Posted by James Financial Services Inc

Real Estate and Stocks: What’s the Difference?

Real Estate and Stocks: What’s the Difference?

Everyone needs an investment strategy that suits the budget and needs. While many individuals choose the market as an investment option, real estate investment can be more effective in the stock market. It may offer a lower risk, may give a better return, and usually offer better diversification under the right circumstances.

10 years ago, about two-thirds of Americans invested in the stock market but it took a major toll after the great recession.

It was in 2016 where the market participation rate dropped to just over 50 percent. The Americans are encouraged by financial advisers to invest to be able to maximize their long-term returns but since they have just recovered from the fallout, the majority of young adults are into real estate investment or saving their money instead of following the advice.

Comparing Stock Investments and Real Estate 

Stocks or real estate investment gives you no better option since it is a personal choice and it is influenced by the financial ability of the investor, tolerance to risks, goals, and style of investment. It can be assumed that more people invest in the stock market since it does not take much to be able to buy stocks. Real estate investment needs a lot of money to commence.

Real estate for potential investors is attractive since it is a tangible asset that can be manipulated aside from it being diverse. 

Compare Returns With Clients

For years now, the average compounded return of stocks is about 8 percent per annum but there were also times where the returns are negative. However, most of the investment firms are significantly estimating lower returns in the years ahead. The stock market investment will be greatly appreciated when partnered with benefits that will increase your returns such as catch-up contributions or company matching. But those perks are not at all times offered and there is a maximum value to how much you can get from them.

Comparing real estate and a stock market in terms of the factors that affect the value, price, and returns are very distinct, we can take the value as the basis. Since 2000, real estate has overtaken the stock market to about two to one, 10.71 percent annual real estate earning compared to 5.43 percent annual stocks earning. With this clear comparison in investment return, many investors want to cash in and take control of real estate by buying rental properties.

Most people tend to buy real estate and they expect to have a significant increase over time. As a matter of fact, it increases to 3 to 4 percent every year. Nevertheless, investors gain from a rental property. An 8 to 12 percent increase in return every year is generated from renting out their property.

Comparing The Risks for Real Estate and Stock Risks

Both the real estate and stock markets are greatly affected by the Great Recession but always remember that real estate and stocks both have different risks.

Real Estate Risks

A lot of research is required for real estate. This is one of the most important risks that people should understand. Remember that real estate cannot be easily liquidated and it cannot be sold so easily. 

 The risks in rental properties are in managing rentals and handling repairs on your own. Aside from the additional costs that will incur, one of its biggest risks is the dilemma in dealing with the tenants since tenants may always ask for something. Hiring a property manager or a contractor to deal with the everyday needs of your tenants may be a good idea.

Stock Market Risks

There are different kinds of risks you will meet when investing in a stock market such as economic risks, market risks, and inflationary risks.

First and foremost, stock value is subject to fluctuations in the market since stocks are dependent on so many things like the economic status or cycle, political status, monetary policies and regulations, and many others. 

There are also risks in stocks that originate from the investor himself. A higher risk is certain for investors who do not choose to diversify their holdings or depend on a particular type of stock.

Advantages and Disadvantages Of A Real Estate

Investors on real estate may see several tax benefits and they may have the capability to yield more leverage on their capital. While real estate and stock markets are not totally the same, the long-term cash flow offers passive income and the potential to be appreciated.

In spite of this, it is important to be concerned about the amount of money invested in real estate. Investors must have the ability to get financing and down payment if the deals are not on an all-cash basis. Real estate investors cannot rely on selling immediately their properties when needed since real estate is not as liquid as of stock market. Another disadvantage as well as the other costs related to managing a property and the time that you have to spend on the upkeep of the building

One significant disadvantage of real estate is that it cannot be liquidated or sold easily compared to stocks where it can be traded easily.

Advantages and Disadvantages Of A Stock Market

A big amount of cash is not needed to get started with investing in a stock market. Stocks are liquid and can easily be bought and sold. Therefore, in case of emergencies, you can rely on your stocks.

But, stocks are riskier since it tends to be more unstable. Selling stocks results in having a capital gains tax giving you additional tax to be paid. Your assets may not be very sizable unless you have a lot of money invested in the market.

Additional Factors to Consider 

Bigger capital is required in buying property compared to investing in stocks. But, when purchasing property, the investor will have more control over his money allowing him to buy a more valuable asset. Having a 25000-dollar investment into securities will give you a 25000-dollar in value. On the other hand, a similar investment in real estate could buy 125000 dollars in property with a tax-deductible interest and a mortgage.

Generated cash from rent is anticipated to cover the insurance, property taxes, mortgage, and repairs. However, the property that is very well managed will give the owners additional income. Additional benefits for a real estate investment includes depreciation and other tax write-offs.

One additional advantage is that the generated monthly income from real estate may rise with inflation even in a rent-controlled area. The taxes after selling the investments are another thing to consider. Typically, selling stocks yields capital gains taxes. In real estate, if another property is bought after the sale, the capital gains can be deferred. In tax code, this is called a 1031 exchange.

Key Takeaways

    •    Stocks or real estate investment is a personal choice and is influenced by the financial ability of the investor, tolerance to risks, goals, and style of investment.

    •    Stocks and real estate offer different opportunities and risks.

    •    Real estate requires a lot of your time, money and effort in researching but is also offers passive rental income.

    •    Stocks are bound by economic, market, and inflationary risks, but a big amount of cash is not required, and it can be bought and sold easily.

The Bottom Line 

Stocks and real estate both offer rewards as well as risks. Stock market investment is a popular retirement investment vehicle especially to those who regularly pay for their 401(k) or Roth IRA. But, it is important to diversify most importantly when saving for the long term. A variety of asset classes or sectors must be chosen by the investors to minimize the risks. It is ideal to invest in real estate to be able to diversify your own or your client’s portfolio on investment while minimizing risks and increasing returns at the same time.  

James Financial Services Inc
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