Buying a property requires more start-up capital than investing in stocks, mutual funds, or even REITs. However, when buying a property, investors have more influence over their money, allowing them to purchase a more valuable investment vehicle. There are basic differences when it comes to investing in real estate versus stocks, but how well you do with any of them depends a lot on time. Very few shares would have surpassed the purchase of beachfront properties in California in the 1970s and the sale 20 years later, and virtually no real estate purchase could have surpassed the profits it would have made if it had invested in Microsoft, Apple, Amazon or Walmart stocks at the beginning of the history of those companies.
The cash flow of equity investments is not the same as the cash flow that would come from renting a property that you own. Most stock cash comes in the long term when you sell. However, investors can be paid while still owning shares through dividends, which you can reinvest. If you use the cash that a company sends you from owning its shares to buy more shares, over time, you should own many more shares, which entitles you to even higher cash dividends.
Using leverage (debt) in real estate can be structured much more securely than using debt to buy shares when trading on margin. Compared to stocks, real estate requires a lot of practical work. You have to deal with midnight calls about water leaks in the bathroom, gas leaks, the possibility of being sued for a bad porch board and more. Even if you hire a property manager to handle your real estate investments, managing your investment will require occasional meetings and supervision.Borrowing against your investments is much easier in stocks than in real estate.
If your broker has approved a margin loan for you, it's as easy as writing a check against your account. If the money isn't there, a debt is created against your shares and you pay interest, which is usually quite low. When it comes to investing, liquidity is the ability to get money out of your investment easily. Stocks are much more liquid than real estate investments.
During normal market hours, you can sell your entire position, many times, in a matter of seconds. It may take a few days to see the profits, but you can exit your investment almost whenever you want.Both Real Estate and Stocks Can Provide Long-Term Financial Gains, and Both Carry Risks. When choosing the right investment strategy for you, the best way to protect yourself against that risk and take advantage of potential gains is to diversify as much as you can. You can diversify much more easily with stocks than with real estate, especially with mutual funds.
You can buy shares in several companies, so if one of them takes a hit, you could still make money in another. Mutual funds carefully choose stocks to ensure funds are properly diversified. Historically, stocks have returned about 10% per annum compared to ~ 4% of real estate in the past 60 years.That said, real estate prices have been rising in double digits recently. If you put a 20% down payment on a property, the average annual cash back is close to 20%.
While real estate can fall over years or decades in certain areas, most investors who see that starting to happen can sell their investment before losing money. This means that real estate investors still benefit from inflation in ways that stock market investors don't.While you can pay brokerage fees or fees to a mutual fund manager for managing your stock investments, these are proportionately smaller than they can be for, for example, the cost of managing an apartment building or other real estate investment. If you have the personality that likes to take charge of situations, you probably prefer to own real estate rather than shares.If you ask yourself questions such as “is it better to invest in real estate or an index fund” or “is it better to invest in rental properties or dividend stocks?” , the answer is nuanced. Take a look at this ROI graph from Fundrise, my favorite real estate crowdfunding platform.
Therefore, real estate not only provides comfort during uncertainty but it also becomes more affordable.I received an overly long response to your last column detailing all the reasons stocks outperform real estate (for those of us who aren't workaholics at least), but I finally canned everything. Real estate that generates monthly rental income can increase with inflation even in a rent-controlled area offering an additional advantage. Some platforms such as EquityMultiple allow you to invest in individual properties specifically commercial real estate. In fact FinTech has taken this risk aversion and turned it into investment products that allow it to access the real estate market without having to physically own the properties or make daily decisions about how to obtain tenants manage the property or make renovations.
Passive real estate investing is a way to invest in real estate without having to actively manage properties. There are a number of considerations for investors when choosing between investing in stocks or buying real estate as an investment. One of the most lucrative ways to make money on real estate is to buy rental properties and well rent them out to others who pay the bills for you.