The question is age old: which is the better investment, real estate or stocks? Real estate is a tangible asset that appreciates over time. Stocks, on the other hand, are shares in the ownership of a company whose value rises and falls based on revenue, growth, and market conditions.
If you’re deciding between investing in real estate or stocks, here’s what you stand to gain from each one.
Advantages of investing in real estate
- Opportunity to earn rental income
- Tax advantages
- Financial leverage
- Potential for more robust returns
Investing in a real estate property provides you with the opportunity to rent it out. Whether you purchase a single-family home, apartment, or land, investment property has the potential to generate income from rental or lease agreements. Revenue-earning properties are also fairly stable and predictable.
Unlike stocks, investing in real estate comes with a variety of tax benefits such as short-term and long-term capital gains, depreciation, and the 1031 Exchange. Tax deductions, in particular, are one of the biggest benefits that investors can take advantage of.
If you own rental property, you can deduct the expenses that go into maintaining and managing the property. Mortgage interest rates, property tax, and travel costs are deductible as well.
Leverage involves borrowed capital that is used to buy real estate. A portion of the total cost will be paid upfront and the balance (including the interest) will be paid over time. A mortgage, for one, is one common way to leverage your investment. When done right, leverage can build wealth and accelerate your return on investment.
Due to leverage, rental income opportunity, and tax benefits, investing in real estate has proven to generate better returns. Real estate also appreciates over time, leaving you with a more valuable asset than what you started with.
Advantages of investing in stocks
- Easy to buy and sell
- Higher rate of return
Buying or selling shares of stock is much easier compared to real estate. Transaction costs are lower as well. To buy shares, one must simply open an online brokerage account and buy through an online stockbroker.
Selling follows a similar process. Those selling their shares through a broker place a sell order and decide whether they want to unload their shares at the current market price, at a minimally accepted sales price, or at the lowest price.
Stocks are a viable wealth creator because they quickly increase in value. After accounting for inflation, stocks typically increase by 7% in the long run. This long-term growth rate has generally seen an upward direction. However, these assets are riskier because there is no guarantee of a profit when you buy.
Investing in stocks is a great way to diversify your portfolio and reduce risk. Since you’re not putting all your eggs in one basket, you spread out your risk across your assets.