In his article, I will compare real estate investing vs stocks. Which one is the best to invest in as a beginner? Both investments have advantages and disadvantages you need to know before investing in any of them.
Most traditional people prefer real estate. They will advise you to buy properties because it’s safer than anything. They treat it like pure Gold. And they are right. But the stock market can be a better investment if you know how to make money here.
Table of Contents
- Real Estate Investing vs Stocks – My Favorite
- Real Estate Investing Types
- The Advantages of Real Estate
- The Disadvantages of Real Estate
- The Stock Market vs Real Estate
- The Advantages of the Stock Market Investing
- The Disadvantages of Stock Market Investing
Real Estate Investing vs Stocks – My Favorite
But first, let me tell you, you can buy properties through the stock market. It is called Real Estate Investment Trust (REIT). You can put your money in the stock market and purchase some REITs. It is a new form of real estate investment.
In 1960 US Congress built REITs for people who wish to invest in properties but don’t want any hassle. By the way, REITs are performing well and giving their investors good dividends. I have written a whole article on REIT investing. If you wish you can read it. Let’s get back to the point.
Real Estate Investing Types
Normal real estate investing can be broken into two main categories, and those are:
- Residential properties: apartments, single-family homes, multi-family homes, rental properties, or flipping homes
- Commercial properties: office buildings, shopping malls, retail shops, or any property where a business I run.
Also, there are some more options you have to invest in this real estate investment like:
- Raw land
- Mobile homes
- Fractional ownership investing
- InvITs (Insfruture Investment Trust)
You have options to choose any of the above to start investing in this real estate sector.
Also read: REIT vs InvITs investing
The Advantages of Real Estate
Keep all these advantages in mind while investing in this segment to maximize your return.
1) Investing in real estate is easy
The process of real estate investing is always simple, buy, fix and sell or buy, hold, and sell. For the buy and sell strategy, you can make quick bucks. But to build your wealth, you should focus on the hold strategy in rental property investing.
Plus, real estate will save you from any kind of market crash via the rental income it will generate every month. All the other businesses will suffer, but real estate will continue to generate money for you, no matter what’s happening in the market (you have seen this during the pandemic).
That is why the older generation loves real estate. To them, that is very real, not like some computer digits. They can touch, feel, and do whatever they want with it. They have total control over their properties. They are proud of it.
If you look at the Royals of the world, you will see that they have a lot of properties in their portfolio. And those properties are serving them for 1000s of years over generations. That is the power of real estate, simple, easy, and long-lasting.
2) A Hedge Against Inflation
As I was talking about, it can save you from a market crash and inflation, which is normally 3% -5% in most countries. Inflation will force the value of your currency to go down every year.
Inflation also means that the value of a product you buy daily will not go up, but the price of that currency will go down. The value of that product is the same, but because of the weaker money, you have to pay some extra to buy that same product.
That is inflation. If it goes beyond that, Hyperinflation will occur as it did in Germany during the world war and recently in Zimbabwe. You may have heard of it.
Real estate will protect you from all of those. The value of your property will increase every year, automatically, and the rent you will collect will also increase every year or every three years, as you have agreed with your tenants.
In short, no market conditions can affect you if you hold some real estate. That is the biggest advantage of property Investing I think.
3) Huge Tax Breaks from the Government
The government wants more houses in the affordable segment, and you, as an investor, are delivering those. That’s why they will help you build more by giving you some tax breaks.
Plus, if you buy a house on a mortgage, govt will give you a tax break. If you buy the house in your wife’s name you will receive tax breaks. There are a lot of real estate tax laws that you can use to reduce your taxes to almost zero. Tax rules like:
- 1031 tax exchange
All these will help you to reduce your capital gain taxes. Isn’t it amazing? You will make money without paying any taxes, legally. These are the main advantages of real estate investing vs stocks.
The Disadvantages of Real Estate
There are lots of disadvantages to this investment. That’s why most people dont want to enter. Because they think they can’t handle those hassles that a property investment offers. Here is the list of disadvantages of investing in real estate vs stocks.
1) It takes a lot of effort
Owning properties requires much more effort in analyzing, maintaining, and finding leads than purchasing stocks or mutual funds. Yes, it is easy, as I have said earlier. But to make things work for a longer period, you need to analyze them with the highest effort. Easy to understand but not easy to make money.
2) Real estate is expensive and illiquid
You can not buy a property with $1000. You need more than $30,000 to buy a small piece of property. That is why most average men don’t want to invest in this segment, as most do not have that much money.
Plus it’s an illiquid investment. You can not sell it with just one click on your computer. It takes months to buy and sell and to make money with all those heavy paperwork.
That is why real estate is not for those who want quick money. You will get money, but you must be patient.
3) Political games are involved here
There will be some politics in the real estate business, and you have to take care of it. If you can’t, your whole property may be stuck there for more than five years, and you will lose everything you have invested there.
History has proven these kinds of political games all over the world. That’s why when you invest, maintain good relations with the local politics. So they don’t become a barrier to your success.
The Stock Market vs Real Estate
So now you have seen some amazing advantages and disadvantages of real estate investing. Now let’s learn what you can expect in the stock market. Is it good for you?
Here is a quick list of the type of stock market investing.
- Large Cap Stocks
- Mid Cap Stocks
- Small Cap Stocks
- Hybrid Stocks
- Growth Stocks
- Preferred stocks
- Common stocks
- Income Stocks
These are the main categories of stock market investing. Note that I am not including REIT here. REIT is real estate investment. But some people treat it like stocks.
The Advantages of the Stock Market Investing
After knowing all these advantages, you will rush to buy stock. But wait, first understand it and then maybe, if you think it’s good, you can buy it. So let’s start with the first one.
1) Stocks are very liquid
You can sell a stock at any moment. Obviously, when the market is live. It will just take a click, and the money will be received in your account. Super easy, not like real estate. That is why most people want to invest in stocks.
2) Fewer transaction fees than real estate investing
In stocks, they will charge you only the brokerage fees, not any other fees, unless you earn big bucks quickly. Capital gain taxes are also applicable in the stock market, which can go up to 20%, but the extra fees you will pay will be far less than the real estate.
3) Huge no of produces
There are not many options in real estate investing, but stock market investing is full of them. You can invest even with just $100. Products like mutual funds, hedge funds, or other kinds of real estate stocks that I have discussed above, and obviously trading apps like Robinhood make trading super easy.
In short, trading in the stock market is easy than real estate investing. Anyone with a little money can enter. The stock market investing trend is raising at full speed. Thanks to the high-speed internet.
The Disadvantages of Stock Market Investing
Now let’s talk about the disadvantages of stock market investing that might shock you. Get ready.
1) Stock prices are much more volatile
The stock you have purchased may lose its value quickly within a day, from $100 a share to $5 a share. It does happen in the stock market. There is no guarantee of stability in the market. A lot of factors affect the stock flow process.
It is the biggest disadvantage to stock market investing. In real estate, the value of your property will not go down to zero. It will hold some value, at least. From $50,000 to $40,000 no like $10,000.
2) Capital gain tax might hit you hard
As I have said earlier, the capital gain tax is applicable to any kind of investment. But saving is more difficult in the stock market than in real estate. Yes, you can save your capital gain tax, but options are limited.
3) Emotional decisions can damage the profit
As this investment is super liquid, your emotional feelings can have an effect on the decision to sell it or not. If you can not control your emotions the chance of your success is low. One mistake and you are out of the market.
In real estate, that never happens because it takes time to buy and sell. In that time, you will think with numbers, not emotionally. So emotional problems are there, you have to discipline yourself, and then you can invest.
So these are all the things you should consider when investing in real estate vs stocks. I hope you have got all the answers to the questions you have. Leave a comment if you have any questions. See you soon. Thanks for reading.