When deciding how to invest our money, it’s common for most people to look to the stock market as their primary option. However, real estate is another very viable investment option, with lots of opportunities for great returns.
When deciding which to invest in (or when considering both), here are some things you should pay attention to:
- Returns: which will make you the most profits
- Liquidity/Illiquidity: how quickly can you sell your asset for cash
- Tangibility: do you physically own your asset
- Risk: how much risk are you willing to bear
- Barriers to entry: how easy is it to invest in that asset
- Leverage: whether can you finance the asset with debt
- Taxes: how will you get taxed for owning/selling the asset
Real Estate vs Stocks: Quick Definitions
When you invest in stocks, you are essentially buying a portion of the company. You have a small ownership share in the company. There are two ways to make money from stocks:
- The stock pays dividends (payments to shareholders, typically paid out quarterly.) This is called the dividend yield.
- Note that not all companies’ stocks pay dividends.
- The stock goes up in value (the price appreciates) and you can sell for a profit. This is called the capital gains yield.
If you want more information about investing in stocks and how it works, read more at Nerdwallet.
When you invest in real estate, you’re getting physical land/property. There are a few ways to make money from real estate:
- You can lease out your property and collect rent, creating passive income.
- The land/property can appreciate, and you can sell for a profit.
What About REITs?
A real estate investment trust (REIT) is a company that owns, operates, or finances properties. 90% of the profit from REITs must be distributed as dividends to shareholders, so they can be a good investment opportunity.
So when you invest in a REIT, you are investing in a real estate company. You do not own any of the properties, but you own a piece of the company which owns the properties.
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Why Should I Invest in Stocks?
Stocks will make you the most money, because stocks can go up 50% or 1000% per stock in a day. Based on what stocks you hold, and how long you hold it, you can see some really dramatic returns. It’s happened with big companies like Apple, Tesla, and Netflix and smaller companies as well.
In a nutshell, stocks have the potential to make you a lot more money.
It’s a Liquid Asset
You can sell your stocks at any time, and the money will be back in your account in 1-3 days. Contrast this with real estate, where it takes time to sell. It takes between 30-60 days to sell, and the selling process can be very long and complicated.
If you value having liquid assets, avoid real estate. It’s a lot harder to sell a house than it is to sell some shares of a company.
It’s Easy to Get Into
Real estate is also harder to get into than stocks. Especially with new apps like Robinhood and Webull, you can start trading with stocks immediately. You can buy fractional shares, and there are low barriers to entry in investing in stocks.
To start investing in real estate, you’ll need some seed money, typically about 20% of the property’s sale price.
Don’t let this intimidate you! There are ways to invest in real estate with no money down. Read our post about how to use seller financing to get into real estate to get an idea.
Why Should I Invest In Real Estate?
With the lower returns, low liquidity, and higher barriers to entry, why would anyone consider real estate? We’ve already mentioned the lower risk, but there are also other benefits to investing in real estate.
If you have $20,000 to invest, and you invest in stocks, you’re getting $20,000 worth of stocks. However, with real estate, you have the opportunity to use leverage and get $100,000 worth of real estate.
Leverage is using a combination of debt and your own equity to fund an investment. You can finance 80% of your property’s purchase price with debt, and so the power of your investment dollar can go further.
There’s a lot more volatility with stocks; there’s more competition and innovation, and a myriad of factors you don’t have control over. Any of them could cause your stocks to plummet and for you to lose all your money. As the saying goes, with great risk comes great reward.
When it comes to real estate, the returns are modest. You’ll probably get between 3% and 10% on your return, especially if you live in a good area. Although the passive income for real estate can’t compare with stocks, there’s a lot less risk and volatility with real estate.
There are many ways that the tax code has been written to benefit real estate investors.
- You have depreciation.
- You can write off your expenses and interest on your mortgages.
- You can avoid capital gains tax by doing 1031 exchanges. With stocks, you will have to pay a capital gains tax when you sell your stock.
It’s hard to get around taxes with stocks, but it’s encouraged with real estate.
With owning real estate, you physically own your property. You can walk through it, see it daily, and there’s a tangibility aspect that owning stocks lack.
Of course, whether you choose to invest in stocks or real estate is based on your own personal financial situation, your tolerance for risk, your investment style, and your overall investment goals.
If you have a higher tolerance for risk and want to have the possibility of high returns, stocks may be the best option for you. If you have a lower tolerance for risk and prefer having tangible assets, real estate could be the best option.
However, although we contrasted the two investment strategies, it doesn’t mean that you can’t invest in both. Real estate provides an excellent opportunity to diversify your portfolio and provide you a tangible, controllable asset.
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.