Real estate has long been viewed as a sound investment – Much better than investing in the stock market. The benefits of investing in real estate vs stocks are directly related to a substantial increase in the wealth of an individual. Is it better to invest in stocks or real estate? Here are a few things you must know when deciding between real estate and stock investments. We shall explain the difference between investing in real estate and stocks and how to choose between the two.
Unlike stocks, real estate that you own is tangible. Real estate has historically served as an effective inflation hedge and it is easier to avoid fraud with real estate. Wholesaling and buying a turnkey rental property are just a couple of the ways investors can benefit from real estate. The important benefits of investing in real estate are an increase in property value due to appreciation as well as good cash flow in the form of rental income
Education and networking are very important to become successful in real estate investing. Another advantage of investing in real estate is that there are many ways in which you can get a superior return on investment. How to begin investing in real estate is a multifaceted challenge. There are many things to look at in determining where, or even if, you want to invest in real estate.
First of all, you need to consider what type of real estate investing suits your tastes and needs. Would you prefer residential, commercial, industrial, retail, or mixed-use real estate investments? You also need to consider the population growth of a given area, economic development potential, property values, and trends, as well as a host of other factors.
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The Pros of Real Estate vs Stocks Investment
Success in real estate investing can be independent of the state of the economy. People need a place to live, and they’ll pay a premium to live near amenities and employment. This means your apartment building or single-family home is worth more because it is close to schools, parks, employers, or a college. And you’ll receive rental income as long as people want to live there. This is why in the “real estate vs stocks” debate, real estate wins when you want security.
If you don’t have the cash to buy investment property outright, financial institutions will loan you money to do so. They will rarely offer loans so you can buy stock, equity in a business, or even business equipment. Furthermore, since real estate is typically seen as stable and secure, the interest rates will be lower than almost any other type of business loan.
This is because the real estate is a real asset, and their loan is secured by a physical building that has high, intrinsic value. For some, the ability to leverage other people’s money is why real estate wins in the real estate vs stocks investment debate. The returns on real estate investment are quite predictable. You know what property values are and rental rates.
You can estimate the value of a property after it is fixed up and how much cash flow you can get from it. There will only be minor variations based on local crime rates, neighbors, and massive changes in the local economy. You can predict a monthly cash flow of X dollars a month and X dollars a year barring surprises like a hot water heater leak. And you get regular cash flow every month if there is a tenant in the apartment or house.
In contrast, you can’t guarantee that a company will pay a quarterly or annual dividend. This is why rental real estate is often seen as the ideal complement to a bond portfolio. Yet in the real estate vs stocks debate, we often overlook bonds because of their low rate of return. That’s why many approaching retirement should consider property investing.
Homeowners’ insurance reduces the financial risk you take when you buy property. You can increase your level of protection via an umbrella insurance policy or holding investment properties in a limited liability corporation. Now you don’t risk losing your own home because someone sues you after being injured in the swimming pool or on the sidewalk of your rental property.
It is almost impossible to take out such insurance to protect you from legal issues when trading stocks. Nothing can protect you from losses when the company goes bankrupt or like the GM bondholders deal under Obama, the courts say you get nothing. This comes back to the security side of the “real estate vs stocks” debate.
Real estate almost automatically keeps up with inflation. The value of the property automatically rises with inflation rates, and it may appreciate faster due to demand. After all, the cost of labor and building materials for new properties will go up with inflation, increasing prices for existing housing stock. Rental rates can often keep up with inflation, though rent control laws may limit that.
Conversely, rental rates may go up much faster than inflation based on the demand for housing in an area. If inflation is a major fear, real estate wins the real estate vs stocks investment argument. With real estate, nearly every expense is a tax-deductible business expense. You can deduct realtor fees, property insurance premiums, property taxes, and maintenance costs.
You can deduct the legal fees to review contracts and the property manager’s salary. That makes it almost impossible to lose money when you have rental real estate you buy and hold. And that’s why many say real estate wins when you’re torn between real estate vs stock investment.
In the real estate vs stocks investment debate, we often forget how often people can end up as accidental landlords. You inherit Mom’s house, can’t bear to sell it, formally inherit it, and become a landlord. Or you move away from a community but keep the house, so you’re renting it out and earning an income from it. Vacation homes may be rented out when you’re not using them, and you end up becoming a long-distance landlord.
The tax benefits of investing in real estate are that you have the advantage of deducting certain expenses every time you file your annual income tax. When you get rental income from the rental of a residence unit, there are some expenses you may deduct from your tax return. These expenses include mortgage interest, property tax, operating expenses, depreciation, and property repairs.
Operating Expenses: All expenses you incur to manage your investment property can be deducted from your tax. You can write off repairs immediately in the form of expenses.
Repairs: The IRS considers conceivable wear-and-tear each building will need over time. It's called the depreciation of a property, and in case you're an investor in turnkey rental properties, you can use this depreciation as a yearly tax deduction. For residential properties, you can deduct the depreciating value of a property over the course of 27.5 years.
1031 Exchange: When you choose to sell your property, you are required to pay taxes for your capital gains. With the help of section 1031 of the Internal Revenue Code, you are permitted to postpone paying taxes when you reinvest those gains in another property. IRS considers that you are exchanging your old property for another real estate property. However, there are some criteria for 1031 Exchange.
The new property must be of the same nature and its value should be equal to or greater than the old property. You must find the new property within 45 days of selling the old one and include it in the official documents, and you must close the deal in 180 days. With the 1031 Exchange, you cannot handle the money, nor transactions, on your own.
You need an intermediary to do so, and this person cannot be anyone you’ve worked with in the past two years (e.g. real estate agent, broker, investment banker, lawyer, accountant, or employee). Failure to meet these criteria will disqualify you from the 1031 exchange and will hold you liable to pay taxes on your capital gains.
Primary Residence Exclusion: How to avoid capital gains taxes when selling your house? If you're selling a house that has been your primary residence for at least two of the past five years, you can take full advantage of the IRS capital gain exclusion.
Capital gains from the sale of your primary personal residence are excluded from capital gains taxation up to $500,000 for married couples and $250,000 for single individuals. In order for the IRS to view the home as your primary residence, you should have owned it for five years and lived in it for at least two years.
If the gains are greater than the above amounts, you can also invest that portion through a 1031 exchange described above and get a tax benefit. The IRS allows you to sell one investment and reinvest the proceeds without taxation. The swap must be a “like-
The Cons of Real Estate vs Stocks Investment
Real estate investing tends to be illiquid. If you’re selling a house in a matter of days, you’re either in an incredibly competitive real estate market or selling the house at a loss to a wholesaler to get your money out in a hurry. This increases the risk in real estate unless you are using cash to buy properties. If you had that much money, stocks win in the real estate vs stocks debate.
Real estate investing can bring significant, costly risks if you don’t know what you’re doing. For example, if you buy a house with the intent of fixing it up and flipping it, you’re borrowing money to buy it and pay for repairs. You could lose money because you paid too much for it in its dilapidated state, failed to discover everything in need of repair, over-built it for the market, or can’t sell it fast enough.
The carrying costs like mortgage payments, insurance, and taxes will cost you if you buy and hold while waiting for the property market to recover, too. Real estate investing takes work. This work may take the form of scouting for property to buy, handling legal paperwork, and then selling them.
It may be day-to-day management of the property like screening tenants, fixing clogged drains, and collecting the rent. If you hire a property manager to do this work for you, you’ll give up a fraction of the rental income. Those debating real estate investing vs stocks need to know about real estate scams to avoid them. Tax liens are probably the highest on the list.
Buying properties sight are another reason why so many are burned in real estate investing. For some, they’d choose stocks over real estate in the real estate investing vs stocks, because there is more federal and state-level oversight. You can more easily sue a stock broker who defrauded you or charged high fees than a bad realtor or contractor.
The Pros of Investing in Stocks vs Real Estate
Unless you’re buying equity in a small business or firm that doesn’t have publicly traded shares, your stock investment is very liquid. You can sell and get your money out in a day or two. It is easier to invest in stocks in tax-sheltered accounts like 401Ks and IRAs. It is difficult to invest in real estate through tax-advantaged accounts unless you’re buying shares in a real estate investment trust or shares in a property-focused ETF.
Stock investing can yield significant returns, both capital gains and dividend income. This can be the ultimate in passive income since you don’t have to do anything other than buy, hold, and collect income. This can be much less work than managing several rental houses.
Nor do you have to incorporate or set up a business to manage a large portfolio. Buying and selling stocks can be done online. The research involved may take time, but you can run things by an adviser or stick to a few trusted stocks you buy and hold.
Yet the real estate vs stocks investment debate is marred by emails hyping a penny stock knowing that a few thousand flooding into it pumps up the price while they sell at a profit. With stock investing, you can start small. You can open an account with a few hundred dollars. Real estate investing takes thousands just to put a down payment on the house. The risk and the borrowing costs go up with the amount of leverage (debt) you have.
The Cons of Investing in Stocks vs Real Estate
The stock market’s performance is tied not just to the economy but to public mood. This means stock prices can rise and fall based on fear-mongering and irrational exuberance. For some, that emotional roller coaster isn’t worth it. In the real estate vs stocks investment debate, many choose to buy and hold property because they know it will go up the same two to ten percent year after year.
Stocks may or may not provide dividends, but you’ll owe capital gains taxes if you sell at a profit. This tax rate can be high, especially if you sell the stocks at a profit within a year of buying them. Taxes are brutal and complicated if you’re day trading. The challenge is finding dividend-paying stocks that pay a good dividend.
These stocks also tend to be expensive relative to others that only yield a profit when you sell high. Utility company stocks and some others pay better than massive consumer goods company stocks. However, you’re now investing in the success of that company.
In the debate between real estate investing vs stocks, you don’t have to hunt as hard to find good deals on the stock market, because advisers will give you plenty of tips. On the other hand, real estate wins in the real estate vs stock investment debate when you have real estate agents sending you tips about distressed sellers.
Real Estate or Stocks: Which Will Make You Richer?
In the real estate investing vs stocks debate, real estate providers have greater likely returns and steadier returns than stocks. However, there is more effort involved, and you have to do your due diligence to avoid making a mistake.
When cities attract strong businesses with good-paying jobs, the employees that follow those companies and have substantial disposable will look to spend it somewhere. One thing is certain; they will need some form of residential real estate. The coming year is shaping up to be a very strong year for investors who are in the residential real estate market and there are many markets in the US to choose from.
The biggest advantage of real estate vs stocks is that the real estate can safely be leveraged to increase your return on investment. For many people, investing in real estate is a very comfortable thing. They grew up with the idea of, “someday owning a home.”
That is a familiar concept compared to buying stocks and bonds. When you own a piece of real estate property, you have something tangible, something you can look at, take your friends to see, and have the satisfaction of knowing that you own that piece of land or that building. It is very important psychologically to the investor.
By contrast, when people buy stocks, the intention is to hold them over a long period of time, investing the dividends along the way. Over the long haul, stocks can provide an excellent return, but along the way, they can experience some extreme fluctuations. The problem is that most investors are too emotional to just sit tight, so they do not execute their plan and they fail to realize their maximum benefits. Remember the calming effect of owning real estate.
One noteworthy downside of real estate investing is preparing your income property before you rent it out, which defers the time when you can begin profiting from your real estate investment. All things considered, turnkey rental properties take out this issue as you can begin renting them out and generating rental income when you purchase them.
In addition, you can hire a turnkey property management company, which means that you will have no worries at all about managing your property, collecting rent, or addressing the complaints of your tenants. As soon as you buy a turnkey rental property, you can find tenants and start collecting rent from them, which is your rental income.
As long as you are able to rent out your rental property for enough rent, you will have positive cash flow immediately. Turnkey rental property investing has really led to an increase in the number of people turning from stocks to real estate in the US.
For more information on how to buy turnkey rental properties, click on the link. You will find some essential tips which will help you to buy turnkey rental properties. These tips have been proven to be productive and rewarding for a passive real estate investment. In looking at the financial aspects of owning real estate, it is much more difficult to be defrauded with real estate than it is with stocks.
The benefit of investing in real estate vs stocks is that with real estate, you can physically go there, inspect it, walk around the land, and make repairs to the building. Your property management company is responsive to ensuring that your rental property remains occupied with qualified tenants so that the rental income flows without any hassles. With stocks, you have to trust in your company's management.
When you purchase a company's stock, you're looking for appreciation in the stock value, and perhaps annual dividend if the company pays it. With bonds, you're looking for income yield on the interest rate paid by the bonds. Another benefit of investing in real estate vs. stocks is how you can use debt.
Using debt as leverage in real estate is safer than using debt by trading stocks on margin. Also, in times of inflation, real estate has proven to be a very strong hedge against inflation when there is a loss in the purchasing power of the dollar.
Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process.
They are well-informed about critical factors that affect your specific market area, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.
NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional real estate investment opportunities in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.
This article aimed to educate investors who are keen to invest in real estate or stocks in 2024. Investing in real estate or stocks requires a lot of studies, planning, and budgeting. Not all real estate deals or stocks are solid long-term investments. We always recommend doing your research and the help of an expert counselor.
References:
- https://www.richdad.com/pros-and-cons-of-real-estate
- https://learn.roofstock.com/blog/pros-and-cons-real-estate-investing
- https://37parallel.com/considering-real-estate-investing/
- https://www.mashvisor.com/blog/pros-and-cons-of-real-estate-investing/
- https://investorjunkie.com/real-estate/pros-and-cons/
- https://www.thebalance.com/real-estate-vs-stocks-which-is-the-better-investment-357992
- https://budgeting.thenest.com/pros-cons-stock-market-26063.html
