A study from Charles Schwab found that about 15% of current retail investors only began investing in 2020.
With so many new investors, they each have to decide what type of investment is right for them. But this can be overwhelming and can lead to inaction.
By not investing, you can miss out on a lot of opportunities for growing your finances. So, in this post, we’re going to look at two of the most popular types of investments and their differences, real estate investing vs stocks.
By the end, you should have a better idea of which is the right type of investment for you.
Keep reading to learn more.
The return you can earn for both of these investments is dependent on how you invest in them.
An important piece of choosing which return is more attractive to you is your specific goal. Whether you’re interested in monthly cash flow to live on, or you’re looking for a larger payout down the line.
Real estate provides a return in 4 different ways. These are:
- Cash flow
- Tax benefits
Appreciation is the increase in value of your property over time, or immediately through forced appreciation. This is what a lot of people first think of when considering investing in real estate. They think about buying a property and then selling it in the future for a profit.
Your property’s cash flow is the amount you’re left with each month after collecting rent and then subtracting your monthly expenses from that amount. If cash flow is your priority, real estate is one of the best investments you can make. However, you need to be sure to do your financial analysis right before you buy, so that you don’t wind up losing money every month.
Equity is the amount of the investment that you actually own versus the amount you still may owe in the form of a loan or mortgage. The tax benefits you can expect are mainly tax deductions for depreciation, operating expenses, and mortgage interest for the property.
Stocks earn a return when you sell them for a profit. They can also sometimes receive dividends periodically as cash flow, but usually not as much as you would earn from real estate investments.
When you buy stocks, you are hoping that their price will go up so you can sell for a profit. This is when you’d receive a big return.
The average return for stocks is about 10% per year.
Cost to Invest and Manage
When you’re choosing an investment, part of the decision has to be about how much capital you have available to invest. You should also consider how much time you’re willing to put in to find the right investment, as well as how much time you’re willing to spend to maintain that investment.
Depending on the real estate investment loans you have access to, you may need a full 20% or more for a down payment.
It is possible to invest in real estate with little or no money down, but it often requires living at the property or a hard money loan, which can get very expensive if something goes wrong.
It can be time-consuming to find the right property, but the time commitment doesn’t end there. If you manage the property yourself, it can become a full-time job.
You will also have the cost of regular home maintenance to pay for with a real estate investment. Consider landscaping, plumbers, or trash pick-up as a few of the expenses you may incur.
Stocks take much less time, and if you’re working with a financial advisor or brokerage, you can remain relatively passive in the process if you want.
Stocks themselves can be either expensive or cheap to buy, depending on the company. Many of the more well-known and established companies tend to have higher stock prices. This means that if you want to invest in a significant number of shares, it can get very expensive.
Other smaller or newer companies can sell for tiny amounts, even pennies. These are, of course, more affordable but also tend to be riskier.
On top of the price of the shares themselves, there are often brokerage fees to pay. These range from .25% to .75% of the value of the trade you’re making. Many brokerages also have annual maintenance fees, which can range from .25% up to 1.5% of your assets.
While investing in stocks can be expensive, it is still usually more affordable than a down payment on a property.
All investments come with risks; there is no way to avoid that. But there are some investments that are less risky than others. Both of these investment types have ways to invest that are riskier and others that are safer.
Investors have to choose for themselves how much risk they’re willing to take on to potentially get a big return.
The amount of risk your real estate investment has depends on how you’re investing in it. Investing in a real estate investment trust (REIT) is much lower risk than others, such as flipping houses.
In general, there is much less volatility in real estate than in the stock market. Changes in property values tend to happen slowly, over a period of months. So there aren’t significant swings in the price like there can be in the stock market.
However, real estate is a highly illiquid asset, which means it can take a longer time to sell your investment to receive any cash from it. So, if you may need cash fast, this probably isn’t the investment for you.
There is also the risk of a natural disaster, like a fire or flood. Hopefully, you would receive a payout from insurance, but it may not make up for the loss.
The stock market has much greater volatility than real estate. The price per share can change in an instant, wiping out all of the unrealized gains you had made. This on its own isn’t always an issue, but it can make it easy to panic and sell your shares to try and protect against the price going any lower.
This means that any unrealized loss that happened becomes permanent, and doesn’t give the stock’s price the chance to rebound.
It’s less risky to invest in mutual funds vs individual stocks since they hedge against the risk of one company ruining your entire investment.
On the other hand, stocks are highly liquid, and as long as the market is open, you will usually be able to sell them off immediately.
Which Is Right for You: Real Estate Investing vs Stocks?
Choosing a way to invest is all about you as an investor and what your goals, available capital, and risk tolerance are. You should now be able to choose between real estate investing vs stocks, and take your financial future into your own hands.
For business advice or real estate investing tips, check out the other articles in our business section!
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