Stocks vs. Real Estate: What Performs Better

Brent Davis - April 19, 2021

stocks vs real estate
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Stocks and real estate both represent lucrative investment potential for professional investors and regular individuals with some extra money on their hands and the desire to see their portfolio grow with time.

When it comes to stocks vs. real estate, which performs better? Historically, property purchases have been the go-to choice for building generational wealth.

On the other hand, the volatile stock market gives you the chance to win big from being in the right place at the right time. 

You might try your hand at a combination of these two ventures. Still, rarely anybody has the time and funds for such a feat. For most people, getting informed and deciding on either is the best path forward.

So, let’s take a look at the potential benefits, risks, and returns of both investment types.

There’s no guarantee that you’ll exit this guide knowing a definite answer, but you’ll be much more able to gauge the relative value of each.

Stocks vs. Real Estate: Overview

 

Real estate and stock investments are personal choices that depend on your goals, investment style, financial situation, and risk tolerance. 

In general, more people invest in the comparatively accessible stock market. Homebuyers are typically well-off or have spent years accumulating the amount of money necessary for growth. 

In essence, when you buy stocks, you own a tiny piece, usually under a percentage, of that company. The purchase provides you two income sources:

  • The sum a company pays annually to its shareholders in the form of dividends
  • Value appreciation with company stock increases

You could also acquire land or physical properties, earning from:

  • Renting and collecting rents for a steady income stream
  • Buying fixer-uppers and selling at a higher cost
  • Appreciation as the property value increases

Both are legitimate ways to invest money, and choosing either is much better than leaving your funds sitting in your bank account.

Stocks vs. Real Estate: A Brief How-To

The process behind purchases and sales can also inform your ultimate decision. You’ll need to learn a lot more before spending a penny, though.

These guides are only there to help you get a general image of the methods.

Stocks 

The first thing to consider is how you’ll invest in stocks. Popular methods include:

  • Individual stocks. Choose this one if you have the motivation to research and evaluate your shares on an ongoing basis.
  • Index funds. These build substantial returns over time without requiring too much time and effort on your end.
  • Robo-advisors. Brokerages can select your investments, optimize tax efficiency, and make automatic changes over time.

When it comes to the amounts, only invest as much as you won’t need for at least the next five years. You’ll then choose and open a brokerage account

Tip: Seek to diversify and focus on the businesses and industries you understand.

Real Estate

You have three main ways to dip your toes in the calm waters of property investment. 

You could lend money to developers looking to build projects and receive monthly or quarterly distributions. 

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Rental properties are another avenue worth pursuing. If you’re only getting started, it’s usually better to live in your newly acquired home while renting out smaller apartments or even rooms. 

Move on to condos and complexes with time. A blog post written by TheUrbanAvenue indicates how choosing a competitive market with luxurious condos popping up left and right is your best bet. 

If you already have enough money on your hands and some architectural tendencies, flipping properties is the way to go. 

Purchase an underpriced home, renovate it, and resell it for profit. There’s a bit of risk to this strategy, but you can surpass the pitfalls with a reliable contractor on your team. 

Tip: Choose a secure, hassle-free seller such as House Heroes to reduce the heaps of paperwork you have to tackle.

Stocks vs. Real Estate: Potential Returns

The potential financial gains from stock purchases directly correlate to the company selling the cuts. 

As its value grows, so does the worth of your percentage in it. Shares might become over or under-valued, though, making it crucial for you to study the company as a whole, as well as its board of directors, to determine whether your investment will pay off.

Real estate requires a much higher initial investment, but it rarely fails to provide a solid return. 

People always need a place to live, and whether you’re renting or selling a property, a steady income source is close to guaranteed. The exact value depends on the market, your willingness to dedicate time and money to repairs, and how quick you think on your feet, though.

Stocks vs. Real Estate: Competitive Advantages

The lists of potential benefits to yield from either investment are close to endless. Let’s emphasize the advantages one type holds over the other.

Stocks Advantages

Stocks have historically higher returns per year than real estate, making it a go-to investment for those looking to grow wealth quickly. Other notable advantages include:

  • Higher liquidity. Selling stock holdings is quick and easy, sending cash to your hands in no time.
  • Less work. Properties require continual maintenance, while stocks earn money by themselves. You could even hire a financial advisor to handle your portfolio.
  • Lower transaction costs. Most exchange marketplaces charge low to no fees for your transactions.
  • More variety. Most home investors own one or two properties throughout their life, but with stocks, you’re free to invest in whatever piques your interest.
  • Easy hedging. Stocks make it easy to protect your portfolio from downside risks.
  • Fewer ongoing costs. Property taxes can add up, while individual stocks have no ongoing fees.

Real Estate Advantages

Property investment stands on the opposite side of this debate, giving you more control over your money and bringing the following benefits:

  • Tax advantages. You can deduct the interest on your primary home or even sell it for tax-free profits. 
  • Asset tangibility. While stocks are 100% real money, homes are something you can see and put into practice. 
  • Easy analysis and quantification. This relatively stable market makes it much more manageable to calculate realistic prospective expenses. 
  • External variable insulation. Homes are local, and as long as you stick to economically strong regions, you’ll get to profit from it even amidst the shakiest economic environments.
  • Government assistance. The government seeks to extend loan modifications and bail out those late on their mortgages to incentivize home purchases.

Stocks vs. Real Estate: Common Risks

The banking crisis of 2008 and the housing bubble led to investors in both fields seeing value declines. The COVID-19 pandemic has led to another bust cycle, but these are no more than coincidences. In reality, the two investor types face very different overall risks.

Stocks Risks

The stock exchange faces risks from several factors:

  • Market. Stock values are subject to market fluctuations, impacted by geopolitical and company-specific events.
  • Economic. Companies operating domestically or abroad might face economic or political issues, causing the stock value to plummet.
  • Inflationary. Monetary policy regulation and tax revisions all impact the relative stock worth.

Moreover, investors who don’t choose to diversify their holdings expose themselves to greater risk.

Real Estate Risks

The first and most prominent risk that real estate investors face stems from our tendencies as humans to rush at the sight of money. The market requires a lot of research and punishes those who enter it casually, expecting immediate returns. 

Those flipping homes or owning rental properties face an additional level of management-related risks. Dealing with tenants, homebuyers, and repair experts can all be causes of timesinks and headaches.

Plus, the costs of buying, maintaining, and, eventually, selling a property, plus the expenses of hiring contractors and property managers, cut into your bottom line.

Stocks vs. Real Estate: The Ideal Investor

Having read the above, you now hopefully have a balanced, well-rounded perspective. It’s possible to get rich off both assets, but different investors find it much easier to navigate one than the other. 

Most stock investors:

  • Have a limited amount of capital to invest
  • Don’t mind giving up control
  • Enjoy high-adrenaline situations
  • Stay up-to-date with the news
  • Like studying economics and politics
  • Aren’t ready for high levels of commitment

Conversely, property investors:

  • Have a solid view of the future
  • Don’t do well in volatile environments
  • Find themselves tempted to buy and sell often
  • Enjoy interacting with people
  • Want to feel in control over their funds

Of course, these are only harsh generalizations, but that makes them no less beneficial. If you find yourself resonating with one of these personalities, it’s a pointer towards that investment direction.

REITs: A Solid Alternative

If neither option sounds too attractive to you – perhaps one is too volatile and the other too slow to pay you back – there’s a third option that’s a solid mixture of the two. Real estate investment trusts, or REITs, own and operate income-producing properties, such as:

  • Apartments and apartment buildings
  • Offices and office buildings
  • Warehouses
  • Malls 
  • Hotels

Choose a reliable REIT with a strong track record, letting you benefit financially from large, growing dividends as it grows in value and effectiveness.

Stocks vs. Real Estate: Final Verdict

In the end, it’s not easy to say which investment type is right for you. Consider your available time, money, and personality characteristics before making a decision.

All that to say, we have to hand it to real estate. Those investments have just as much, if not more, return potential as stocks.

The price appreciation, rental income, and inherent tax benefits give it the potential for impressive long-term results.

 

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Brent Davis has been writing about the financial markets for 10 years and worked in research for the last five years at a Fortune 500 company. Brent's investing strategy is to buy high-quality companies and then let compounding do its thing.