There is no need to convince anyone of the importance of investments in 2021. As inflation keeps rising and the purchasing power of national currencies is declining, financial advisors recommend investing. The only question is what type of asset to choose. The most popular and potentially profitable ones are stocks and real estate. This article is to show the principal difference between these two popular assets and help you decide which one suits you best.
Real estate vs. stocks
Needless to say that one thing doesn’t have to exclude the other, and many people do both, buying real estate and shares. All things considered, diversification won’t do you any bad. Having a good rental property and owning shares that rise in price – sounds like a pretty good approach. But for those who are only at the beginning of their investing path and thinking of where to start, let’s compare the attributes of these asset types and try to choose which one suits you best.
Buying real estate requires more money than buying shares of a company. Thus, entering the stock market is more affordable than becoming a property investor. About $200 – $1,000 will be sufficient to buy a few shares of an average company or fractional shares of larger companies. Real estate, on the other hand, requires larger sums of money from an investor’s side, even when borrowed capital is involved. So consider the amount of money you are ready to allocate before picking an investment.
Liquidity is the ease of turning an asset into cash. In other words, if you urgently need money, how quickly you can sell the house or stocks you own. Liquid assets are easily sold. Real estate is considered one of the least liquid assets. Depending on the stocks you are interested in, there are more or less liquid ones. Blue-chip stocks are highly liquid. Penny stocks can’t boast high liquidity.
Transaction costs and other expenses
Buying and selling real estate is more expensive than buying and selling stocks. Real estate agent commissions, taxes, and fees need to be paid when buying a house. Once you own the property, you are obligated to pay property tax, insurance, maintenance, utilities, and sometimes real estate management. When it comes to owning a company’s shares, you only pay a small brokerage commission.
Over a long history, the stock market has generated much higher rates of return than real estate. The companies grow (without much of your involvement), and their shares rise in price. Plus, certain companies pay dividends regularly, creating an additional source of income for you. Property prices tend to increase over time too, but the growth is slower than in the stock market.
Unlike stocks, real estate is tangible and easy to understand. This is the reason why traditional investors like it. It is believed to be more steady and reliable contrary to the volatile stock market. Novice stock investors are more exposed to stress associated with their asset’s price fluctuations. Thus, they are more likely to fall prey to emotions of fear and greed, which may result in irrational behavior, e.g., selling the stock when it temporarily drops in price.
The stock market is more volatile than real estate. It doesn’t make it a bad investment only if you look at it as a long-term thing. If you know that you will spend days worrying about daily price fluctuations of index funds, maybe investing in stocks is not that good idea. Remember, the word investment implies long-term commitment. Housing prices are far less volatile than stocks which partially can be considered as an advantage.
Neither real estate nor stocks are free of financial risks. Neither of them is resistant to economic turbulence, e.g., the Covid-19 crisis or the 2008 financial crisis. The most common reason for money loss both in property and stocks is lack of knowledge. People lose money in stocks when they act impulsively or invest in the wrong shares. Another common mistake is buying overpriced stocks, which will surely fall in price due to poor research. The same risks are associated with real estate. The only way to buy property is to have a clear understanding of associated expenses and potential profit.
Why Invest in Real Estate?
Although there are numerous advantages of stocks over the property market, there are individuals who prefer investing in real estate. And there may be a valid reason for that decision. Suppose you can get a discount on a house and sell it later at its real price. When choosing a property for an investment, make sure it will be easy to rent out. Often the main selling point for housing is its location.
Calculate the potential revenue by subtracting property tax, possibly insurance, maintenance, utilities, real estate managers, etc., from the rental price. If the amount left is more than you would make in stocks (analyze the historical performance of a stock), it is probably not a good idea. The situation when there is no demand for the property means it stops bringing profit, even though the expenses remain the same.
Even though the stock market may seem abstract while housing is tangible, stocks have significant advantages over real estate. The historical evidence shows that stocks outperform real estate and other types of assets. The profit from the stock market can reach up t 20% rates of return, while real estate generates much lower profit. In addition, housing is an illiquid asset compared with stocks and is harder to get started due to large down payments.
Despite the factors mentioned above, you should choose an asset with respect to your personality. Some people just love real estate – they know the market, they are good at finding great properties and determining the best time to buy and sell, and eventually, make a lot of money. In any other case, stocks are probably a better idea. Pick your investment wisely based on the amount of money you are ready to allocate, your risk tolerance, and thorough research. Be rationa – your success will depend on the quality of your analysis before you invest your money.
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