Should you invest in stocks or real estate? This is an age-old question that many beginning investors ask. Ideally, it would be good to diversify your portfolio and include both stocks and real estate, among other investments. However, if you need to choose one over the other, weigh the pros and cons of both, and see which option sits with you better.
Here are a few things to consider:
- Real estate is a tangible asset
- Real estate gives you better control over your investment
- The returns on real estate and stocks are vastly different
- You face risks when you invest in real estate or stocks
When you invest in a home, land, or building, you can see, touch, and perhaps live in your asset. To many, that is an important psychological advantage. In the worst crisis, you know where to find your asset and protect it or use it to your benefit.
You can do whatever you wish with your property. You can rent it out, live in it, or repurpose it, depending on how you think you can make the most profit.
Stocks are paper assets that you have little control over. When you buy shares in a company, you essentially own a piece of the business, but unless your shares are substantial, you have very little say on how it is run and managed. All you can do is watch and hope for the best.
If you’re the kind who need to be hands-on with your investments, real estate may be the better option for you.
How your wealth grows by investing in stocks or real estate is very different. In real estate, value appreciation is the simplest way to growing your asset. Real estate in America historically increases in value over the years, generally at a rate of 3% to 4% every year.
Furthermore, investors can get regular income from their property by renting it out. In addition to value appreciation, they can get an ROI of around 8% to 12% every year through rentals.
Property flipping is another popular real estate investment approach. You buy a property that’s priced below the average market value, renovate it, and sell it at a profit. This allows you to recoup your investment faster.
As for stock investments, it has historically been proven to be one of the most significant wealth creators in the world. Stock prices tend to be highly volatile particularly in the short term, but if you hold on to your shares over long periods, you may expect their value to grow dramatically. Historically, stocks have returned an average of 10% every year.
In addition to value appreciation, you may also get additional income from your stock assets through dividends. However, dividends are never guaranteed, and when they do come, you might want to reinvest them into additional shares to grow your asset.
When choosing between real estate and stock investments, it may be important to know that from December, 2000 to December, 2016, real estate has outperformed stocks, returning 10.71% yearly compared to stocks’ 5.43% based on the S&P 500 Index. Consider, though, that analyzing and measuring returns may be done in different ways and yield different results.
No investment comes without risks. Whether you choose to invest in real estate or stocks, you need to be mindful of the risks you face.
In real estate, these include:
- Lack of liquidity
- Rental property risks
Rental properties are inherently prone to several risks. These include prolonged vacancies and tenant issues.
Dealing with tenant issues is also another risk you have to face. To protect yourself, make sure you’re highly familiar and compliant with all rental laws in your area. Consider hiring an experienced property manager who can look after all the important details of running a rental.
- Can’t sell property
If you’re a property flipper, you’re in danger of losing money the longer the home remains unsold. You may have to take a discount and not be able to recover your investment cost.
You typically invest a large sum in real estate, but selling property can take time. If you have an urgent need for cash, you’ll have to look elsewhere for the source.
The biggest risk in investing in stocks is volatility. Share prices are greatly affected by political, economic, and geographical events. Even when things are pretty stable at home, the share prices of a multinational company can tumble if political turmoil suddenly breaks out in a major international hub. With the volatility of stocks, seeing your investment wiped out in a day is a possibility you cannot discount.
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