The debate “real estate vs. stock” is one of the oldest and probably never-ending debates. The comparison between them is difficult because of the different factors attached to both kinds of investments. If you are looking for “real estate vs. stocks” and couldn’t find the right answer, then you need to answer specific questions to yourself. As an investor, you need to evaluate what kind of investment you are looking for? Is it a short term investment or a long term? Are you planning something for your retirement or thinking about covering your college expenses? How risk tolerant can you be? What is your budget for the investment? Are you looking for immediate returns or planning to expand your portfolio with reinvesting?
If you can find answers to these questions, you can assess what kind of investment will suit you because it is totally your personal choice. Both categories have different types of rewards and returns, as well as risks and dangers. rOne you evaluate what you are looking for, things can be more transparent and more comfortable for you. However, if you are still unsure and want to have a more in-depth look into the options available, then, let us give you a comparison between real estate vs. stocks:
- The tangibility of assets: Real estate assets are of a tangible nature. You can touch them, see them, feel them as they are in the form of building, land, shops, malls, mansions, apartments, etc. while, on the other hand, stocks are intangible assets. You just have a piece of paper that entitles you as the owner of those stocks which have no physical existence. You do not have any control over the performance of stocks, and if things go south, you might lose your investment overnight. On the other hand, real estate assets give you extra control, and it is highly unlikely that you lose your investment suddenly unless your property is hit by a natural disaster.
- Tax benefits: Another benefit of investing in real estate, is having tax benefits. Not only this, but tax authorities also allow you to deduct the expenses incurred for the maintenance of those properties. Tax rates are not only lower but, you can earn tax-free profits by selling a particular property if you have resided in that property for a minimum of two years. Real estate losses can be settled against gains from other real estate properties. Some countries have even exempted gains from real estate for tax purposes. According to a survey, 28.1 million people in the united states are attached to the real estate business. They either own real estate properties or somehow connected to transactions related to the business.
- Real estate is easier to evaluate and quantify: It is easier to calculate your income and expenses as far as real estate is concerned. For example, if you rent out a property, you can calculate your rental income and expenses incurred to that property for a specific period. Or, if you sell your property, even then, you can calculate the gains or losses easily. However, in the case of stocks, you are relying on the stock market and the companies you have invested in. It has been seen over the time that companies manipulated the results to portray the things in a better way while the reality was different. This means you are not sure how much you actually gained from stocks. Besides, stock evaluation is a lot more complicated as compared to real estate.
- Lesser Volatility: Studies have shown that fluctuations in the real estate business are way lower as compared to the stocks. Investing in real estate is considered a safer and low-risk venture. Even during the economic recessions, as a real estate owner, you do have the luxury to earn through your property because people will always need a place to live in or buildings to carry out their business activities. Stocks, on the other hand, are highly volatile, and history shows that the stock market faced severe market fluctuations and has cost people a lot of money.
- More control and diversification: Real estate gives you more control over your investment. You can mold your property according to your liking. You can renovate it, improve it, customize it, and can get higher rents if you can find “right tenants.” Moreover, you can do multiple things with your property. For example, you can sell it if you want, you can rent it out, or you can rent a specific portion of your property to make passive income. However, this is not the case while investing in stocks. You are entirely dependent on the market, and you can only buy or sell stocks. Moreover, you can get immediate profits by flipping a property if you can find the right buyer. In the case of stocks, it is highly unlikely to earn high profits by selling stocks immediately within two or three days of purchase.
- Appreciation in value: Another advantage of investing in real estate is that your property keeps appreciating in value. This gives the owner a dual benefit. You can rent out your property and earn regular passive income, and your holdings will keep appreciating in value. This is one of the best ways to counter the effect of inflation.
Stocks & Shares
- High Liquidity: Stocks offer high liquidity as compared to real estate. You can sell your stocks in a very short time if you are in need of urgent cash. However, this is not the case when we talk about real estate. It can take days or even weeks to sell a property. But, stocks are more prone to market fluctuations as compared to real estate. Therefore, investing in stocks is riskier as compared to real estate.
- Investing in stocks does not need a high amount to start with: Investing in stocks gives you a window to start investing even at $100. But, this option is not available in the real estate business. Even if you using the mortgage option, you still have to pay 10% to 20% of the total amount as a down payment. But, you have to rely on the broker if you are willing to sell or buy stocks, and investing in stocks needs proper planning, experience, and even a professional consultancy from a financial planner or other experts.
- Appreciation in the price: Although stock prices keep increasing, the risk factors are even higher. Past events have shown that blue-chip stocks yielded better returns and better appreciation in stock prices, but this has not been the case in every kind of stock. Moreover, stock market crash or price fluctuations can significantly reduce the prices of the stocks at once. The real estate market, on the other hand, has shown a consistent rise in prices over the years.
- Dividends:Dividends are the return on your stocks investment. Dividends are mostly given annually or semi-annually. However, some companies also give quarterly dividends. Just like real estate rentals, it is also a form of passive income. But, most of the companies do not give dividends even annually. The reason behind that is most companies, which are at the development stage, reinvest the profits earned during the year. So, as an investor, it can be frustrating if you are looking for regular income methods.
Let’s have a look at the statistical comparison of the ratio of the returns of the Vanguard real estate mutual fund (REITs equity index benchmark) and S&P 500.
|TIME PERIOD||S&P 500 Total Return||Vanguard Real Estate ETF Total Return|
|SINCE MAY 13, 1996||621.8%||865.3%|
Source: “yCharts. Time periods ending on 7/16/19. May 13, 1996, is the inception date of the Vanguard Real Estate mutual fund.”
Now, if you look at the figures in the first three rows, you will see the underperformance of return on real estate stocks. The biggest reason for that is inclined in interest rates, which have been raised several times in the past three years by Federal Reserve. But, if you look at the long term benefits, the real estate return ratio has outperformed the stocks by a huge margin. Besides, this data only included REITs, and other real estate options are not included in it.
Bottom-line: The selection of the type of investment depends on the individuals, their preferences, their future plans, their investment ability or budget, etc. Both types of investments have different kinds of risks and rewards, and they work in different dynamics.
However, based on stats and researches, it is evident that real estate has outperformed stock investment easily. Not only this, nut, people in the United States, as well as other countries, also prefer investing in real estate because of some evident reasons like less volatility, consistency, value appreciation, passive income, etc.