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Real Estate vs. Stock Investing: Which Is Right for You?

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Real estate vs. stocks, what’s the difference? Ask a hundred financial advisors what the best two types of investments are, and you’ll hear the same answers over and over again: real estate and stocks, stocks and real estate.

But ask those same advisors which of the two is better, and it’s unlikely they’ll reach any kind of consensus. That’s because while both real estate and stocks are high quality investments that’ll almost certainly make you prosper, they each come with unique pros and cons, and are heavily dependent on circumstances.

For example, if you bought Apple stock in the Eighties, you’re probably pretty happy with your investment, whereas if you put your life savings into Pets.com stock in 2000, you probably got angry just reading this sentence. Same with real estate: houses in D.C.’s Logan Circle that sold for four or five figures in the early Eighties are now going for $2 million or more, while there are people who bought condos in 2007 who are still underwater on their mortgages.

So which is better? Well, it depends. Let’s run down the advantages and disadvantages of each type of investment, so that whichever one you choose, you’ll know exactly what you’re getting into with real estate vs stocks.

Investing in Stocks

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At base, a stock is just a piece of a business. So when you buy a share of a stock, you’re buying a stake in that business, one that entitles you to a share of the profits. That means that if you choose wisely, and get in early, stocks are one of the most explosive ways to build wealth.

Of course, no one would claim that it’s easy to pick the winners, but if you do, the potential payoffs are huge. Consider Apple stock, which was selling for 91 cents a share in 1996. A hundred shares would’ve cost you less than a hundred dollars; that same hundred shares, today, would be worth over $25,000. Even Manhattan real estate didn’t go up that much.

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Pros of Investing in Stocks

There are a lot of positives about buying stocks: let’s go over a few of the biggest advantages.

History is on Your Side

In the past century, nothing created more wealth, at a faster pace, than a solid stock portfolio. According to one respected metric, housing between 1928 and 2013 has averaged an annualized return of 3.7%; over that same span, stocks had a 9.5% annualized return. 

Even if you cut the timespan down to 1975-2013, stocks returned more than triple the return than housing.

Stocks are Easy

Once you buy a stock, all you do is sit back and wait. If you chose wisely, you’ll get yearly dividend checks for doing literally nothing. Being a landlord, on the other hand, can be a full-time job, and then some.

Diversification Comes Naturally

Any decent stock portfolio is going to contain a number of different stocks, which translates to vastly reduced risk. If one stock tanks, the others can keep the ship afloat.

On the other hand, consider the risks of real estate investment, especially when you’re starting and only have one or two properties. If the value of your property plummets, you’re going to be in a tough spot.

The Cons of Investing in Stocks

But we don’t want to convey an unrealistically rosy picture of stock investment; buying stocks comes with plenty of risks. Here are a few of the most concerning.

It Takes Tremendous Discipline

Buying and selling stocks isn’t gambling, but it can feel like it. Ideally, you’d buy your stocks and let the market do the work, but a lot of investors find it hard to resist the hands-on approach. These micromanaging investors swing from the highs of a successful buy to the lows of a lost investment, riding a constant emotional rollercoaster. The worst part is, this approach almost never pays off. If you’re an emotional investors, stocks can be as much of a trap as a boon.

Stock Prices Fluctuate – a Lot

Buying real estate means you’re looking at a steady upward curve over the course of years or decades. Stocks, on the other hand, can seemingly flatline, sometimes for years, before shooting up in a matter of days. The reverse is also true: a lucrative stock can plummet and lose nearly all its value overnight. This can test the patience of even the most thick-skinned investor.

Investing in Real Estate

Real estate is always going to be a top-shelf investment. As the saying goes, they aren’t making any more land. Real estate couples unparalleled safety with a great return; if you’d invested $100 in real estate in 1975, it would’ve grown to $500 by 2013. For a low-risk investment, that’s a stellar rate of return.

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Pros of Investing in Real Estate

Let’s take a look at some of the biggest positives of buying and owning real estate.

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When you buy a property, you’ve bought something physical that has a demonstrated limit on supply. That kind of fundamental value can be tremendously reassuring if the market wavers. In contrast, if you own stock, you’ll always be aware that, on some level, all you’ve bought is a line in someone’s ledger book.

Real Estate is Useful

Homes are lived in, office buildings are used by businesses. The fact that your property investments have real-world utility means there’ll always be a high floor for their value. 

Incidentally, it also means that you can live in the property that you buy. Considering that rent or mortgage payments are the largest expenses in the typical American’s budget, being able to live in your investment can be the equivalent of a 20% bump in your salary. 

Cons of Investing in Real Estate

While real estate is a low-risk investment, there’s no such thing as a zero-risk investment. Real estate does come with some significant risks and disadvantages.

No diversification

Buying a selection of different stocks is a way of spreading risk around; if one stock loses value, that doesn’t sink your entire portfolio. That’s not so if you have all your money tied up in one or two properties. A price bubble, natural disaster, or other bad luck could decimate your wealth almost instantly. 

It Demands a Hands-On Approach

Being a landlord is hard work. You’ll need to screen tenants, perform repairs or cultivate a relationship with a contractor, and keep track of leases and taxes. And if you opt to hire a property manager to do all that for you, you’ll have to give up a steep percentage of your rents, just so your life isn’t completely taken over by investment maintenance.

Illiquid and Expensive

If you have money in stocks, you can sell off and get a check from your broker in a day. Selling off a house takes weeks or months. If you need fast money, real estate is nearly useless.

It can also be incredibly expensive. If you own a multi-unit building, and a lot of those units are vacant, you’ll have to chip in your own money just to cover expenses. After a few months of this, you might question the wisdom of buying property in the first place.

A Note on the 1031 Exchange

Real estate does come with a special tax advantage that can allow investors to level up their investments at a borderline ludicrous rate. The 1031 exchange is a provision in the tax code that essentially lets you sell your investment property, defer capital gains taxes (which can run up to 40%), and invest all that money in a more expensive investment. 

In this way, real estate investors can repeatedly flip one property into a more expensive property, without giving Uncle Sam his due until much, much later. There’s no equivalent mechanism for stocks. Taking that into account, real estate might be the better investment for the ambitious, gutsy investor.

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Ben Mizes
Ben Mizes
Ben Mizes is the CEO of Clever Real Estate, an online platform that connects home buyers and sellers with a top-rated, full-service real estate agent for a fraction of the traditional commission fee. Ben is also an active real estate investor in St. Louis, MO with over 22 units.

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