Real Estate or Stocks: Which One To Invest in Today

There are many investment options to choose from when it comes to making money. Two of the most popular choices are real estate and stocks.

Investing in the real estate market and investing in the stock market both have pros and cons, and it cannot be easy to decide which option is best for you.

In this article, we will compare and contrast real estate and stocks so that you can make an informed decision about the right investment for you!

Many may feel overwhelmed when deciding between stocks and real estate, as these two asset classes can differ.

However, some key similarities between the two should be taken into account. They are similar as they both have the potential for asset appreciation and passive cash flow.

Both real estate and stocks share similar investing principles, such as the time-tested adage “buy low and sell high.”

In other words, to make profits in either asset class, you must purchase an investment when prices are low and then sell when prices have increased.

Of course, there are also key differences between real estate and stocks that should be considered.

One major difference is the level of liquidity.

Stocks are much more liquid than real estate, meaning they can be sold quickly and with less hassle.

It’s important to consider this if you need to access your money quickly or if you are worried about being able to sell your investment promptly.

Another key difference is the level of risk involved.

Real estate is generally considered a more stable investment, while investing in individual stocks can be more volatile. Real estate may be a better option if you are risk-averse, while single stocks may be more suited for those comfortable with taking on a higher level of risk.

Now that we have explored some basic similarities and differences between the two asset classes, let’s go into more detail about the returns you can expect from each.

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Returns: Real Estate vs. Stocks

One of the most important things to consider is the returns you can expect from each investment.

Regarding real estate, the average return is around 9-12%. This number can fluctuate depending on various factors, such as location and the type of property you invest in.

However, over the long term, real estate has proven to be a relatively stable investment and can be a considerably higher return on investment.

When it comes to stocks, the average return is around 12%. Again, this number can fluctuate depending on various factors, such as the company you invest in and the overall market conditions.

However, stocks have the potential to generate higher returns, but they are also more volatile.

Real estate can generally yield higher rents than dividends from stocks. Real estate can be a great option if you are looking for income investments.

With that said, stocks have the potential for compounded capital appreciation, which can lead to higher returns in the long run.

If you want to learn more about the stock market, you can check out this other article I wrote – Investing 101: Mutual Funds vs. ETFs vs. Index Funds.

Risks: Real Estate vs. Stocks

Investing in real estate or stocks comes with its risks. With real estate, one of the biggest risks is the potential for a decrease in property values.

This can happen for various reasons, such as a recession or changes in the local market.

Another risk to consider is the possibility of vacancies, which can lead to a loss of income.

You can interview your tenants, but you can never be sure they will stay long.

Related Content: 7 Mistakes To Avoid As A New Landlord (Our Experiences)

Regarding stocks, one of the biggest risks is the potential for losses due to market volatility.

The value of your investments can go up and down rapidly, leading to losses if you are not careful.

Another risk to consider is the possibility of fraud or mismanagement by the company you invest in. This can lead to a loss of your investment entirely.

There are ways to lower the risks of each investment type. Some ways to do this are by diversifying your portfolio, investing in quality assets, and working with experienced professionals.

Let’s explore some more ways to lower your risks.

Ways To Lower Your Risks When Investing

By keeping these investment principles in mind, you can lower the risks whether you want to become an investor in the stock markets or real estate.

Diversify: Don’t put all your eggs in one basket. This is key in any investment, whether buying stocks, picking a mutual fund, or investing in real estate.

Have a long-term outlook: Don’t get caught up in the market’s day-to-day fluctuations.

Be patient: Don’t expect to get rich quickly. Investments take time to grow.

Know your risks: don’t invest in something you don’t understand. Make sure you know the risks involved before you invest your hard-earned money.

Know the law: Some certain rules and regulations apply to different investments. Make sure you understand the laws before you make any decisions. By having insurance with a good law team,  you can be sure you are covered in case any legal issues should arise.

Keep emotions out of it: Don’t let your emotions guide your investment decisions. This can be not easy, but it’s important to remember that investments are based on numbers, not feelings.

Do not over-leverage yourself: Don’t borrow too much money to finance your investments. This can lead to financial ruin if things go wrong.

Start small: Don’t go all-in on your first investment. Start small and gradually increase your investment over time.

Work with experienced professionals: Get help from those who know what they’re doing. This is especially important if you’re new to investing.

By following these principles, you can minimize your risk and maximize your chances for success, no matter your investment type.

Now that we have explored the risks and rewards of real estate and stocks let’s look at each investment’s pros and cons.

Pros and Cons: Real Estate

One of the biggest advantages of real estate is that it is a physical asset.

You can see and touch your investment, which can give you a sense of security.

Another advantage is the potential for high returns. As we mentioned earlier, real estate has the potential to generate higher income returns than stocks, although it is also riskier.

Real estate debt. It can be seen as a risk by some people. Others will perceive real estate as a great investment method without using much of your own money.

This is because you can often use leverage to purchase property, which means you can control a much larger asset for a smaller investment.

Real estate can also offer tax benefits. For example, you can deduct the interest you pay on your mortgage from your taxes.

You can also depreciate the value of your property, which can lead to significant tax savings.

The biggest disadvantage of real estate is the fact that it is illiquid. It can take longer to sell your property, and you may not be able to get your money out as quickly as you would like.

Another disadvantage is that maintaining and repairing your property can be expensive, which can affect your profits.

The most troublesome disadvantage of real estate is bad tenants. As a landlord, you may experience mistreatment of your property or be sued for eviction.

You may also have to deal with damage to your property that tenants cause. A solid screening process can help minimize the risk of bad tenants.

Pros and Cons: Stocks

One of the biggest advantages of stocks is that they are liquid, which means you can sell them relatively quickly if you need to.

Another advantage is the potential for high returns. As we mentioned earlier, stocks have the potential to generate higher compounded returns than real estate, although they are also riskier.

The biggest disadvantage of stocks is the fact that they are volatile. Their value can go up and down rapidly, leading to losses if you are not careful.

You may also experience negative tax consequences, such as capital gains taxes, if you sell your stocks for a profit.

If you plan to trade frequently, it’s important to consider this. To become a long-term investor, consider investing in tax-friendly accounts such as an IRA.

Another disadvantage of stocks is that they require ongoing maintenance. For example, you may need to pay fees to a financial advisor to help you manage your portfolio.

If you plan on picking stock individually on your own, it can be time-consuming and stressful. However, these disadvantages can be negated by investing in stocks through ETFs.

Another disadvantage is the possibility of price manipulation by whale investors. This is when a small group of investors buys or sells a large number of shares, which can cause the price to go up or down.

The most troublesome disadvantage of stocks is the potential for fraud. This can happen if a company misleads investors about its financial situation or commits accounting fraud, which can lead to losses for investors.

Stocks vs. Real Estate: Which is right for you?

Both real estate and stocks have the potential to generate high returns and create wealth over time.

However, they each come with their own set of risks and disadvantages.

So, which is the right investment for you?

The answer to this question depends on your circumstances. For example, stocks may be a better option than real estate if you are looking for an investment that you can sell quickly.

On the other hand, if you are looking for a more stable investment that offers tax benefits, then real estate may be a better option.

If you only have a few thousand dollars to invest, it may be better to invest in the stock market as a down payment for a house may require more than what you have.

As your income increases, it wouldn’t hurt to compound small amounts in the markets. During this period, you should also ensure that your credit score is in good standing, as this will be a factor when you’re ready to purchase the property.

Once your income has increased and you can save money faster, you can consider looking into investment properties or following a similar strategy to us where we buy a residential property, fix the property up, rent it out, then refinance.

If you don’t want to own real estate yourself but still want exposure to the real estate market, try investing in REITs or with property crowdfunding. These investments require a lower barrier of entry, but you will not receive the same tax benefits of leverage potential as if you owned the property.

No matter what route you decide to take, remember that you are on the right track for wanting to learn about these two investment assets.

Before making a decision, remember your investment goals, risk tolerance, and time horizon.

Real estate may be a better option if you want an investment that will generate passive income through rental properties. But stocks may be a better choice if you want an investment that will appreciate without much maintenance.

You may want to consider both options and hold both long-term.

As someone that is thinking about their financial future, you are already ahead of most people!

Sometimes we can become biased toward one option or the other. It is important to remember that you should diversify your portfolio and not put all of your eggs in one basket.

Doing this can minimize your risk and maximize your potential for returns.

The bottom line is that there is no right or wrong answer regarding real estate vs. stocks.

The answer depends on your individual circumstances and investment goals. So, take the time to research and make an informed decision about which option is right for you.

In pursuing financial freedom, never forget that you can benefit from both asset classes.

Real Estate vs. Stocks: Which is the Better Investment?

So, which is the better investment? Real estate or stocks? The answer depends on your circumstances.

Real estate may be a better choice if you are looking for stability. However, stocks may be a better option if you are looking for quick, high returns.

Ultimately, the best decision is to diversify your investment portfolio and not put all of your eggs in one basket. Also, consider index funds or ETFs that allow you to invest in hundreds of companies at once. This way, you can minimize your risk and maximize your potential for returns.

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Disclaimer:

We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!