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Real Estate Investing vs. Stocks: Weighing the Pros and Cons

Ask a 100 financial advisors where you should invest your money, and most will answer either “stocks” or “real estate.” Choosing between the two, though, is going to be a little more difficult. Both are great options, but both come with unique risks. Let’s review the upsides and potential pitfalls of each type of investment to see if a clear winner emerges.

Real Estate

Andrew Carnegie famously said, “ninety percent of millionaires became so through owning real estate,” and there’s still a lot of truth in that. Here are a few of the benefits to owning the most tangible of investments.

High Degree of Safety

If you’re following a “buy and hold” strategy, as opposed to the riskier house flipping strategy, your money is going to be pretty safe. Market crashes like we saw in 2008 are going to happen every decade or two, but historically, the real estate market is on an unmistakably upward trajectory. According to data from the National Association of Realtors (NAR), median home prices in the 36 years between 1968 and 2004 averaged yearly increases of 6.4%, without a single year of decline. Although the crash of 2008 broke that winning streak, home prices resumed their steady climb soon after, and remain a great long-term bet.

Cash Flow

Renting your property out means you’ll get a steady stream of rent checks. There are very few other investments that come with a steady, predictable, monthly cash flow.

A Hedge Against Inflation

While inflation erodes the value of a dollar, real estate has historically been a great hedge against inflation, as it generally increases in value faster than the rate of inflation. Real estate is considered a hedge against inflation, since home values and rents typically increase alongside rising inflation.

There are some caveats to this rule, though. A paper by MIT found that while most forms of real estate were indeed effective hedges against inflation, office real estate failed to meet that benchmark.

You Can Invest with Other People’s Money

If you want to invest in, say, stocks, or gold, or municipal bonds, you’re going to have to pay cash up front. But one of the great things about investing in real estate is that you can do it with the bank’s money. All you need to do is come up with the down payment— and sometimes, not even that.

Think of it like this: if you buy a $500,000 property in cash, and it appreciates by $50,000, that’s a 10% return on your investment. But if you put $100,000 down and borrowed the rest, you’ve gotten a 50% return on your investment. That’s the power of leverage.

Copious Tax Deductions

Landlords have access to a long list of very precious tax deductions. The largest one is usually mortgage interest, but they can also deduct repairs, insurance premiums, depreciation, and many more.

The Cons

Real estate is a relatively safe investment— but as any investor knows, there are trade-offs for that lower risk. Let’s run down some of the downsides and risks of being a property owner.

High Maintenance

We’ve all heard the landlord horror stories about getting calls from a tenant at 4AM about an overflowing toilet. Your luck may not be quite as bad, but being a landlord is hard, time-consuming work, and the more tenants you have, the more work it is. There are great property management services out there, but they aren’t cheap; typically, they’ll cost you a percentage of rents collected.

Hint: Create systems that minimize the time you spend maintaining the property to create true financial freedom.

Poor Liquidity

Even in a hot market, preparing a home for showings, listing it on the market, and closing the sale is going to take months. If the market’s lukewarm or cool, it could take several months, and several price drops, to get a buyer. Real estate’s a great investment, but converting it to cash is a long process, much of which will be out of your control.

There’s also the costs associated with selling real estate: capital gains taxes, real estate agent commissions, maintenance, legal paperwork, etc. These all cut into your profits, and it’s why many investors suggest buy and hold strategies over constant home flipping with slim and risky margins.

Real Estate Does Outpace Inflation— Barely

According to the raw numbers, median home value has increased since 1940 by an annual rate of 5.5%. But when you adjust for the change in the average home’s square footage— homes have steadily increased in size since 1940— and inflation, that number goes down to 1.5%.

The Case for Stocks

There’s a reason that Wall Street is synonymous with wealth; the stock market is one of the biggest creators of wealth in the world. But while there’s definitely money to be made in stocks, there’s no such thing as easy money.

The Pros

Excellent Historical Return

Over the past century, stocks have averaged an ROI of 10%. There’s simply no other investment you can make that will consistently yield that kind of average return. That’s only the market average; windfall investments have made smart investors billionaires. Of course, the year-to-year ROI isn’t exactly that cut-and-dried, which we’ll address below.

Own Part of a Business— Without the Hassle

Real estate is a very hands-on investment, especially if you manage your own properties. Stocks are just the opposite. You’ve bought a stake in a company, but you aren’t required to go to any meetings, weigh in on any decisions, or deal with any customers. It’s the definition of passive investing.

Very Liquid

If you need to sell your stocks, you can do it with a click of a mouse or a single phone call to your broker. Depending on the type of sell order, completing the sale could take as little as seconds, and your money will be available in a few days.

Easy Diversification

Spreading your money out to guard against sudden drops is much easier in the stock market, where you can put your money into several different industries simultaneously. Contrast this to the real estate world, where putting money into several different buildings, or into residential, commercial, and office real estate would take a prohibitive amount of capital.

The Cons

Stocks are risky, not only in a literal financial sense, but in a psychological sense; the market skyrockets one day, and the bottom drops out the next. Most of the cons of investing in stocks are related to this volatility.

Stocks Take Mental Strength

Experts suggest stock investing as a long-term move— you should use money you won’t need for at least five years. But in reality, few investors can resist monitoring the daily or even hourly ups and downs of their investment, and acting accordingly. When your stock is on a long slide, or in a stomach-turning nosedive, it can be difficult to ride out the turbulence. But that’s exactly what the smart investor has to do.

Constant Fluctuation

Remember when we mentioned that stocks averaged a 10% annual return over the past century? In the short term, though, the market is so volatile that between 1926 and 2014, yearly returns fell in between 8% and 12% only six times. The lesson? The stock market is a rollercoaster.

High Risk

The history of the stock market is full of stories about meteoric risers that make investors rich overnight, only to crash to earth soon after. Remember, just because the market averages a 10% annual return, doesn’t mean any individual stock is necessarily a safe bet, and in a fast-moving economy, a stock that seems rock solid can collapse overnight.

In Conclusion

So which is better— stocks or real estate? If there’s one thing to take away from this piece, it’s that there’s no definitive, one-size-fits-all answer to that question. The bottom line is, the best investment for you is going to depend on how much capital you have, your appetite for risk, your timeline, your geographical location, and the amount of time and effort you’re able to devote to managing your investments. Answer those questions for yourself, and your best course of action should be clear.