Debating real estate vs stocks? Both types of assets have pros and cons, but the answer as to which is the right investment for you depends on your worldview, financial means, and your appetite for risk. Your preference for real estate or stocks will also be highly dependent on where you are in life as well.
Investing with stocks
Stocks are shares or portions of publicly traded corporations that have made their operations open to all investors (companies must make an initial public offering, or IPO, to go public). These companies frequently issue stock to raise funds for internal development and expansion. This means that when you buy stocks, you’re buying a piece of a company’s ownership.
Stocks are divided into two categories: common stock and preferred stock. The main difference between the two is that common stock allows you to vote, but the preferred stock does not. You’ll be able to vote for a company’s board of directors and other policies if you own common stock, also known as voting stock.
However, dividends are paid on both types of stocks on occasion. Dividends are cash payments made by firms for each share that you own. If you hold two shares of Target and the company pays dividends, you’ll almost certainly see a cash increase on both of your shares.
Stocks are traded on stock markets all around the world, however trading on international exchanges can be tricky at times.
Pros of investing in stocks
Stocks have the advantage of being highly liquid assets, which means they can be quickly converted into cash without losing much of their value. Stocks, bonds, mutual funds, ETFs, and money market funds are all examples of liquid investments.
Stocks also have the potential for growth and capital appreciation, which can benefit both short- and long-term investors. When the market value of an investment rises, this is known as capital appreciation.
As previously discussed, some stocks pay dividends, allowing you to generate additional income from your holdings. Companies usually pay cash dividends or provide bonuses in the form of additional stock.
Cons of investing in stocks
One of the disadvantages of stocks, like most assets, is that market prices vary. This means that the value of your investment can fluctuate, and economic, political, and environmental events can all have an impact on how successful your business is.
You’ll also need to be aware of the capital gains tax. When selling stocks, you may have to pay this tax, but if you’ve kept your investment for more than a year, you’ll pay less (capital gains tax rates generally range from 0 % to 20 %).
Investing in real estate
Commercial, residential, retail, mixed-use, and industrial real estate are the five main types.
You’ll also have five options when it comes to real estate investing. You can acquire and manage your own rental properties, flip houses for profit, participate in real estate investment groups (REIGs), or use online brokerages and crowdfunding real estate platforms to invest in real estate investment trusts (REITs).
REITs are a good option if you want to take a more hands-off approach to real estate investing.
Companies that own and/or run income-generating real estate-related projects are known as real estate investment trusts (REITs). Hotels, apartments, mortgages, medical centers, warehouses, and other amenities are examples of such projects. REITs are available through most online brokerages, as well as real estate crowdfunding platforms.
When companies buy and operate real estate assets and sell shares of those assets to investors through public (and sometimes private) channels, they become REITs. Private REITs, also known as non-exchange-traded REITs, must be purchased through a broker or financial advisor who specializes in non-traded REITs (they are also quite illiquid, thus you won’t be able to convert them as easily as a standard REIT).
If REIT stocks or non-traded REITs aren’t your thing, you can diversify your real estate investing portfolio by purchasing REIT mutual funds and REIT ETFs.
Pros of investing in real estate
Investing in real estate has a number of advantages for investors. For one thing, the properties you manage may be eligible for tax deductions. This enables you to deduct charges like as property tax, upkeep and management, and insurance.
Inflation hedges are frequently associated with real estate investments. Inflation raises the value of your property and rents it out, increasing your return on investment (ROI).
One advantage of REITs is that they provide easy access to commercial real estate investing. You can bypass the time-consuming process of selecting and financing real estate by investing in REITs, which are corporations that have already invested in real estate assets.
Furthermore, publicly-traded REITs are highly liquid, which means you may purchase and sell them whenever you want. Real estate is illiquid and cannot be converted into cash quickly, but REITs can.
Companies must donate at least 90% of their taxable income to investors to qualify as REITs. This 90 percent rule permits businesses to avoid paying corporate taxes, which means greater dividend payments for you.
Cons of investing in real estate
However, you should keep in mind that your REIT investment is still vulnerable to economic risks. In reality, coronavirus caused a dramatic drop in commercial real estate prices in early 2020.
It’s difficult to plan for the unexpected, but you could pick REIT mutual funds and ETFs if you want to reduce your risk.
Takeaway
The growth potential, dividend yield, time horizon, and risk level of stocks and real estate investments are all different.
Short-term and long-term investors alike can benefit from stocks. These investments are also quite liquid, and if the firm you invest it succeeds, you can make a lot of money.
If you want to go into real estate investing but don’t want to find and buy the properties yourself, REITs can be a good fit. Real estate investments are normally illiquid, requiring the purchase and holding of property for at least five years, while REITs can be quickly converted to cash.
However, you are not obligated to select one over the other (and you are not obligated to choose either). If you’re deciding between stocks and real estate, keep in mind that you can invest in both. Investing in both stocks and real estate, in fact, can help diversify your portfolio and increase total profits.
Ultimately, the best investment is one that you’re comfortable with and that fits your situation, goals, and overall portfolio. Stocks and real estate both have the potential for long-term development (as well as dangers and disadvantages), so if you have to choose between the two, go with the one that best suits your needs.