The choice between investing in stocks or real estate markets is never that simple. Before making a final decision, you need to take into consideration many crucial factors, among which are your personality, favor of certain lifestyle, risks, amenities, etc.
Stocks market is quite a popular option of investing dollars these days. However, the popularity of stocks overshines the fact that purchasing real estate can also be seen as a profitable investment. If you follow certain rules and circumstances in the real estate market, you can gain more significant profit, lower risks, and have a multiplicity of choices.
Another major factor is timing. For instance, back in the 1970s, not many stocks would not have outperformed beachfront property in California. And no real estate could have outperformed the profits from shares of Apple, Microsoft, Amazon, and Walmart in the early stages of companies’ lives, specifically if you have making new reinvestments with your dividends.
However, if we look at a general situation, it is quite difficult to forecast changes in investment choices. To choose the path of investment, you need to work on the strategy that will help you enhance your income and develop a certain level of financial protection.
Real estate against stocks
Imagine the following situation: after purchasing shares of stock, you purchase a piece of a company by default. For instance, if the company offers 2,000,000 shares and you have purchased 20,000 shares. As a result, you have 1% of the company.
Over time if the value of shares from the company goes up, then the value of your purchased stocks also goes up. Each company has a board of directors. They are usually chosen by stockholders to maintain proper management. Moreover, these directors decide the level of profit that gets reinvested into growth and the amount of sum that paid in the form of cash dividends.
There are situations when stock can be or overvalued or undervalued. Thus, before making any sudden decisions, learn all the available information about the company, especially about their amount of profit that is paid in the form of dividends. In case when this amount of profit is more than 60%, then there is not enough cash flow to protect them from any critical situations on the market.
However, when you decide to evolve in the world of real estate, you are purchasing property or any physical land. If you opt for a free parcel of land, then you have to pay for maintenance and taxes until you will find a developer to sell this parcel.
However, if you opt for a rental house, apartment building or shopping center, you are going to pay only for expenses, where the lessee pays the rent. As a result, you are going to have a difference. Now we are going to discuss all possible advantages and disadvantages of these types of investment.
Investment in real estate
Advantages of investing in real estate
- Cash flow: Renting your property can offer seamless and reliable income on a monthly basis. In comparison, other types of investing provide you only with profit only after you sell something.
- Using leverage: with the help of dept real estate, creates more effective and safe structures than using the same debt to purchase stocks by marketing on margin.
- Convenience: As a rule, middle and lower social classes choose to invest in real estate because it is more comfortable and related to the period when they were coming of age. At the same time, upper classes discover bonds, stocks, and other related topics at the same age. So, if you relate yourself to the middle class, you likely have heard your parents talking about “having/purchasing own home.” Thus, you and your peers are more invested in putting your investments on land rather than somewhere else.
- Moderating frauds: If you own a real estate, the possibility to be bilked is much lower. You can check your property at any time, find out whether purchased land has physical existence, even control all your tenants and fix all issues on your own. In comparison, stocks processes are mainly managed by auditors and other people.
- Security: Investing in real estate can become a real inflation hedge, even in the most difficult situations in the currency market.
Disadvantages of investing in real estate
- Subsequent expenses: If you do not have any tenants, you are likely to spend extra costs on maintaining your property. This includes utilities, taxes, general maintenance, insurance, etc. In case when the vacancy rate is much higher, and you can not fix it, you are likely going to lose more money month after month.
- Effort and time: In contrast with stocks, you need to work hard in the real estate sphere to make something done. For example, you need to deal with issues like gas leaks, sewage in a toilet, being sued for various problems inside the property, etc. Even if you have a professional manager to look out for your property, investments, real estate still needs a lot of control and meetings.
- Value: Adjusting for inflation, the real value of property rarely goes up. Thus, all your profit depends mostly on the power of leverage. For instance, if you purchase property for $400,000, you are going to put down $60,000 from your wallet. In case inflation rises to 4%, the value of a property will go up to $416,000. Your part has not increased, only the value of a property has done it.
Investing in Stocks
Advantages of Investing in Stocks
- A small amount of work: In comparison with owning a small company, having shares of stocks of this company needs less effort on your side. You mainly gain profit from the company’s achievements and even do not have to come to work.
- Access: To start your investment process in the stock market, you do not have to own big assets. You can even start with a bare minimum. This minimum usually turns to be $100 per month. Moreover, there a lot of apps for micro-savings that even help you to invest for the smallest amounts like $26. For comparison, real estate needs much bigger sums to start your investments, and it’s not counted in thousands of dollars.
- Longevity: Many years of various research have shown that even against all the odds, even with volatility and other issues, purchasing stocks and having them for long periods can bring you solid income over the years. For now, humanity has not invented any better kind of business ownership than purchasing stocks of other companies. Because you are buying not only money, you purchase a piece of a company.
- Dividends: Promising stocks increase not only your income year by year, but they also support their dividends. As a result, while the profits of the company go up, you are going to get larger checks. If you decide to keep your stocks, in the long run, you are going to get much bigger profits than now.
- Liquidity: It is a fact that stocks are much more liquid in comparison with property investments. You can always sell out your entire position within seconds over regular market hours. However, when you try to sell your property, you will need weeks, months, and sometimes even years to find a proper buyer.
- Borrowing: Borrowing against the stocks is always easier than any other kind of investment. When your broker decides on your margin borrowing, you can start filling checks against your account. However, if there is no money, a debt goes to your stocks and pays for the interest on it.
Disadvantages of Investing in Stocks
- Temporary volatility: There are temporary situations when prices for stocks go through enormous fluctuations. For instance, your $50 stock can rise to $90 or fall to $15. If you purchase stocks of a certain company for particular reasons, such a situation should not concern you. This can be a good opportunity to purchase even more shares or sell them out at a certain point. If you opt for keeping valued stocks, volatility also should not bother you. In case if you are looking for a quick profit, such highs and lows might play against you and your assets.
- Emotional investment: If you are an overly undisciplined and emotional person, it is going to be quite a difficult task to gain big profit through stocks in the long run. As a result, you are more prone to lose money than other investors due to these human factors. For instance, back in 2007-2009, when the world has faced the credit crisis, many financial advisors recommended investors sell their stocks when the decision should have been exactly the opposite.
- Stagnation: Many investors decide to pump into the companies that are not oriented on development and innovation. As a result, their stocks face stagnation for decades. In some cases, this can be just some illusion because these charts do not take into consideration the most important driver, such as reinvested dividends. However, if you use cash payments from the company’s stocks to purchase even more shares. As a result, in the long run, you are going to have even more cash dividends.
Risks of real estate and stock markets
Thanks to the financial crisis of 2008 and the housing bubble, now we face a recession in value for all investors in the stocks and real estate markets. Nowadays, we have to deal with another issue in the face of coronavirus that affects all spheres of human life. Expect from these temporary risks, there are those risks that are unique only to the stocks or real estate markets.
We added the most wide-spread risks that may occur in the real estate market if you are not attentive enough. For instance, you should remember that real estate is about in-depth research. You can not just enter the market, find at the once needed property, and have all the needed results and profits in a short period. Moreover, if you are in the market to sell property, it also takes a lot of time to find a proper client. If you face any difficulties, you can not avoid them only by taking cash from the deal.
If you opt for flipping real estate or rental properties, you are going to cope with maintenance and controlling all rental processes on your own. Besides, you will face big expenses, spend your time and patience on tenants who may run into debt during the rental period. These processes are going to take all your free time.
If we study the stock market, we are going to see here other kinds of risks like economic, market, and inflationary risks.
It is a well-known fact that the values of stock can be quite volatile. As a rule, any fluctuations in the market, like coronavirus, affect the prices significantly. Moreover, volatility can be a result of some company or geographical events. For instance, if some well-known company works on operations in a different country, their division should follow according to the rules and laws of a country.
However, if that country has issues or political instability, then your stocks can face instability. In other cases, stocks can even suffer from various regulations, economic cycles, tax revisions, monetary policies, and variations in the interest rates from the central bank of the country.
There are even risks that may come strictly from you. For example, if you decide not to diversify their company, or work only with specific types of stocks, you are more prone to risks than other investors.
Other factors to take into consideration
As we mentioned before, on the one hand, purchasing real estate needs much more starting capital than investing in stock markets, mutual funds, and other types of investments. On the other hand, if you buy property, you have more control over your money. For instance, if you put $30,000 into valuable securities, you are going to purchase $30,000 in value. In opposition to this, the same purchase in the real estate market can purchase $130,000 in the property, even with tax-exempt and mortgage interest.
In the second case, payments from tenants should cover your insurance, mortgage, taxes for the property, and maintenance. Moreover, you are going to have extra profit from your property. Other benefits can be tax write-offs and depreciation. Furthermore, your property can offer your month-to-month rental profit that can even go up after the inflation.
All in all, markets of stocks and real estate can both offer you good financial income in the long run and other risks in addition. While you are still deciding on investment strategy, remember to diversify all your options while you have opportunities.
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