Stocks vs Real-estate Investing

Investing in real estate or stocks is a personal choice that depends on your financial situation, risk tolerance, goals, and investment style. It’s safe to assume that more people invest in the stock market, perhaps because it doesn’t take as much time or money to buy stocks. If you’re buying real estate, you’re going to have to save and put down a substantial amount of money.

When you buy stocks, you buy a tiny piece of that company. In general, you can make money two ways with stocks: value appreciation as the company’s stock increases and dividends.

Investing in the stock market makes the most sense when paired with benefits that boost your returns, such as company matching in a 401(k). But those perks are not always available and there is a limit to how much you can benefit from them. Investing in the stock market independently can be unpredictable and the return of investment (ROI) is often lower than expected.

Pros of Investing in Real Estate

• Comfort. Real estate is often a more comfortable investment for the lower and middle classes because they grew up exposed to it (just as the upper classes often learned about stocks and other securities during their childhood and teenage years). It’s likely most people heard their parents talking about the importance of “owning a home.” The result is that they are more open to buying land than many other investments.
• Cash flow. Rent from real estate can provide steady, reliable cash flow on a month-to-month basis. Many investments only improve your cash flow in the long-term or when you sell them.
• Limiting fraud. It’s more difficult to be defrauded in real estate because you can physically show up, inspect your property, run a background check on the tenants, make sure that the building is actually there before you buy it, and do repairs yourself. With stocks, you have to trust the management and the auditors.
• Using debt. Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.
• Safety. Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in the purchasing power of the dollar.

The cons

• Real estate investments can be more work than stocks. While purchasing property is easy to understand, that doesn’t mean the work of maintaining properties, especially rental properties, is easy. Owning properties requires much more sweat equity than purchasing stock or stock investments like mutual funds.
• Real estate is expensive and highly illiquid. Investing in real estate, even when borrowing cash, requires a large upfront investment. Getting your money out of a real estate investment through resale is much more difficult than the point-and-click ease of buying and selling stocks.
• Real estate has high transaction costs. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. That’s a hefty cut compared with stocks, especially now that most brokers charge no fees for stock trades.
• It’s difficult to diversify your investments with real estate. Location matters when investing in real estate. Sales may slump in one area, while values explode in another. Diversifying the purchase of real estate properties by location and type (a mix of residential and commercial, for example) requires much deeper pockets than the average investor has.
• The return of your investment isn’t a sure thing. While property prices tend to rise over time, there’s always a risk of selling a property at a loss —  the 2008 financial crisis is a reminder of that. This is also true of stocks, of course.

Pros of Investing in Stocks

• Longevity. More than 100 years of research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in history.³ Nothing, in terms of other asset classes, beats business ownership—and when you buy a stock, you are buying a piece of a business.
• Minimal work. Unlike running a small business, owning part of a business through shares of stock doesn’t require any work on your part (other than researching each company to determine if it is a sound investment). You benefit from the company’s results but don’t have to show up to work.
• Dividends. High-quality stocks not only increase their profits year after year, but they increase their cash dividends as well. This means that you will receive bigger checks in the mail as the company’s earnings grow. And if you hold onto your stocks long-term and reinvest your dividends, after a few decades your wealth will have grown significantly.
• Access. You don’t need to have huge sums of available cash to begin investing in the stock market. With some mutual funds  or individual stocks, you can invest as little as $100 per month.⁴ There are also a variety of microsaving apps that allow you to begin investing for less than $25.^5 6 Real estate requires substantially more money in your initial investment, as well as the cost of maintenance and improvements.
• Liquidity. Stocks are far more liquid than real estate investments.⁷ During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
• Borrowing. Borrowing against your stocks is much easier than real estate. If your broker has approved you for margin borrowing (usually, it just requires you to fill out a form), it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks and you pay interest on it, which is typically fairly low

The cons

• Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view on the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility.
• Selling stocks may result in a capital gains tax. When you sell your stocks, you may have to pay a capital gains tax. If you’ve held the stock for more than a year, however, you may qualify for taxes at a lower rate. Also, you may have to pay taxes on any stock dividends your portfolio paid out during the year.
• Stocks can trigger emotional decision-making. While you can buy and sell stocks more easily than real estate properties, that doesn’t mean you should. When markets waver, investors often sell when a buy-and-hold strategy typically produces greater returns. Investors should take a long view of all investments, including building a stock portfolio.