Stocks or real estate?

Stocks Or Real Estate Investment? Which Is Best For You?

It can feel daunting to choose how to invest your money since there are so many seemingly lucrative options, especially if this is your initial investment. You want to earn great returns while balancing your risk tolerance, timeline, and desired involvement.

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 finds and stocks. That said, real estate comes with benefits beyond what a stocks only investor could receive!

So, which is a better fit for you? Are both real estate and stocks or mutual funds up your alley? Or should you lean more toward just one of these options? Let’s take a look at the pros and cons and variety of ways you can invest in each plus, the tax implications and other benefits of real estate versus the stock market.

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 their profits. You can buy shares in publicly traded companies regulated by the SEC and make money in two ways:

  1. Selling the stock for more than you paid

  2. Receiving 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 a variety of stocks (yeay 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 skill or time to choose their own stocks.

Real estate investment trusts (REITs) work much in the same way as 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 real estate.

The truth is, however, the real estate operating companies may own a variety of real estate properties and bundle those property types (apartment building, for example) into REITs. And while this does make traditional real estate more accessible since you can invest easily, through most online brokerages, you’re investing in the company, not the physical property they own or their products.

It’s always up to you as the investor to perform your due diligence and fully understand what 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 build 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 close to 7% over the long haul.

  • Accessibility: 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. Neither do you need a huge initial investment. You can buy some individual stocks or ETF shares for as low as a couple of dollars apiece.

  • Ease of Diversification Diversification means minimizing risk 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. That could mean hundreds of different stocks. Most investors can’t afford to buy that many individual stocks but can easily afford to buy into an index fund.

  • Passive Income When you invest in the stock market, you can be as active or as passive as you like. Some people relish the thrill of trying to beat the market by timing their trades just right. Others want to buy and hold an index fund or mutual funds and only check their returns quarterly.

    When it comes to 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 of 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.

  • Liquidity While it isn’t always lucrative to trade stocks frequently, one benefit of the market is that you can buy and sell quickly and easily. This is a major advantage for people who might need to cash out their investments at the drop of a hat.

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.

You know that stock market volatility we just talked about? Not everyone does well with it. Some investors panic when their portfolio suddenly drops 15%. They live in a constant state of stress, obsessed with their returns. Worse yet, they sell low and end up losing a bunch of money.

Real Estate Investments

Traditionally, when you invest in real estate, you buy land or residential real estate. You make money by selling that tangible asset for more than you paid or by renting out the real estate to tenants for a monthly fee (or both). Whether investing through real estate investment groups in industrial real estate or you have rental properties or you flip houses, when you buy physical assets, the value is intrinsic.

Owning real estate does come with its own set of concerns like maintenance, property taxes, capital gains tax, and tenant management, but the benefits found in real estate ownership are second-to-none.

Benefits of Investing in Real Estate

Buying rental properties appeals to a certain kind of investor. Here’s why you might consider it:

  • Appreciation As with the stock market, nothing is guaranteed. History shows us, however, that the value of real estate tends to increase over time. It’s extremely likely that the rental property you buy today will be worth more when you sell it in just 5-10 years. This is one reason real estate investments are an appealing option for investors with long-term cash flow and property value goals.

  • Inflation Protection Investing in real estate 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, especially 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 income payments. The same goes for office or apartment buildings too, and the higher the yearly revenue, the greater the real estate value.

  • Passive Income Depending on your setup, owning a 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, the rental income you earn (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 how to avoid 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 in your pocket (or you could make other real estate investments). Owning real estate is a great way to make a sound investment that assures you future rent payments and ongoing cash flow.

Drawbacks of Real Estate Investing

If real estate investing in physical property didn’t have some serious drawbacks, everyone would do it. Here are a few things to consider:

  • Tenants 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.

    Then, even if you find great tenants, you’re on call 24-7. Any issues that come up with the rental properties are your responsibility, and you better believe they’ll call you and expect immediate action. You can always hire a property manager to find tenants, collect rent, and respond to maintenance issues, but that will eat into your real estate profits.

    Another option is to invest in real estate through a real estate syndication (real estate investment groups). As a passive investor in a real estate syndication, you pool your resources together with other passive investors to invest in a large real estate property, like an apartment complex or other commercial real estate.

    Best of all, you get all the benefits of investing in a rental property (monthly passive income, tax benefits, and more) without having to deal with the hassles of being a landlord.

  • 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, it takes time to list a property, have a real estate agent show it, and close a deal. In a slower market, you might not see movement for months or years. Therefore, real estate investing isn’t a good choice for people who may need to cash out quickly.

  • Large Buy-In Unlike real estate, it costs little to get started with stock market investing, making it extremely accessible to the average investor. This isn’t the case with the real estate industry.

    When you buy rental property, you must arrange a mortgage and pay a large down payment – often as much as 25% of the real estate purchase price. This is the single biggest factor preventing otherwise interested investors from getting into the real estate market.

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 freedom. Some strategies may yield steeper returns more quickly, but again, your risk tolerance has to be considered before making any investment decision.

Additional Factors to Consider

The stock market is more flexible because of its liquidity. However, investing in real estate can give you more control and yield higher returns and 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 helps so many people attain financial freedom.

Have you tried investing in the stock market, real estate, or both? Let us know in the comments! Sandra Parsons is a freelance writer and staff writer for Club Thrifty, a website dedicated to helping people dream big, spend less, and travel more. 

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