The two traditional forms of investing when saving for the long term are stocks and real estate. Both have proven to be successful over the past decades and offer a path to financial security, but which is better? Real estate or stocks?
The truth is that there is no one right answer for everyone. Each of these investments has their own advantages and disadvantages in building up a portfolio of assets and the deciding factor often comes down to personal preferences.
Advantages and Disadvantages of Real Estate
There are good reasons to select real estate as your investment model. Perhaps the most important reason is psychological.
The real estate is a tangible piece of property that you can look at and feels more real as an asset compared to stocks that look like numbers on a screen. Since the value of a property isn’t constantly changing, this can cause a big difference in how you treat the asset.
Instead of looking for a quick flip, you might be more likely to hold on to the property for the long term and collect rent from the house.
You can also use leverage by taking out a mortgage to buy properties. This makes them easier to purchase and improves returns if the property does well because you only needed to put down part of the initial payment for the house.
There are also tax advantages to owning properties. The government offers several tax deductions on property taxes and mortgage interest payments. Depending on your circumstances, the tax savings can be considerable.
Of course, real estate investing is also a considerable amount of work from taking care of the property to getting tenants. When something falls apart, tenants expect their landlords to fix it.
The costs can add up and reduce the profits from renting a house, especially if you have to hire someone to fix everything instead of doing it yourself. Also, finding tenants can be a challenge if the property is in a location without high demand.
Each day a property remains vacant is a day without income, but the costs to maintain the property needs to be paid throughout the year.
The other downside to a property is that real estate values rise slowly compared to stocks. This may be problematic if you are interested in selling the property in the near future.
Advantages and Disadvantages of Stocks
Not to be left behind, stocks also are sources of considerable advantages compared to real estate purchases. The most obvious advantage over real estate is the passive nature of the investment.
You can buy stocks and leave them alone for decades without having to do anything. Professional management teams are already in place to take care of the companies.
Plus, it is a lot easier to buy and sell stocks than real estate. If you decide that you no longer want stock in a particular industry, you can switch to a different one with a click of a button. The transaction costs are also significantly lower than what a real estate agent collects.
The disadvantage of stocks is that they can be very volatile. When stock market crashes can occur very quickly and you can lose more than 30% in a matter of months.
The other disadvantage is that the management of companies can commit frauds that are hard to spot by a passive investor. A stock that becomes Enron loses all of your money.
Also, the income from stocks come in the form of dividends. Dividends are paid from company earnings that are already taxed once at a company level, whereas real estate doesn’t have this problem of getting taxed twice.
Rate of Return
The one area that ranks most important to many people is the rate of return of their investments in stocks or real estate.
When looking at overall numbers for investment returns between real estate and stocks, there is little question that stocks have increased more.
Over the decades, an equal investment in both stocks and real estate demonstrates the return of stocks is several times higher than real estate. Yet, there are other factors to consider.
Frequent stock trading can cause capital gains taxes that can take a large bite out the profits made from stock investing. Also, if you are deciding between renting a place or investing in stocks, the peace of mind from owning your own home is something to consider.
It should also be noted that while the overall numbers are important, it would be more accurate to look at exactly what was purchased so that you can properly judge your rate of return.
For example, an investment in Apple stock would have beaten any real estate investment, but an investment in a hot real estate market would beat the average stock at the right time.It depends mostly on what you choose for your portfolio.
Which is better?
In the end, when planning for the long term, both real estate and stocks offer solid investing possibilities for your portfolio. The best answer may be to invest in both so that you can enjoy the benefits of both types of assets.
The diversification can help you reduce risk and many people like the idea of having real estate. Due to the amount of capital required for real estate, for most people, this would be a stock portfolio combined with a house they live in.
However, savvy investors can use Real Estate Investment Trusts (REIT) for their real estate portion of their portfolio. REITS own real estate and have a professional management team in place.
Many trades on a market just like stocks so investors who buy them gain some of the advantages of buying stocks. The REITs also have favorable tax benefits and avoid the double taxation issue of most stocks because their earnings aren’t taxed at the company level.
Whichever choice you make, make sure you keep focused on your goals to build a long term portfolio. The road to retirement and financial independence is a journey that can’t be rushed.
About the author: Nick Karr is a private investor with years of experience. From his early days working on Wall Street to now writing a private investment blog at Pugvestor, he’s always believed in empowering individual investors to take control of their own financial destiny.