The choice between equities (stocks) and Real Estate is a common Question faced by investors seeking to build long-term wealth.
The Big Q: Will they be more successful by putting their money in Real Estate or Stocks?
The Big A: The assumption that the choice is 1 or the other is incorrect, as it is not either/or; many people own both.
Each investment class has advantages and disadvantages, depending on the investor’s circumstances, risk tolerance, temperament, and interests.
Comparing classes of investments is based on long-term investment return, risk, liquidity, tax treatments, required expertise, and investment minimums.
The following comparison applies to passive investors, not active in either class as a business.
The comparison does not apply to those whose participation is a business, i.e., Real Estate trading aka flippers or stock traders who regularly buy and sell on a short-term basis.
Investing in Real Estate is an often talked about but unfamiliar investment opportunity for most people, even though their homes are often the most valuable asset they own. But, Real Estate is the favored investment of the ultra-rich by 3 to 1.
Overall, the average long-term rate of return on Real Estate compares favorably to the annual ROI (return on investment) of the S&P 500 Index (SPY and SPX) of 8%-9%.
Notably, The Trump Rally has the S&P 500 up 14.8% YTD.
Neither class are risk-free and neither class has a guarantee of profits.
A real estate investor assumes a greater risk of loss due to leverage and the costs of diversification required for Real Estate.
For example: a stock investor with $50,000 could buy 10 different stocks in $5,000 increments.
At the same time, a real estate investor with $50,000 is very limited because now a typical down payment of 20% of the appraised value.
Leverage used wisely, it can compound returns when the rate of return on an asset is greater than the cost of debt.
Stocks from a risk point of view have the advantage.
Liquidity means the ease by which an investor can turn an asset into cash.
According to the current data the average time required to put a house on the market and receive cash is 55-70 days in the US. Plus, real estate values typically vary by season and are difficult to estimate accurately.
By contrast: prices for a publicly traded stock are live and reported around the clock 24/7. Thus, a stock is easily liquidated with cash received within a 3-day settlement frame, or for a fee on a expedited basis in 1 day.
Selling stocks is faster than even the fastest time frame for selling a building or house.
“Caution is the best advice when it comes to investing for liquidity especially in times like this is important. Too often friends and advisors proffer a tip or that “great deal!”
“A good investment rule to remember is that Real estate is a long term investment while stocks and bonds are short term and offer quick liquidity when and if necessary.
“Investing has no fixed or standard rule for it depends on the individual, their objectives and existing financial condition necessary to meet on-going bills. In today’s market it is easy to lose sight of this cardinal principle,” says investment guru Bruce WD Barren.
Stocks from a liquidity point of view have the advantage.
Real Estate has the advantage over stocks from a tax point of view due to the availability of accelerated depreciation to shelter investment return and unrelated income from current income taxes.
On the other hand, cash received from stock ownership aka dividends are generally taxed at a taxpayer’s regular rate.
Long-term capital gains are available for investors in Real Estate and stocks.
In the case of tax-favored retirement accounts, IRAs, 401ks, stocks have a favored position.
It is possible for IRAs and 401ks to invest Real Estate, the rules are complex, and a wrong move can cancel a retirement plan favored tax status.
Real Estate Vs Stocks advantage is a toss up as I see it.
Stocks and Real Estate investments require knowledge and familiarity with the ability to analyze and compare individual investments.
The expertise needed to manage Real Estate successfully is a profession that requires the ability to market and maintain a rental property, deal with tenants, and conform to local housing codes and requirements.
Maintaining a stock portfolio requires knowledge that can be easily gained, plus the expertise to identify, analyze, and monitor the continually changing economic, social, technological, and financial forces that affect prices buth now and in the future, but that is a profession, and most big portfolios are managed by professional for a fee or participation.
Investors in both classes can rely on experts for management and maintenance of the investment.
A person can develop the necessary expertise in either class of investment or outsource the need to professional advisers.
Investing in a just 1 piece of real estate property require an investment in thousands of dollars plus good credit to get the leverage.
Stocks from a management point of view have the advantage
Both investment classes are popular choices for those seeking to build their net worth.
Both have proven to in the right circumstances.
An investor can combine the 2 classes by buying a REIT (Real Estate Investment Trust). A REIT is a managed fund of real estate property bought and sold as a security. The combined vehicle has more likely investment success than an investment in stand alone Real Estate
If you are just beginning the investment stage of your live, investigation and introspection are recommended before buying Real Estate or stocks.
The very 1st thing to do pay off your high-interest consumer debt, especially those with rates of 12% or more annually and stop buying things that you do not really need, before making any investments. As a super credit rating provides lots financial benefits to you all along the path.
I started out in Real Estate development and moved to stocks and commodities after learning 1st hand what my grandfather told me as a boy, ‘Paul never invest in anything you cannot carry with you.” Equities you can carry on your smartphone anywhere in the world.
Have a healthy weekend, Keep the Faith!