Real Estate vs. Stocks: Where Should You Invest Your Money?
Is Real Estate or investments the ultimate choice? Well…as any lawyer can tell you, it depends!
One of the most common questions from clients is whether they should buy rental properties or put more money in the stock market. Both strategies—if done over time and thoughtfully—will work to build wealth, but their implementation and outcomes will vary substantially. This means that what’s best for you will really depend on your situation and what you’re trying to accomplish.
Before you determine what will best maximize your investment outcomes, here are some pros and cons to consider. I also have a list of questions you will want to ask yourself to help determine which investment strategy—real estate1 or stocks2—is best for you.
Real Estate Investing
When you think of real estate investing, think stability. When it’s done right, you have a slow and steady stream of income that grows over time. Some other benefits include potential appreciation of the asset itself. With a great rental property, not only will you receive rental income but the property itself will grow in value. There are also numerous tax deductions with rentals that may make the rental income even more profitable (mortgage interest, property taxes, depreciation, etc.).
One of the biggest drawbacks to owning real estate, however, is it can be capital intensive. The initial barrier to entry is high; you will need large capital up front to acquire a property. In addition, you may have improvements or other unforeseen costs you need to make to maintain the property or make it as cashflow positive as possible. You also need to make sure you account for maintenance issues that will inevitably come up.
Another significant drawback that is often overlooked is the illiquidity of real estate. You can build a steady stream of income with real estate, but if you unexpectedly need a large amount of money in a short period of time, it can be difficult to sell the property or borrow against it quickly or cost-effectively.
Stock Investing
Stock investing in the short term feels a lot more volatile, less slow and steady. However, some of its benefits contrast greatly with the real estate route. One, there is no barrier to entry; no matter what amount of money you have available to invest, you can start today. And once you’ve started, there are no additional capital outlays required.
Another great aspect of owning a stock portfolio in comparison to real estate is that it’s fully liquid. There are not issues with accessing the monies quickly if needed (you may pay capital gains and penalties in retirement accounts, but the money is still accessible).
One large drawback in comparison to real estate investing however, is that lack of control. With rental property you have some control over how the investment performs; you can select the tenants, improve the property, and make decisions that will directly improve the cashflow. However, with a stock portfolio the fund/stock pricing is entirely out of your control, and in the hands of the economy or individuals running these companies.
Other Factors: Performance & Volatility
The two greatest factors of evaluating an investment you should also think about are investment performance and volatility.
Now, you must view either of these options as long-term investments. No asset class is going to build you wealth in a few years (with a few rare and lucky exceptions).
Over time the stock market investment performance outperforms the majority of real estate investments. (However, real estate varies pretty substantially based on the location.) But it is also more volatile along the way—there are ups and downs as your wealth grows, which can be difficult to stomach for some investors.
What To Ask Yourself
Here are four questions to ask yourself before you jump into either investment to help determine what might be best for your current life stage.
What are you goals? Are you trying to build a steady income for the future or just build wealth?
If you just want to start building wealth and worry later about how that wealth is going to sustain you in retirement, then I would suggest stock investments. If, however, you want to strategically build a set amount of income to sustain your retirement, then real estate may be a good option.
How old are you and what startup capital do you have?
If you do not have the capital to buy a rental property, then start with stocks. Do not leverage yourself to the max to try to acquire rental property if this is all new to you.
How much time/effort/learning do you want to put into this investment?
A lot of people overlook the amount of time and effort real estate investments require. If you want to learn how to manage properties, and see this as part of your routine in retirement, then real estate might be a good way to go. If, however, you are a busy professional or have young kids, it may be more realistic to stick with the simple stock portfolio.
At the end of the day, both strategies can build wealth and sustain your future, but they should be implemented purposefully and complement your long-term vision for your financial future.
Spring Projects & Beautiful Storms
This spring is certainly marked with new beginnings for our family as we grieve the loss of Lucy, but we are keeping busy. We upgraded our coop—complete with an automatic door that let’s them out on a schedule. And we’ve launched Tennessee Time (our boat)—ready to explore more of Lake Ontario this season!
Here are a few snapshots.
I love our winter storms.
Weekly Rewind: Recent Videos & Lives
🚩3 RED FLAGS Your Life Insurance Agent Might Be Scamming You
Are you worried that your life insurance agent might be taking advantage of you? In this video, we discuss 3 red flags that could indicate that your agent is scamming you. Watch till the end and I'll share what to do if your agent is potentially scamming you.
📽️Life Insurance is NOT an Investment! 4 Reasons Why You're Wasting Money!
Are you under the impression that life insurance is a smart investment for your financial future? Think again! In this live, I'll explain four reasons why it is absolutely not an investment and should not be treated as such. Watch now to learn the truth about life insurance and why it's important to understand its true purpose. Watch this video before you buy permanent life insurance and avoid making a costly mistake!
Real estate in this discussion refers to buying residential rental properties for the purposes of renting out to long-term tenants.
Stocks in this discussion refers to the U.S. equities market, and can be thought of as the S&P 500 or something equivalent.