Real estate vs. stocks: Which investment option is right for you?

When it comes to comparing real estate vs. stocks, one of the main differences is that real estate involves investing in a physical asset (properties) to either rent or resell for a profit, while stocks involve buying a share of a company and waiting for them to potentially increase in value. Investors aiming for a more passive income might lean towards real estate, while those looking for faster returns and portfolio diversification might choose to invest in stocks.

However, you don’t necessarily have to choose between the two. Depending on your investment goals, doing a bit of both can help you further diversify your assets and potentially benefit from the profits both investments offer. Aligning your goals with your investment risk tolerance and financial situation can help you determine which one, or both, is the right choice for you. 

Let's explore the pros and cons of investing in stocks versus real estate to help you better decide what method works best for you.

Real estate is a type of alternative investment, which includes multiple types of properties (single-family houses, mobile home parks, apartment complexes, strip malls), which can usually be categorized into two groups: residential and commercial. You can generate income in real estate by purchasing a commercial or residential property and either renting it out or “flipping” it, which involves renovating a property with the goal of selling it at a higher market value to make a profit. 

Since real estate investing requires a big up-front investment, and is generally considered to be extremely risky, it is important to consider the potential advantages and disadvantages before deciding to purchase a property. 

Let’s consider some of the pros and cons, along with an alternative to traditional real estate investments.

• Real estate is a tangible asset: Unlike stocks, real estate is a physical asset you can see, manage, and improve or renovate. This might offer a sense of security and control to some investors.

• Real estate investments may appreciate over time: Property values have the potential to increase over the long run, which can potentially lead to gains when you decide to sell your property.

• Real estate can provide a steady income: Rental properties can provide a consistent stream of income, oftentimes monthly, which may grow over time. However, you might want to account for management and repair costs as well.

• Property ownership can have tax advantages: Having a mortgage can allow you to potentially qualify for tax deductions on interest, property taxes, depreciation, and operating expenses. You can also use a 1031 exchange (swapping one real estate property for another similar type of property) to defer capital gains taxes.

• Real estate can help serve as an inflation hedge: Property values and rent tend to rise with inflation, which can help preserve purchasing power.

• Real estate investments have high upfront costs: Investing in real estate requires a considerable upfront investment, including down payments, closing costs, realtor costs, inspections, and repairs. This requires substantial capital to get started, and often involves a more difficult financing process compared to primary home loans.

• Investing in real estate is highly illiquid: Unlike stocks or mutual funds, real estate is not as liquid if you need quick access to cash, since properties can’t be sold as quickly.

• Real estate comes with a management burden: Owning rental properties requires a lot of time and effort. Dealing with tenants, maintenance, repairs, and vacancies can be quite stressful. If you don’t want to manage your properties yourself, you also need to consider the cost of hiring a property manager.

• Real estate still comes with market risk: Even though real estate may appreciate in value, you can still experience property value decreases due to economic downturns (such as the banking crisis of 2008), oversupply, or neighborhood decline. Essentially, there is no guarantee of positive returns.

In general, real estate requires a big up-front investment, in property costs, renovations, management, and more, which some investors may not be ready for. However, there is an easier option, which is real estate investment trusts, or REITs.

REITs are companies that own, operate, or finance income-generating real estate properties, such as apartment complexes, shopping malls, skyscrapers, and more. This type of investment gives you the opportunity to earn money from real estate without having to buy, finance, or manage said properties yourself.

REITs were designed to be a more accessible alternative, giving smaller investors the opportunity to invest in diverse real estate properties. However, unlike real estate, REITs can be purchased and traded like stocks and are, in turn, more liquid.

When you buy stocks, you are essentially purchasing a small share of a company with the goal of earning a return on your investment. This can be done by selling shares when the company’s stock value increases or by holding it when dividends are paid. Stock prices may vary depending on the type you are purchasing, such as mutual funds or exchange-traded funds (ETFs), allowing you to start your investment journey with minimal funds.

Investing in stocks is a popular way to build wealth over time, but it does not guarantee a profit. While stocks offer significant potential for growth, there is also the possible risk of losses. Therefore, it is important to be aware of the advantages and disadvantages before getting started.

• Stocks offer potential for high returns: Historically, stocks have shown higher long-term returns than most other investments. On average, stock market returns tend to be positive, but past performance doesn’t guarantee future results.

• They are highly liquid investments: Stocks can be bought and sold rather quickly through exchanges, making them a more liquid asset than real estate. It may also be easier to know the value of your investment at any given time compared to real estate.

• Stocks are quite accessible: You don’t need large amounts of money to get started investing in stocks. Online brokerages or investment apps can help you get started, even with low amounts of money.

• More diversification options: With thousands of stocks available across different sectors and geographies, you can build a diversified portfolio and help spread your risk.

• Potential for tax-advantaged growth: If you purchase shares through an employer-sponsored retirement account (like a 401(k)) or an individual retirement account (like a Roth IRA or traditional IRA), your earnings can potentially grow tax-deferred or tax-free.

• Market volatility and risk of loss: Stock prices can drastically change in short periods due to economic changes, geopolitical events, or company performance, which can also lead to losses. Furthermore, unlike savings accounts or bonds, stocks can lose value (sometimes drastically) and do not guarantee any returns.

• Requires knowledge and market research: If you want to make informed choices, investing in stocks requires understanding markets, analyzing companies, and staying up-to-date on financial and geopolitical news.

• Emotions can get in the way: Fear and greed can cloud your decisions, such as panic selling during downturns or buying into hype during market highs, which can potentially lead to losses or missing out on gains.

When deciding on which investment option is the best choice for you, it is important to consider your investment goals, risk tolerance, and current financial situation. In general, real estate may be an attractive option for those seeking tangible assets, passive rental income, and less daily volatility. But it is still important to note that it requires more upfront capital and hands-on effort.

Stocks might be a more appealing option for those looking for more liquid assets with a long-term growth potential and room for diversification. However, this does come with more short-term volatility. 

If you are unsure about whether real estate or stocks would be the best to meet your long-term goals, you can also consider seeking advice from a professional, such as a financial advisor. Regardless of what investment option you decide on, it is crucial to stay informed and be aware of potential losses you may face. 

Here is an overview of the pros and cons of investing in real estate vs. stocks:

Investing in real estate and stocks comes with different risks and rewards. It is important to define your goals and do your research before choosing what option works best for you. You can also consider REITs if you are comfortable with the risks but not ready to purchase a property or are looking to diversify your portfolio. 

If you are looking for further diversification methods, Raisin is here to help. The Raisin marketplace gives you access to a variety of high-yield savings products with competitive interest rates to help you grow your money faster. Sign up today and start maximizing your savings potential!

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.