Real Estate Investing vs Stocks – Pros, Cons, and Differences

 

Investing in real estate is one of the best ways to build generational wealth in tangible assets that tend to appreciate in value. Real estate is also one of the oldest and safest investments available today. But what about real estate investing vs stocks?

 

This article discusses the basics of real estate investing vs stocks and how you can decide which investment type is best for you. We will discuss the benefits and drawbacks of real estate investing as well as the pros and cons of investing in stocks in 2023 and beyond.

 

What is real estate investing?

 

Real estate investing comprises many strategies investors use to generate a return on investment in different real estate classes. 

 

Real estate investing generally falls into two categories: residential real estate and commercial real estate. Residential real estate includes single-family homes, multi-family units, and condominiums with four units or less.

 

Commercial real estate includes office buildings, strip malls, and housing complexes of five units or more. Commercial real estate has the potential for higher returns since large buildings and income-generating properties are bought and sold at higher price points than residential real estate.

 

Real estate investing can also include alternative investments like real estate investment trusts (REITs). This type of investment doesn’t invest in physical real estate. Instead, a real estate investment trust is a public company that invests in many different commercial real estate properties and acts much like a stock. 

 

Benefits of real estate investing 

 

Real estate investing provides plenty of benefits regardless of your experience level or upfront capital. Below are some of the top benefits of real estate investing:

 

  • Potential for high returns. Real estate investing has the potential for outsized returns that stocks typically can’t match. Savvy investors who can spot a distressed property with the potential for a fix and flip can turn a profit in a short amount of time. Additionally, buying and selling commercial properties has the potential for high returns as well.
  • Tax benefits. Investing in real estate also comes with plenty of tax benefits. Investors can use the real estate investment as a tax write-off that helps to reduce their taxable income at the end of the year. The government also has tax programs that encourage real estate investing and homeownership which can lower the amount of taxes you owe each year.
  • Potential for passive income. Passive income is income that doesn’t require daily effort to maintain. Investors with several rental properties can hire property managers to take care of the day-to-day operations–allowing them to acquire more rental properties and make more passive income.

 

Drawbacks of real estate investing

 

While real estate investing has some significant benefits, there are some drawbacks that you should consider before investing in real estate.

 

Illiquidity

 

The first drawback to real estate investing is that it’s highly illiquid, meaning it’s difficult to convert your real estate investment into cash on short notice. Those looking for liquid assets will find that stocks are a better investment.

 

Capital expenditures

 

Capital expenditures (or “cap-ex”) are large purchases you must anticipate as a real estate investor. This may include replacing your roof, hot water heaters, and other large expenses that add up and may drain your working capital.

 

Raising capital

 

Raising capital can be one of the most challenging parts of being a real estate investor. Since real estate investing may require a large upfront investment, it helps to know how to raise capital for real estate investing effectively.

 

If you decide to passively invest in real estate, you turn over the management and raising capital to an operator or sponsor. By being a passive investor, you can don’t have to deal with the headaches many active investors encounter.

Investing in stocks

 

Investing in stocks is a great way to diversify your investment portfolio. Investing in index funds, mutual funds, and other stocks can provide stable returns over many years. However, investing in stocks typically doesn’t offer the possibility of outsized returns like other investments.

 

Benefits of investing in stocks

 

Investing in stocks is a tried and true method of investing. Some of the top benefits you’ll receive from investing in stocks include:

 

  • Liquidity. Unlike real estate investing, investing in stocks provides investors with liquidity that allows them to convert their investments into cash quickly. Selling your stock investments doesn’t require a lengthy process like selling your real estate investments.
  • Stable returns. Index funds provide stable and consistent returns, while mutual funds give investors diversification to ensure they’re not putting all their eggs in one basket. Stocks can be an excellent option for those looking for stable returns.
  • Protection from inflation. Stock market returns are known to outpace the rate of inflation. The long-term inflation rate has increased about 3 percent each year since 1913 compared to a double-digital return from stocks during this period.
  • Easy to get started. Robo-advisor apps and retail investing platforms make it easy to start investing in stocks. You don’t need a lot of money to start investing in stocks; often as little as $10 can get you started.

 

Drawbacks of investing in stocks

 

Investing in stocks has several downsides. First, investors with low account balances may find that they aren’t generating significant returns with their investment strategy. Investing in individual stocks is especially risky since market conditions may cause the stock to have major fluctuations that can wipe out your account balance within a few hours.

 

How to get started investing in stocks

 

The easiest way to start investing in stocks is to download one of the many robo-advisor apps. These apps make it easy to deposit an initial investment and watch it grow over time without actively managing your portfolio. 

 

Robo-advisors automate the investing process by assessing your risk tolerance and investing in a portfolio of stocks while adjusting the holdings over time. This is the best way to start investing in stocks since it comes with minimal risk and doesn’t require active portfolio management.

 

Final thoughts

 

Real estate investing tends to have a higher potential for big returns compared to investing in stocks. However, stocks may be more stable over time and easier to start with. 

Whichever investment you decide to make, ensure you are doing what’s best for you and your investment strategy!

 

Book a Free 15-Minute Discovery Call

Podcasts are one of the most effective ways to become a leader in your industry — whether you’re a podcast host or guest. If you’re a real estate agent or an investor who’d like to share your expertise on podcasts, unlock your free 15-minute discovery call to learn how we’ll get you there.