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Real Estate Vs. Stocks - Why Real Estate Investment Is a Safer and More Profitable Option

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It’s the age old debate: what’s a better investment option: stocks and shares or real estate?

Of course, the answer is: it depends on your investment style, what type of returns you’re looking for, and which one you’re most comfortable with. 

Stocks can be a good investment, if you know what you’re doing. You don’t need a lot of money to get started with stocks and shares, and there are plenty of different ways that you can invest in them, from mutual funds to going through a stockbroker. You can even invest in stocks yourself, or just buy a tracker that follows the stock market. But there is a downside to investing in stocks as well. They tend to be a lot more risky, especially if you’re hand picking stocks and end up overly exposed to risk.

Real estate, on the other hand, is in many ways an extremely accessible investment. You can easily assess its value yourself and ensure that you’ll be able to generate the returns that you’re looking for. It’s also a tangible asset, and offers a range of excellent benefits, including cash flow and appreciation (some stock investments offer this), but in addition to this, you also get leverage, which is using the bank’s money to grow your investment. This, coupled with real estate’s ability to serve as a long-term hedge against inflation and market fluctuations means that it’s considered one of the safest ways to build wealth, hold on to it, and even pass it onto future generations.

Real estate also has a low correlation with other major asset classes, which means that when stocks are down, real estate value is often up. The rich use real estate as a way to diversify a stocks-and-shares-heavy portfolio (most 401Ks), as it can help to offset any major economic downturns. During a drop in the economy, stocks may stop paying dividends. In most cases though, a rental will continue to rent; even during times of economic uncertainty.

There are many other things worth having a look into that make real estate an ideal investment choice for many. 

Let’s take a look now:

Property Investments Are a Hedge Against Inflation

Inflation is happening at a steady pace, and eating away at the value of your money. Inflation usually ranges between 2% to on up past 5%, which means it’s lowering the value of cash savings and fixed-income investments as well. Investing for inflation means investing in assets that at least beat the inflation rate. Real estate, especially rental property, is a great option for this. 

MIT Economics says that retail and apartment properties are complete inflation hedges. Meanwhile, for stocks, even Warren Buffet said that “it’s not a secret that stocks do poorly in an inflationary environment.”  The value of real estate rarely stays down and property and rental values typically increase with inflation (depending on where you invest), boosting your returns. Furthermore, if you buy the property on a mortgage before inflation surges, the interest rates remain the same while rental revenues increase.

Property Appreciates in Value

Long-term, there’s an increasing demand for property. 

“There’s an inherent demand for real estate, whether the land produces a product like coffee or is home to an apartment or retail space; so it will always be a good investment,” says Marcello Arrambide, founder of Day Trading Academy. “No matter what kind of business you run, you need land.” 

You Can Add Value to Your Investment

When investing in stocks, you have no control over factors that can increase their value unless you’re one of the decision-making executives in the company. With real estate, you’re the boss. You can actively play a role in increasing the value of your property to make it more attractive and improve its market value. This works out well for both property flippers or would-be landlords. You can buy an undervalued property that’s not in the best shape, fix it up, then rent it out or sell at a good profit. With stocks and shares, the best you can do is speculate and make an educated guess about whether a share’s value is expected to increase or decrease.

Need inspiration for property fixes? Check out Investments Upgrades That Can Last a Lifetime in Your Unit

There Are Tax Benefits

Taxes are unavoidable when it comes to income. But did you know that in real estate, there’s a lot of tax benefits that you can claim? Here are some of the tax deductions you can avail if you’re a property investor:

  • Interest on the mortgage
  • Depreciation deduction
  • Insurance premiums
  • Property tax deductions
  • Cost of repairs, services, and utilities
  • Travel and transportation costs associated with property management
  • Legal fees for the mortgage or rental

Stock investors don’t have the same tax benefits and have a greater tax burden when the time comes to sell their stock.

For investment properties, real estate capital gains taxes are also deferrable through the 1031 exchange. This allows you to sell your property and defer capital gains tax as long as you use the proceeds of the sale to buy another property. However, this property must be used for investment and not for immediate resale or personal use

To find out more about real estate taxes and deductions, read our Guidebook on Year-Round Tax Strategies – What Every Investor and Landlord Needs to Know 

Real Estate Creates Predictable Passive Income

Owning rental property gives you a source of immediate, predictable income from monthly rental fees. Cash flow is the amount of money you have leftover from the rent you collect, minus your operational expenses. Entrepreneur Bethenny Frankel says, “Your best bet is investing in residential properties that produce rental income year-round. Just make sure you understand all of the associated legal fees and are prepared for unexpected costs.” Most investors target a return of 8-12% for rental properties. 

Stocks also provide recurring income in the form of dividend payouts. However, the returns from standard tickers that follow the entire fund are often just a little bit above inflation. The S&P 500’s mean dividend yield is currently at 4.30% (dividends only, not including stock appreciation). Of course, you can adjust your returns by hand picking better stocks or having a stock broker do this for you, but you’ll need to factor in fees for that as well.

Leverage and Easy Access to Funds Through Financing

Borrowing money to invest in the highly volatile stock market may not seem like the best idea, but for real estate, you can borrow significant sums of money to finance your investment. Borrowing capital to buy property instead of paying the whole amount out-of-pocket is called “leverage”. This is one reason why real estate is so attractive to many investors. You can get funding through banks, credit unions, or private money lenders. Most banks require you to pay 20% of the sale price and then lend you the rest of the amount, to be paid for over 20 or 30 years. For first-time investors though, house hacking, and using a FHA loan, can help you to get started for a much lower down payment (in some cases, 3.5%). Even with the interest, your returns are maximized because you put in less cash upfront for the investment. 

The amount you owe the bank or lenders doesn’t have to be paid for completely by you, either. If you score a rental property with a great cash flow or a house that you can fix and flip for profit, the mortgage you took out can be paid for by other people. The investments pay for themselves and generate additional profit at the same time.

Real Estate is a Tangible Asset

The tangibility of real estate is one big reason why people generally feel safer with it. It won’t disappear overnight if the market crashes. The prices may fluctuate sometimes, but it’s still there. It’s something you can see, touch, and physically use. You’re less likely to fall victim to hacking or fraud because you can personally inspect the property before buying. When you rent it out, you can also do background checks on tenants to make sure your property will be well taken care of.

Real Estate is Insurable

Risk is an element that’s always present when investing. Because of this, investments in the form of stocks, bonds, or mutual funds can’t be insured against market crashes that cause significant loss. Real estate, despite being an investment, can be insured against elements that damage its physical value. You can take insurance policies against fires, floods, sewage, and other hazards. Industry-specific insurance is also available. There’s builder’s risk insurance for those who are renovating vacant properties, and you can get cover for worker injuries, property damage, and vandalism that can occur while rebuilding. In some cases, you can even get insured for loss of rental income.

It’s Transferable

A lot of investors want to create multigenerational wealth. With real estate, it’s easy to transfer properties to your family members or friends without having to pay exorbitant taxes. Landowners can create trusts to hold their real estate assets, and upon the grantor’s death, ownership is automatically transferred. “If the heirs decide to sell immediately, they won’t pay any capital gains tax,” says Peter Zarifes, Director of Wealth Management for Whittier Trust Company. 

You Don’t Need Specialized Knowledge

To invest in stocks, a fair amount of knowledge and time is needed to make sure you make money from it. That’s why a lot of people prefer to do it through stockbrokers who do the research and stock picking for them. 

In real estate, it’s not difficult to assess the value of a property that you can see, inspect, and visit physically.  Aside from this, computing for ROI and forecasting how much income you can make is completely doable by yourself or with some expert help at the beginning. Online calculators are also available to help you do the math. To study the real estate market prices, you also don’t have to look further than the area you’re looking to buy property in. You can look at similar properties in the area, compare, and come up with a valuation. 

So which is better? Stock options or real estate? That’s something you’ll need to decide for yourself. There is money to be made through both options, as long as you know what you’re doing. For many investors though, the best option is one that exposes them to both stocks and shares as well as real estate. By purchasing both, you’ll be able to diversify your investments, and help protect yourself from any fluctuations that would be felt more directly if you were overly exposed to one or the other. No matter what you choose to invest in, make sure you’ve done your homework. As always, ensure that you take the time to research the viability of the individual investment first, before you dive in. 

Looking to invest in rental properties? Our tools can help. Take a look at our available inventory of investment properties, or head on over to our Research Center to get investor-grade market information about the area that you’re thinking of investing in. 

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