To invest in real estate or stocks — or both? That is the question.
Deciding whether to invest in stocks or real estate requires being honest about your risk tolerance and lifestyle preferences. Both investment strategies have their advantages and disadvantages, so it really comes down to your financial goals and budget.
Understanding the differences between the two will help you determine how to move forward. Let’s take a look at the benefits and drawbacks of both and then discuss which investment makes the most sense for your portfolio. Spoiler: it might make sense to invest in both.
Real Estate vs. Stocks
Investing in real estate means you acquire a physical piece of property. Regardless of the type of real estate investment you make, most investors make returns on monthly rental income and/or when they sell the property on account of it being an appreciating asset.
On the other hand, when you buy shares of stock, you purchase a piece of a company. As the company’s value grows, your stock value also grows. You can also receive income in the form of dividends on your shares if you hold onto your stocks over time.
An alternative to purchasing physical property is investing in real estate investment trusts, or REITs. REITs are individual companies that own income-producing assets in the commercial real estate space such as office complexes, retail spaces, hotels and apartment buildings.
Many REITs are publicly traded like stocks and tend to pay higher dividends than their equity counterparts. REITs, like stocks, allow you to reinvest these dividends and build your investment value. For this reason, they are quite a popular option for retirement investment accounts.
To buy stocks, you will have to go through a broker, or an entity authorized to buy stocks. You can use a brokerage firm, individual broker, and even online platforms or robo-advisors. Increasingly, many investors choose to use online investing platforms for their convenience and low costs.
Before the advent of free stock trading apps, working with a brokerage firm required making a minimum deposit and maintaining an account value alongside paying brokerage fees for making trades. In recent years, apps like Robinhood allow investors to start trading with as little as one stock and zero fees. Many even offer free stocks for signing up.
My top pick is M1 Finance, a free stock app that allows investors to set up recurring deposits which automatically get invested into a diversified portfolio of assets. You can determine which investments you’d like to make yourself or select from the company’s 80+ expertly-curated portfolios that match with various investment objectives.
Stock Investing Advantages
Stocks are liquid. With real estate, your money could be tied up for many years until you decide to sell. In the stock market, however, you can buy and sell public company shares at a moment’s notice.
Proven track record of success. Despite the many stock market crashes, buying stocks, reinvesting the dividends and holding for long periods of time has proven to be the greatest wealth generator in history. However, you need to keep your emotions at bay when ups and downs inevitably happen to see actual returns.
Earn dividends. Investing in high-yielding dividend stocks can generate significant passive income which you can then reinvest. If you hold onto these stocks long-term and continue to reinvest the dividends, you will see your net worth snowball after a few decades into true generational wealth.
Easy to diversify your portfolio. According to Warren Buffet, “The goal of the non-professional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross-section of businesses that in aggregate are bound to do well.” Basically, with stocks, it is much easier to build a diverse portfolio of investments with investments like index funds across a range of sectors. Whereas with real estate, it is much more difficult to achieve true diversification.
Stock Investing Disadvantages
An emotional rollercoaster. Investing in the stock market requires a cool head and discipline. Many investors run the risk of losing money because they let their emotions get in the way of their investments and cash out at the wrong time. For instance, during the Great Recession, many financial advisors told clients to sell their assets after the market had crashed, when they really should have been buying at that time.
Short-term volatility. If you’re looking to make money fast, then stock price volatility could work for or against you. Stock prices can vary drastically from day to day. If you don’t understand what’s going on in the market or with the companies you’ve invested in, this could cause you severe stress. However, over the long-term, the highs and lows are usually smoothed out for well-valued stocks.
Capital gains taxes. You may have to pay capital gains taxes after you sell your stocks, and your dividends could also be taxed. On the other hand, there are long-term capital gains rates (also called the passive income tax rates) for those who hold onto stocks for longer than a year.
There are numerous ways to invest in real estate, from long-term and short-term rental properties to fixer uppers and house hacking. Understanding your budget, finding the right lender and knowing the amount of work you want to put into your investment ahead of time will help tremendously.
Real Estate Advantages
A hedge against market volatility. Owning property can serve as a hedge against stock market volatility and inflation, as home values and rent prices tend to appreciate with inflation.
Tax advantages. There are a plethora of tax advantages for homeowners and commercial real estate owners. For example, qualified homeowners can deduct the mortgage interest paid on the first $750,000 in mortgage debt. Commercial real estate owners can also avoid capital gains taxes through a 1031 exchange if they reinvest in a similar type of property with the funds or use MACRS depreciation to lower their taxable income.
Cash flow. Real estate investments can offer owners a reliable, passive monthly income through the form of rent payments.
Real Estate Disadvantages
Real estate requires time and money. If you’ve invested in a rental property or fixer-upper, then expect to put a lot of time and money into the project. Being a landlord is no easy task, and you’ll be on the hook for repairs and problems that arise with the home.
Your money is tied up. Investing in real estate is highly illiquid, meaning you will not be able to access your returns for quite some time. This is especially true if you pay cash for your rental property. Selling property is also more difficult than selling stocks.
Tons of fees. There are many transaction costs involved with buying and selling property. Sellers can expect to pay 6% to 10% of the home’s sale price in closing costs, including agents’ fees, while most brokers charge no fees to sell stocks.
Not easy to diversify. To have a truly diversified real estate portfolio that is representative of multiple locations and building types, you will need large sums of money that most laypeople simply don’t have. Thankfully, REITs and crowdfunding apps have made this more achievable.
An Alternative to Traditional Real Estate: Crowdfunding and REITs
If you don’t feel like taking on the significant risk of buying a rental property and using the BRRRR Method to grow your portfolio, don’t worry. You aren’t alone.
In fact, FinTech has taken this risk aversion and made you investment products which allow you to tap into the real estate market without having to possess the properties physically, nor make day-to-day decisions about how to source tenants, manage the property, or make renovations.
You can look into some of the crowdsourced real estate investing apps below, use a free online broker like M1 Finance to purchase publicly-traded REITs, or even invest through a service like Streitwise. Read more about each below.
Diversifying Your Portfolio
As an investor, it’s never a good idea to put all of your eggs in one basket. Therefore, when it comes to investing in stocks and real estate, most Americans do both.
According to the U.S. Census Bureau, 60% of U.S. households are owner-occupied, and the Bureau of Labor Statistics says 55% of American workers participate in an employer retirement plan, meaning they have some exposure to the stock market.
Ultimately, stocks and real estate both have their benefits. Make sure to do your research and determine what you’re willing to risk before moving forward. Going in with a plan, and having the willingness to be flexible with that plan, is the key to generating significant returns.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.