We can’t all have a personal financial guru who knows exactly where to put our money for us so that we strike it rich. For many of us, knowing where to invest our money comes with research and work. For your aid, we have done a little bit of that research for you. So, in 2016, what is the best investment route to go down? Real estate or stocks?
The first thing we should note is that there are pros and cons to both sides of the question, and whether you choose stocks or real estate will depend on your capital, assets and goals (whether long-term or short-).
When investing with stocks, you receive ownership in a company. If the company does well, you profit. If it doesn’t, you’ll see funds diminish as the company’s earning drop. The best way to approach stocks is with a long-term goal and balanced approach.
When compared to real estate, stocks tend to have a higher rate of return. For the past 60 years, it has been shown that stocks yield about an 8% return a year whereas real estate only yields 2-4%. Stocks tend to be more liquid than real estate, meaning that they are quick and easy to sell and very flexible (you can reallocate them into a tax-free retirement account). Though stocks tend to also be more volatile than real estate, this can be a good thing. Some companies can average anywhere from 20 to 50% growth in the course of just one year.
Other pros of stocks are that they require less work - you can basically let them be and watch your money ebb and flow. Real estate requires more management and maintenance. Stocks also provide a wider range of variety, have tax benefits (if you can make it so the majority of your income comes from dividends you could actually lower your marginal tax rate), and hedging is a lot easier than with real estate.
Though the volatility can be a plus side to stocks, it can also be a big con. If the economy or company begins to face challenges, you’ll start to see major losses. Stock decisions are also often based upon emotions, which can lead to some very irrational choices. Stock investors also have to be constantly aware of bankruptcy risks since an investment could dissolve in the matter of a moment.
There are two different kinds of real estate: residential and commercial. You can make money in real estate investing by house flipping or renting out properties. Real estate is a very real and tangible investment. Stocks can feel ambiguous, but real estate is something that you can have more control in. Real estate is a great option as it can come with tax deductions. Depreciation is another positive side of real estate investing. Real estate also gives you leverage over other people’s money (a 3% increase on a 20% down payment can yield a 15% return!), it is less volatile, it is insulated from the national and global economies, and the government is actually out to help you.
If you can’t pay your mortgage there are bailouts available, and banks are actually now forced to extend loan modifications to good and bad creditors. With real estate you can also analyze and quantify your expenses far more easily. With real estate you have a better cash flow component but it also provides a way to build wealth with the equity component. Today there are tons of great resources out there to help you get your hands into the cookie jar of real estate investment. Real estate investor software has really started to be a game changer and, with more things moving online, maintaining a property has become easier.
Similar to stocks, real estate also has its own drawbacks. Unlike stocks, real estate can’t be bought and sold quickly. Often, you may have to hold on to a property before you can sell it and see a profit. Closing costs can also incur thousands of dollars in commissions, fees and taxes. Along with this (and we all know this from the market crash a few years back), real estate prices fluctuate. Over the long term, prices increase, but there is constant fluctuation which can lead to issues with making a payment if the property is now worth less than what you borrowed on it.
Overall, it may seem that stocks have more of the advantage in more categories than real estate does. However, real estate offers stability and tax advantages that stocks can’t. So whether you choose to invest in stocks or real estate may depend on your long-term and short-term goals, your financial situation, and maybe even your personality and level of comfort. If you like the volatility of stocks, then go for it. If you’re looking for something a little more stable, real estate investing may be the better option.