Both real estate and stock investments come with advantages and risks. However, how you approach either largely depends on timing. Very few stocks would have outperformed buying beachfront property in California in the 1970s and selling it 20 years later, and practically no property could match the returns you would have achieved if you had invested in the stocks of Microsoft, Apple, Amazon, or Walmart early in those companies’ histories.
Real Estate vs. Stocks: Cash Flow
When you invest in real estate, you are actually purchasing land or property. Some properties may cost you money every month you hold them, such as a vacant piece of land for which you pay taxes and maintenance while you wait to sell it to a developer.
Renting out properties can provide a steady, reliable cash flow on a monthly basis. Some properties can be cash-generating, such as apartment buildings, rental homes, storage warehouses, or shopping centers where you pay expenses, and tenants pay rent, and you keep the difference as profit.
Cash flow from stocks does not have the same character as that which comes from renting out properties you own. Most cash from stocks comes long-term when you sell. However, investors can obtain cash while owning stocks through dividends, which you can reinvest. If you use the cash that the company sends you for owning its shares to buy more shares, over time, you should own more shares, qualifying you for higher dividend payouts.
Note: It’s easy for stocks to become overvalued or undervalued. Before investing, study the company as a whole, including the amount of earnings being paid out as dividends. If the company pays out more than 60% of its earnings as dividends, it may not have enough cash flow to cover unexpected market changes.
The company’s board of directors, elected by shareholders like you, decides how much of the earnings is reinvested in expansion each year and how much is paid out as cash dividends.
Real Estate vs. Stocks: Management Costs
Real estate can cost you money every month if the property is unoccupied. You still have to pay taxes, maintenance, utilities, insurance, and more. If you find yourself with a higher vacancy rate than usual due to factors outside your control, you might actually end up losing money each month.
While you might pay brokerage fees or fees for a mutual fund manager to manage your stock investments, these fees are relatively less than what it could take to operate an apartment building or another real estate investment.
Note: Mortgage use in real estate can be organized much more safely than using debt to buy stocks through margin trading.
Real Estate vs. Stocks: Time and Effort
Compared to stocks, real estate requires a lot of hands-on work. You have to deal with midnight phone calls regarding bathroom leaks, gas leaks, or potential lawsuits due to a bad sign on the porch, etc. Even if you hire a property manager to take care of your real estate investments, managing your investment will require attending meetings and regular supervision.
When buying stocks, you are buying a piece of a company. If a company has 1,000,000 outstanding shares, and you own 10,000 shares, you own 1% of the company. Unlike running a small business, owning a piece of the business through stock shares does not require any work on your part, other than researching each company to determine whether it is a sound investment. You benefit from the company’s performance but are not required to show up for work.
Investment
Real Estate vs. Stocks: Volatility
Real estate investments have long been seen as a great hedge against the loss of purchasing power of the dollar. While properties can decline over years or decades in certain areas, most investors who see this beginning to happen can sell their investments before they lose money.
Stock prices can experience severe volatility in the short term. Your stock worth $40 can drop to $10 or rise to $80. If you know why you own a particular stock, this won’t bother you at all. You can use the opportunity to buy more shares if you believe they are very cheap, or sell shares if you think they are too expensive. If you hold good value stocks for the long term, these ups and downs can often be buying opportunities, but if you hope to make money quickly, the volatility of stock values can work against you.
Note: It is easier to borrow money against stocks than against real estate. If your broker agrees to a margin loan, it’s as simple as writing a check against your account. If the money isn’t in the account, a debt is created against your stocks, and you pay interest on it, which is usually very low.
Investing in Real Estate vs. Stocks: Liquidity
When it comes to investing, liquidity is the ability to easily convert your investment into cash. Stocks are much more liquid than real estate investments. During regular market hours, you can sell your entire position, often within seconds. It may take a couple of days to see the returns, but you can exit your investment almost whenever you want.
When you own a piece of real estate and need to sell it for cash, it can take at least a month. You may have to list the property for days, weeks, or months, or in extreme cases, years before finding a buyer. Once a buyer is found, your property enters a holding period of at least 30 days, during which inspections and title searches are done, documents are signed, and banking transfers must occur before ownership is transferred and you receive your money.
Investing in Real Estate vs. Stocks: Diversification
Both real estate and stocks can provide long-term financial gains, and both come with risks. When choosing the right investment strategy for you, the best way to mitigate this risk while benefiting from potential gains is to diversify as much as possible.
You can more easily diversify with stocks by investing in several companies, so if one takes a hit, you might be able to earn from another company. Mutual funds carefully select stocks to ensure the funds are properly diversified.
Unless you have unlimited funds, when investing in real estate, you are likely to own a few properties at most. This makes diversification difficult, but even within real estate, you can diversify by carefully choosing the locations and types of properties you purchase.
Investing in Real Estate vs. Stocks: Accessibility
You don’t need to have large sums of cash on hand to start investing in the stock market. With some mutual funds or individual stocks, you can invest less than $100 a month. There are also small saving apps that allow you to start investing with less than $25.
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