Which is a better course of action for increasing your wealth: investing in real estate or creating a stock portfolio?
According to the U.S. Census Bureau, 65% of American households are owner-occupied, and the Bureau of Labor Statistics reports that 55% of American workers participate in an employer retirement plan. You probably have some experience with the stock market if you belong to that group. Nonetheless, it’s a good idea to be aware of the benefits and drawbacks of each method if you’re wanting to double down on either sort of investment or you’re new to investing and attempting to decide between the two.
It’s crucial to understand that you are not required to make a decision. You can buy real estate investment shares without dealing with the hassles of buying, managing, and selling actual properties.
Real estate investment
Residential assets, such as your home, rental properties, or flipping homes to acquire, then resell for a profit, and commercial properties, such as apartment complexes, office buildings, and strip malls, can be divided into two major groups in terms of traditional real estate investments.
The advantages
- Real estate investing is simple to comprehend. Despite the complexity of the home-buying process, the fundamentals remain straightforward: Buy a property, take care of maintenance (and tenants, if you own several properties in addition to your home), then try to sell it for more money. Also, purchasing fractions of ownership in businesses through shares of stock can make you feel less in control of your investment than purchasing an actual item.
- Real estate is a safer investment to make with debt You can invest in a new house with a 20% down payment or less and finance the remaining cost of the property (also known as your “mortgage”). Margin trading, also referred to as stock investing, is a very dangerous strategy that should only be used by experienced investors.
- Investments in real estate might act as a hedge against inflation Due to the fact that property values and rentals normally rise in line with inflation, owning real estate is generally regarded as a hedge against it.
- Ownership of real estate may provide tax benefits For the first $1 million of mortgage debt, homeowners may be eligible for a tax deduction for mortgage interest paid. Additionally, there are tax benefits when you sell your primary house. For example, if you’re single and receive net proceeds of $250,000 (or $500,000 if you’re married and filing jointly), you may be exempt from paying capital gains taxes on those earnings. Via a 1031 exchange, you might be able to avoid capital gains if you own and sell commercial property (if you reinvest proceeds in a similar type of property). Depreciation, or writing off wear and tear on the property, is another way investment properties might benefit from tax savings. Check out our tax guide to learn more about homeownership-related tax benefits.
The drawbacks
- It may take more effort to invest in real estate than in stocks Although while buying property is simple to grasp, maintaining homes, especially rental properties, is not. Compared to buying stocks or stock assets like mutual funds, owning real estate involves far more sweat equity.
- Real estate costs a lot of money and is very unstable Even with a cash loan, real estate investing demands a sizable up-front investment. Reselling a real estate investment is far more challenging than purchasing and selling stocks, which can be done with just a few clicks.
- Real estate transactions are expensive Closing fees are usually high for sellers and can reduce the sale price by as much as 6% to 10%. Since that most brokers don’t charge commissions for stock trades, that is a sizable savings when compared to stocks.
- Real estate investment diversification is challenging When purchasing real estate, location is important. It’s possible for sales to decline in one location while values soar in another. A lot more money is needed than the ordinary investor possesses to diversify the acquisition of real estate holdings by location and type (a mix of residential and commercial, for example).
Purchasing stocks
Before you make the leap, consider the enormous benefits and significant drawbacks of purchasing shares of stock.
The advantages
- Stocks have a lot of liquidity Real estate can keep your money locked up for years, but you can buy or sell shares of a public corporation the instant you feel it’s time to take action. It’s also simpler to understand the value of your investment at any time, unlike real estate.
- You can more easily diversify your stock investment Few people have the time or resources to buy enough real estate to cover a wide enough range of regions or business sectors to truly diversify. With stocks, it is possible to amass a varied portfolio of businesses and sectors for a fraction of the time and expense of doing so with real estate. Investing in shares of exchange-traded funds, mutual funds, or index funds may be the simplest option. These funds purchase stock in a variety of businesses, providing fund investors with immediate diversification.
- With stocks, there are reduced (or no) transaction costs Although you will need to register a brokerage account in order to buy and sell stocks, the pricing competition among discount brokers has typically eliminated the cost of stock trading. Many brokers also provide a variety of mutual funds, index funds, and ETFs with no transaction fees.
- Investments made in tax-advantaged retirement accounts can increase in value Shares purchased through an individual retirement account (IRA) or an employer-sponsored retirement plan (401(k) can grow tax-deferred or even tax-free.
The drawbacks
- Compared to real estate, stock prices are significantly more erratic Stock prices can fluctuate up and down considerably more quickly than real estate prices. Unless you buy stocks and funds for your portfolio with a long perspective, which means you want to buy and keep despite volatility, that volatility can be nauseating.
- Taxes on capital gains may apply when stock sales are made It’s possible that you’ll have to pay capital gains tax when you sell your equities. Yet, you can be eligible for taxes at a lesser rate if you’ve owned the stock for longer than a year. Also, you might be required to pay taxes on any stock dividends distributed by your portfolio during the year. (Learn more about stock-related taxes.)
- Stocks may influence how you feel when making decisions Although stocks are easier to acquire and sell than real estate, this does not mean you should. Investors frequently sell when markets fluctuate even though a buy-and-hold approach normally yields higher returns. While making any investment, including assembling a stock portfolio, investors should think long term.
REITs are a substitute for conventional real estate
Don’t feel like investing in rental properties or flipping houses? Investing in real estate investment trusts, or REITs, is fortunately a simpler option.
Companies known as REITs own (and frequently manage) properties that generate income, including malls, hotels, apartments, warehouses, and offices. The most dependable REITs have a proven track record of paying out sizable dividends that continue to rise. Publicly listed REITs, REIT mutual funds, and REIT ETFs are available via numerous online brokers.
