your portfolio by property type or location.
For example, purchasing a mixture of commercial and residential properties requires a significant financial investment than the average investor.
Your ROI Isn’t a Sure Bet
Property prices often increase with time. However, investors also risk selling their properties at a loss, especially in a crisis such as the 2008 financial crisis or the 2020 Covid19 Pandemic.
These two incidents are a reminder that your return on investment in property purchases isn’t always guaranteed.
What Is Investing in Stocks?
Investing in stocks means purchasing small pieces and shares of ownership in different public companies that deal with real estate properties. These shares are called the organization’s stock. Therefore, by investing in the company, you are hoping that the business will grow and perform well in the future.
If this is the case, the stock you bought will be more valuable, making more investors purchase the shares from you at a higher price. If you choose to sell your shares, you may earn a significant profit from them.
The Pros of Investing in Stocks
Buying company shares has numerous advantages, primarily since you will not directly handle properties’ purchasing or management. Below are essential benefits to consider when deciding between real estate vs stocks:
Stocks Are Very Liquid
When you buy real estate property, your cash will be locked up in the investment for years. However, the sale and purchase of public company shares can happen anytime, as long as you choose to sell or buy.
Unlike buying real estate property, trading stocks allow you to check your investment value at any moment during the day.
It’s Quite Easy To Diversify Your Portfolio
Very few investors have enough time to go through the property-purchase process. Additionally, few individuals have the money lined up to purchase and cover enough industries and locations to have real property diversification.
But with stocks, it’s easy to diversify your investment portfolio by purchasing shares from different industries and companies. You can also do this at a fraction of the cost and time of buying a diverse collection of real estate properties.
Another easier way of diversifying your portfolio is purchasing shares in exchange-traded funds, index funds, or mutual funds. Purchasing shares in funds help you invest in a variety of companies, giving you instant diversification as an investor.
Very Few Transactional Costs When Purchasing Stocks
Before selling and buying stocks, you will need a brokerage account to perform the transactions. Thanks to the competitive nature of the industry, many brokers have zero transactional costs. Additionally, some brokers offer investors a selection of zero transaction fee ETFs, index funds, and mutual funds.
Access to Tax-Advantage Retirement Accounts
You have the option of growing your investment amount in retirement accounts with tax advantages. This is especially true if you buy your stocks through your company-sponsored retirement account, such as the 401(k) account.
You can also get a tax advantage if you purchase company shares through a personal retirement account. This allows your cash to grow tax-free or even tax-deferred.
The Cons of Purchasing Stocks
Buying stocks will help you avoid the hustle of property management and the buying process. However, there are many cons to purchasing stocks compared to buying real estate properties. These cons include:
Stock Trading Can Trigger Emotional-Based Decisions
While it’s much easier to sell and buy stocks than purchasing a real estate property, you need to think carefully before buying any shares.
Sometimes, markets may waver, which leads to investors making hasty decisions to sell or buy their shares. Before investing your money in stocks, ensure you sit down and check out all the investment opportunities and start building your portfolio from scratch.
Shares Prices Are Highly Volatile
Stock prices often fluctuate faster and easier than property prices. It can be quite nerve-wracking if you don’t have the patience and emotional strength to withstand the volatility.
However, this is easily remedied by looking at your portfolio and the types of stocks you purchase. This simply means buying the shares and holding them despite the volatility and resisting the urge to sell.
Selling Shares Could Lead To an Investor Paying Capital Gains Tax
When investors sell their shares of different companies, the IRS may require them to pay capital gains taxes.
However, you could be eligible for a lower tax rate if you hold the stock or shares for over one year. The IRS may also need you to pay some taxes on stock dividends paid out over the year.
REITs: A Great Alternative To Investing in Properties
Do you feel like it’s a lot of work and effort to invest in real estate?
Building or purchasing rental properties and flipping homes is not an easy process. However, investing in REITs or Real Estate Investment Trusts is an easier option and a great alternative to investing in traditional real estate.
A REIT is a company that owns, manages, and operates real estate properties that produce income. These properties include warehouses, apartments, office spaces, hotels, and malls. Reliable REIT companies often offer investors significant dividends.
Therefore, it’s advisable to look into the company before choosing to invest with them. This will help you find the right company based on your needs and preferences.
Now You Know Which Is Better for You: Real Estate vs Stocks
When choosing where to invest your money, it can be challenging to choose between real estate vs stocks.
Fortunately, we have covered the pros and cons of both real estate investments and purchasing stocks. Investing money diligently isn’t easy, especially if you’re unsure.
Contact us at LendSimpli for competitive loan rates if you’re ready to invest and consider finding a lender. We offer a reliable lending experience for our clients looking to invest in real estate properties.