You are probably reading this article for a couple of reasons.
You may have some money saved up and are looking to make a sound investment decision.
Maybe you are planning for your future investment and are trying to develop a good game plan to lead you to success.
Or maybe you are just curious.
In any case, we bring this up because comparing investments in real estate and the stock market is like comparing apples and oranges.
While they are both good investment strategies, they couldn't be more different in how you approach them, who they are meant for, and ultimately what returns you can expect from them.
Investment strategy must match your behavior
In this article, we'll try to make that distinction clear and show you which of these two options is the right fruit for you.
Real Estate vs Stocks##
In very simple terms, real estate is a tangible property like buildings, land, houses, etc., that you can buy or rent.
On the other hand, stocks are a form of an intellectual receipt that signifies that you own a very small portion of the company or organization you bought the stock from. Stocks can be purchased and sold.
To make our comparison more concrete we'll look into the pros and cons of:
- Tangible vs. intangible assets
- Initial investment amount
- Return potential
- Possible pitfalls
After each section, we'll tell you what option is best based on personality types and other factors as well as how you should think about making that decision. As you know, there's no one right answer. We want to arm you with the right information, discuss key aspects to success, and set you up for the right decision.
Tangible vs Intangible##
To a lot of consumers, real estate probably feels a lot more like a 'real' investment. This is because you can see, feel, and step into the thing you are putting money into. A lot of times, what you see is what you get. Also, to a large extent, you as the owner, can make a difference in your property and its value, given that you selected the right location. If you invest in a house and the roof is in bad shape, you can replace it. Are the interiors looking a little drab? Just give a fresh coat of paint, add new floors, etc. Voila! You've completely transformed the space! You are more or less in control.
On the other hand, stocks are non-tangible; you can't see or touch them. As a stock owner, you are at the mercy of the company you invest in. Any problems, difficulties are that of the companies' to solve directly, not yours. A lot of businesses do hold stockholder meetings where you can ask questions and give input, but you have to own a large portion of the company to make or vote on big decisions like growth and profitability.
Which is the right option for you?##
In reality, you should have a diversified portfolio. However, there's generally a skew one way or the other towards finance or real estate. Your investment behavior and temperament determine the right option. The best investment strategy is the type that suits your personality. It's hard to find sustainable success otherwise. Let's look at how to understand your investment behavior. There are two camps of people.
The stock camp##
Some people enjoy a hands-off approach where they've invested money into something, and they want others to handle the minute details and procedures. They like the liquidity offered by the stock market. They are capable of investing and holding steady when the market fluctuates instead of investing emotionally or responding to fear. If you fall into this camp, then stocks are a better option for you.
If you already work a full-time job and have a family, keeping track of your investments and being granular is probably the last thing you want. That's not to say stock owners should be complacent - far from it. They should proactively study the market, look at mutual funds, bonds, etc., and look for major shocks in the market.
The real estate camp##
Some people enjoy a more hands-on approach to investment. If your blood pressure varies with every little fluctuation in the stock market and you react by immediately buying or selling, then the stock market likely won't suit your long-term goals. People from this camp are perfect candidates for real estate investments. With more control and decision-making potential, you are in the driver's seat. You are directly responsible for your tenants and your properties.
This section is the most important distinction between our two options and is ultimately the deciding factor in your immediate decision.
How much money would I need to start?
Real estate investment requires significant cash to break into. The investment amount depends on the nature of the property in question, its location, and other factors. But we can safely say that the barrier of entry is much higher with traditional real estate investments. REITs and partial ownership are different.
Your debt also plays a role in real estate investments. If you have high outstanding student loans and credit card debts, then real estate investment may be tough, depending on your location. It also impacts your credit score, increasing the mortgage interest rate. That said, if you can afford the down payment, it's still possible to get a mortgage and get started in real estate.
Stocks are much easier to get into. You can start investing a lesser amount, whether you have $100 or $1000. You can start with stocks quickly and build your wealth so that you can afford the larger down payment typically required for real estate purchases.
Here's where things get tricky.
Both real estate and stocks have yielded tremendous returns for investors. But many factors go into making either option profitable.
While the return potential is high in real estate, it requires significantly more time and knowledge. Let's take residential real estate as an example. You invest in a house that you renovate and rent. Now you get a tenant who pays you monthly rent for as long as your agreement specifies. Because houses are always in high demand, chances are if you lose a particular tenant, there will always be another one ready to take their place. You continue to get monthly dividends on your investment.
Another thing to consider with real estate investment is the possibilities of asset appreciation. Most of the time, as the economy grows, so does the value of the real estate investment. If you ever decide to sell your property a few years down the line, it will likely sell for more than you bought it for, depending on the location and the economy. Also, unlike other economic ventures, real estate usually benefits from inflation as rent prices increase while your mortgage payments remain constant.
The minutia of how stocks work, and their mechanics would require an entire article in and of itself but here's the gist of it: You buy shares in a company in exchange for a share of the company's annual profit. This return is dependent on the company's operations, the economy, and of course the number of shares or stocks you buy. The more shares you have the higher your return. There are many forms of stocks but for the sake of uniformity, we're only referring to the common stock.
Stocks offer more liquidity than real estate. Some stocks are extremely volatile while others remain steady. There will be times where your stock will be highly valuable because your company had a particularly profitable quarter. Likewise, if the company you invested in had a bad quarter or if the economy is generally in a slump, stock prices will fall. For some people, this is the thrill of stock investment. Riding through 'bull' and 'bear' cycles, looking for the right opportunity to trade or retain their investments. However, overall, long-term steady investment in the ETFs and mutual funds tend to outperform short-term trading. It's hard to time the stock market and to pick the right individual stock.
Some stocks yield dividends
This one's a difficult one to give a verdict on. Overall, real estate investment is simpler relatively speaking, and a more profitable option at face value at least. The same returns and even more can be made with stocks as well. It just takes a lot more time, knowledge, and a good degree of luck too. Know your personality, your real and perceived reactions to market risks when making decisions.
We've already alluded to some of these before but they are summarized here:
Real estate investing pitfalls##
- Requires significant upfront financial investment Extra expenses, depending on the condition and nature of the property you purchase
- Legal issues that may arise with tenants and property damage
- Fluctuations in the economy tend to impact property value
- Assets are not readily liquid
Stock market investing pitfalls##
- Very volatile and prone to hourly fluctuations
- High risk of losing your investments
- Extensive research is necessary for good investments
Each of these pitfalls mean different things for different people. Some might be deal breakers for you and some might not be a problem at all. It all depends on your goals, temperament, and current situation.
What about both?##
Like all things in life, the answer isn't usually either A or B. The best choice is usually somewhere in the middle and investment is no exception.
Life is not binary, neither are your investment choices
Both stocks and real estate should be a part of any good, well-constructed investment portfolio. If you are a beginner, start with stocks, gain experience, and get a feel for investing. While you are doing this, start putting aside some money in the hopes of one day being able to invest in real estate. This may not happen overnight, but it's a great long-term goal to work towards.
If you already own real estate and are looking for another investment to add to your portfolio, then stocks offer diversification.
Diversification is key to risk management
We provide the resources to help you get started in real estate, build and manage your wealth from one place. HomeKasa makes it easy to manage multiple properties, screen tenants, mange property documents, handle move-in and move-out inspections, collect rents all from one place.
We hope this article answered some of the questions you might have had and helps to shine a light on the often complicated but always interesting world of investment and financial literacy. If you want more information on real estate investment and how it works, check out the rest of our blog. We write about a host of related topics and provide helpful information and tips. If you have a question, chances are we've probably answered it there.
Now go out there and make your investments count!