Choosing how to invest your money can be daunting since there are so many seemingly lucrative options, especially if you’re investing a significant amount of money. You already know the sooner you get your hard-earned cash working for you, the better. So, how do you earn great returns while balancing your risk tolerance, timeline, and desired involvement?
Investing In Stock Market vs Real Estate
When it comes to choosing the best investments in alignment with your personal goals, you’ll have to evaluate the pros and cons between both real estate and the stock market, plus sort through whether mutual funds, stocks, residential rental properties, or commercial real estate are opportunities that support your desired lifestyle and returns.
Of course, you’re not limited to one or the other. If I had to venture a guess, I’d say most real estate investors also invest in the stock market. But the reverse isn’t true: most people who invest in the stock market aren’t always real estate investors (outside of owning their own home). That’s because real estate investing carries unique features that can make it appear less accessible than mutual funds and stocks. That said, real estate investments come with benefits beyond what a stocks-only investor could receive!
So, which is a better fit for you? Are you cut out to have real estate holdings and be a stock investor? Or maybe you’re more of a mutual funds and real estate syndication fund investor?
To find out more about each of these options and determine what you’re drawn toward, let’s look at the pros and cons and the variety of ways you can invest in each, plus the tax implications and other benefits of real estate versus stocks.
Investing in the Stock Market
When you make stock investments, you’re buying a small part of a business. Because you own a fraction of that company, you get a portion of its profits. You can buy shares in publicly traded companies regulated by the SEC and make money in two ways:
Sell stocks for more than you paid
Receive dividends as a shareholder
In addition to buying individual stocks, you can buy shares in exchange-traded funds (ETFs). ETFs can be a great way to own shares in various stocks (yay for diversification!) while avoiding high management fees. They’re often an attractive option for people who want exposure to the market but don’t have the skillset or time to choose their own stocks.
Real Estate Investment Trusts
Real estate investment trusts (REITs) work similarly to ETFs, except when you invest in REITs, you’re buying shares of a company whose primary business model is real estate investing and management. One common misconception by many investors is the belief that an investment in a REIT is the same as an investment in physical real estate assets.
The truth is, however, the real estate operating companies may own a variety of commercial properties and bundle those property types (apartment buildings, for example) into REITs. While this does make traditional real estate appear more accessible since you can invest easily through most online brokerages, you’re investing in the company, but not the physical property they own or their products.
With REITSs being easily accessible just like stocks, it also allows your investment to be liquid. REITs provide the liquidity investors sometimes need, which is an advantage to these types of investments.
It’s always up to you as the investor to perform your due diligence and fully understand what type of company or investment property you’re investing in and which benefits and risks you’re willing to take.
Benefits of Investing in Stocks
Here are a few reasons you might want to maintain an investment portfolio of stocks:
Attractive Historical Returns
Countless people have staked their fortunes on investing in stocks, and there’s a sound reason: historically, the market has yielded good returns. This isn’t to say every year has been a winner for the stock market (2008, anyone?), or that all stocks always increase in value.
But the S&P 500 Index’s average annual return since its inception in 1926, adjusted for inflation, is about 7%. Historical returns are no guarantee, but they suggest that if you buy and hold an index fund mimicking the S&P 500, you should expect an average annual return of close to 7% over the long haul.
Getting started with stock market investing is incredibly easy. All you need is a self-directed brokerage account or a robo-advisor account. You don’t need to use premium investing services and you don’t need a huge initial investment. You can buy some individual stocks or ETF shares for as low as a couple of dollars apiece and just as easily sell stocks.
Ease of Diversification
Diversification means minimizing your risk of losing money by including a variety of asset classes in your portfolio. Index funds make diversification easy because you get exposure to all the stocks in the index, which could mean hundreds of different stocks. Most investors can’t afford to buy many individual stocks but can buy into an index fund with just a few dollars.
When you invest in the stock market, you can be as active or as passive as you like. Some people relish the thrill of day trading. Others want to buy and hold an index or mutual fund and only check their returns quarterly because they look at it as a long-term investment.
Regarding passive income ideas, investing in the market can definitely fit the bill. All you have to do is buy shares in an index fund or individual stocks and then sit back and wait. Dividend-paying stocks deliver a regular income stream that requires no effort from the investor beyond making that initial purchase.
While it isn’t always lucrative to trade stocks frequently, one benefit of the market is that you can easily buy and sell quickly. This is a major advantage for people who might need to cash out their investments at the drop of a hat or want to change up their stock portfolio.
Drawbacks of Investing in the Stock Market
The stock market offers a good fit for many investors, but it’s not without drawbacks — namely volatility and stress. Although the market tends to yield positive returns over the long term, it can be quite volatile in the short term.
The value of stocks can fluctuate widely from day to day or even month to month. For this reason, although stocks are technically liquid, they often work best for investors with a long-term strategy.
Some investors panic when their stock portfolio suddenly drops by a few points, and instead of maintaining a long-term “it all works out over time” perspective, they live in a constant state of stress, obsessed with their returns. Worse yet, those investors often create a self-fulfilling prophecy by selling low and losing a bunch of money.
Real Estate Investments
Traditionally, investing in real estate means buying land or residential properties to flip or manage as rentals. You make money by selling that tangible asset for more than you paid or by renting out the space in your investment properties to tenants for a monthly fee (cash flow). Whether you invest through real estate investment groups in commercial real estate, manage income-producing properties as rentals, or play the housing market for flips, the value is intrinsic when you buy physical assets.
Investing in real estate comes with its own concerns, like maintenance, property taxes, capital gains taxes, and tenant management, but the benefits and tax advantages of real estate investments are second-to-none. A strong real estate portfolio could be your key to financial independence.
Benefits of Investing in Real Estate Rental Properties
Buying rental properties appeals to a certain kind of investor. Here’s why you might consider it:
As with the stock market, nothing is guaranteed. History shows us that real estate’s value tends to increase over time. It’s extremely likely the rental property you buy today will be worth more when you sell it in just 5-10 years. Plus, you’ll make money with the monthly rental income. This is one reason investing in real estate is an appealing option for investors with long-term cash flow and property value goals.
Keep in mind that real estate investing can have varying returns based on location and types of properties. What makes real estate different than other investments is people always need shelter/housing because it is a basic life necessity; therefore, even when property prices go down, your financial situation will remain strong if you are properly diversified.
Investing in the real estate market helps protect investors from the negative impact of inflation. While inflation can be bad news for certain types of investments, it’s great news for real estate investing, especially owners of private rental properties.
An increased cost of living means higher rent, which means more money in a landlord’s pocket in the form of steady monthly cash flow. The same goes for office or apartment buildings too, and the higher the yearly revenue, the greater the real estate value. Rental income can be a strong hedge against inflation.
Depending on your setup, owning rental properties can be a source of passive income. It can also be a ton of work. As the property owner, if you hire a property manager to manage rental properties, source tenants, and deal with the day-to-day management, your rental income (less property management fees and expenses like property tax and maintenance) is passive. You can even outsource paying property taxes to a professional and get advice on avoiding capital gains tax.
A real estate investment generally requires you to contribute significant effort upfront. The good news is, however, you’ll continue to generate income long-term, whether real estate prices rise or not. If you simply continue to rent out the property, most of that rental income goes into your pocket (or you could make other real estate investments). Owning residential real estate is a great way to make a sound investment that assures you of future rent payments and ongoing cash flow.
Benefits of Real Estate Investing through Real Estate Syndications
If you are one of many real estate investors who are searching for a truly passive income and consistent cash flow without overseeing an investment property, you might want to consider investing in a real estate syndication.
Syndications are group investments that invest in residential property, commercial property, and other real estate types. You, along with other investors, make a relatively long-term investment, typically 3-7 years, in a piece of real estate. The real estate syndication company oversees everything from researching housing markets and commercial properties to finding, buying, managing, and selling the property. Offering a truly passive income, syndications can provide more money for less work if the deal is strong and they have an experienced real estate management group in place.
Drawbacks of Real Estate Investing
If real estate investing in a physical property didn’t have some drawbacks, everyone would be a real estate investor. Here are a few things to consider before you jump into the real estate industry:
Being a landlord of rental properties comes with its challenges. The biggest is tenants. First, you have to find suitable tenants—not always an easy task. You hope you’ll find good people who pay their rent on time and don’t trash your property, but you won’t know for sure until it’s too late.
Even after you find tenants, you will have to be on call 24-7. This is because any issues that arise with the rental property are your responsibility, and you better believe they’ll call you and expect immediate action. You can always hire property managers to find tenants, collect rent, and respond to maintenance issues, but that will affect your real estate profits.
Of course, if you decide to purchase your investment property through a real estate syndication, then you will avoid this drawback entirely!
Lack of Liquidity
Unlike stocks, it’s generally difficult to sell real estate quickly, making it an illiquid investment. Even in a hot seller’s market, listing a property, having a real estate agent show it, and closing a deal takes time. In a slower market, you might not see movement on your investment properties for months or years. Therefore, real estate investing isn’t a good choice for people who may need to cash out quickly.
Large Upfront Investment
It costs very little to start stock market investing, making it extremely accessible to the average investor. Alternatively, real estate investing requires a significant capital investment, as real estate costs are generally high, and properties can easily cost millions of dollars.
Buying a rental property in commercial or residential real estate, requires a mortgage and a large down payment – often as much as 25% of the real estate purchase price.
Investors interested in real estate can become passive investors with as little as $50,000 in personal capital by investing in commercial real estate as part of a group. By becoming a limited (passive) investor in a real estate syndication, the investor qualifies for tax advantages and earns cash flow, all without having to pony up millions of dollars and without having to manage the property!
Bottom Line: Should You Invest in Stocks or Real Estate?
All in all, the stock market is more accessible than real estate investing, although that is shifting with the introduction of real estate crowdfunding platforms. Both options work well for investors who are interested in an investment strategy that prioritizes long-term wealth-building and financial independence.
Some strategies may yield steeper returns more quickly, but your risk tolerance must be considered before making any investment decision.
Additional Considerations to determining your investment strategy
The stock market is more flexible because of its liquidity. However, real estate investing can give you more control and yield higher returns with better tax advantages. Long-term investors who can fund a down payment and don’t mind dealing with tenants (or hiring a property manager) would be well suited for rental property investing.
If you want to invest in real estate without the hassles of being a landlord, you might consider investing in real estate syndications. It’s a totally passive investment that has helped thousands of people attain financial independence.
Historical Real Estate Returns Favor Investing in Real Estate
Even with major fluctuations in the market caused by the pandemic, changes in interest rates, and the 2008 collapse, real estate investments outperformed the S&P index funds. In 2021, the average 25-year return for private commercial properties was 10.3% compared to 9.6% for the S&P 500 over that same time frame.
Your strongest choice is a diversified portfolio that includes buying and selling stocks and real estate. However, if you must choose between investing in real estate vs. traditional stocks for a long-term investment, real estate investors have some advantages over stock investors.
Real estate holdings are tangible assets that provide a monthly cash flow, consistently demonstrate investment growth compared to stocks, and generally increase in value over time. You can also build long-term capital and secure certain tax advantages through real estate investments.
Syndications provide you with a truly passive cash flow experience, and REITs offer liquidity and diversification. These sorts of non-traditional avenues into real estate can offset the disadvantages that often characterize investing in real estate.
What matters most is knowing your investment goals and what you want for your future. Then take the necessary steps to reach your goals, whether that be through the stock market or the real estate market: these are the investment tools for your long-term investment in yourself, your happiness, and your bright financial future.
Have you tried investing in the stock market, real estate, or both? Let us know in the comments!