Updated: Jan 24
Stocks vs. real estate: Which investment is right for you?
Stocks vs. real estate investing: The biggest differences
Stocks and real estate are both top options for investing and growing your money, but how do you decide which is better for you?
Keep reading to learn about the differences between stock and real estate investing — and keep in mind that you can always invest in both.
Short- or long-term investors, active traders, and beginner investors looking to profit from stock market trends
Highly liquid; high capital appreciation and dividend earnings potential
Stocks have high volatility, meaning prices can rise and fall; you may have to pay capital gains taxes when you sell your stocks
Long-term investors, though REITs are best for short-term investors and active traders looking to profit from liquid commercial real estate
Tax deductions through investment properties; REITs offer easier access to commercial real estate investing; higher dividend payments than stocks
Real estate property value can be greatly impacted by economic, political and environmental events; non-traded REITs are illiquid assets
Pros of investing in stocks
One of the biggest advantages of stocks is that they're highly liquid assets, which means they can be readily turned into cash without losing much of their market value. Other examples of liquid investments include stocks, bonds, mutual funds, ETFs, and money market funds.
Another perk of stocks that can benefit both short- and long-term investors is their potential for growth and capital appreciation. Capital appreciation is when an investment's market value increases. For instance, if you buy a share of a company for $100 and sell that same stock for $500, your investment appreciated by $400.
As mentioned earlier, some stocks also pay dividends, allowing you to earn additional payouts from the shares you own. Companies typically either pay cash dividends, or offer bonuses in the form of additional shares.
Cons of investing in stocks
One of the drawbacks of stocks is that, like most investments, market prices can fluctuate. This means that your investment's value can rise and fall, and economic, political, and environmental events can all impact how successful your company is.
In addition, you'll have to look out for the capital gains tax. You may have to pay this tax when selling stocks, but you'll pay less if you've held your investment for more than a year (capital gains tax rates generally range from 0% to 20%).
Investing in real estate
There are generally five types of real estate: commercial, residential, retail, mixed-use, and industrial.
When it comes to investing in real estate, you'll also have five options. You can invest in real estate investment trusts (REITs) through stock exchanges and brokers, buy and manage your own rental properties, flip houses for profit, invest in real estate investment groups (REIGs), or use online brokerages and crowdfunding real estate platforms.
If you're looking for more of a hands-off approach to real estate investing, REITs may be worth considering. According to Investor.gov, REITs make it possible for you to earn income from commercial real estate ownership without having to actually buy the commercial real estate projects yourself.
Real estate investment trusts are companies that own and/or operate income-generating real-estate-related projects. Such projects might include hotels, apartments, mortgages, medical centers, warehouses, and other facilities. You can invest in REITs through most online brokerages, and real estate crowdfunding platforms like Fundrise also offer them.
Companies become REITs when they buy and operate real estate assets and sell shares of those assets to investors through public (and sometimes private) means. Private REITs are also known as non-exchange-traded REITs, and you'll have to purchase them through a broker or financial advisor who provides the non-traded version (these are also highly illiquid, so you won't be able to convert them as easily as a regular REIT).
If you're not interested in REIT stocks or non-traded REITs, you can also diversify your real estate investment portfolio by buying shares in REIT mutual funds and REIT ETFs.
Pros of investing in real estate
Real estate investing offers several benefits for investors. For one, you may qualify for tax deductions on the properties you manage. This allows you to deduct expenses like property tax, maintenance and management costs, and property insurance.
Real estate investments are also commonly regarded as inflation hedges. Inflation typically causes property and rental value to increase, therefore enhancing your return on investment (ROI).
When it comes to REITs, one benefit is that they offer easy access to commercial real estate investing. Since REITs are companies that have already invested in real estate assets, you can avoid the tedious process of selecting and financing the real estate on your own.
In addition, publicly traded REITs are highly liquid, meaning you can buy and sell them at your disposal. Real estate properties are illiquid and can't be readily converted into cash, but REITs can.
To qualify as REITs, companies have to give at least 90% of their taxable income to investors. This 90% rule allows companies to avoid corporate taxes and results in higher dividend payments for you.
Cons of investing in real estate
A downside to consider, though, is that your REIT investment is still susceptible to economic risks. In fact, in early 2020, commercial real estate prices plummeted significantly due to coronavirus.
It can be difficult to prepare for unforeseen events, but if you'd like to lower your risk, you should also consider REIT mutual funds and ETFs.
Stocks vs real estate: Which is right for you?
Stocks and real estate investments differ in terms of growth potential, dividend yield, time horizon, and risk level.
Stocks can be great for both short-term and long-term investors. These investments are also highly liquid and can generate great returns if the company you've invested in is successful.
REITs could be a good fit for you if you want to get into the real estate investing game but aren't interested in finding and purchasing the actual real estate properties yourself. Real estate investments are typically illiquid and require you to buy and hold a property for at least five years, but REITs can be easily turned into cash.
You don't have to choose one over the other, though (and you also don't have to choose either). If you're stuck between investing in stocks and real estate, remember you can invest in both. In fact, investing in both stocks and real estate could help diversify your portfolio and enhance your overall returns.
Rickie Houston is a wealth-building reporter at Personal Finance Insider who covers investing, brokerage, and wealth-building products.
Rickie Houston, CEPF
Dec 17, 2020, 4:48 PM