Perhaps one of the number one question asked by new investors is, “which is better to invest in real estate or stocks?” Of course the answer is not so cut and dried and actually is very subjective. In fact, if you Google the question you will get a handful of people who love or work in the stock market tell you why stocks are so good. Those responses of course are subjective and perhaps more opinion based than fact.
The same of course is true in reverse as real estate investors and the people who work in the industry have their opinions. While many of the bullet points each side may talk about may be factually based, the question of which is better depends on your own personal goals, risk tolerance levels, cash on hand to invest, time to hold the investment etc. I guess my point is that there is no true answer as to what is the best investment vehicle and anyone answering this directly is stating an opinion based on their objectives.
The basic distinctions of stocks versus real estate
When investing in stocks you are buying a small piece of a company through the purchase of shares. Depending on your investment, you may own a fraction of 1% of the company or perhaps if you own a lot of shares. You may own 1, 5, or 10 percent of the company. These companies are professionally managed and have a board of directors who make calculated decisions to arrive at how much gets re-invested back into the business to help make it grow and how much gets shared with you, the shareholder.
Basically you as an individual investor have no control over the investment. Those who do have control (the board of directors) are supposed to be experts in their fields but ultimately the controls lie within their hands.
When investing in real estate you are buying a tangible asset which typically consists of land and a building. There are many types of real estate purchases an investor can make, but for this post we will discuss the more common individual purchase of a house or perhaps small apartment building.
Depending on what type of real estate you buy, you, as the sole owner of the property, are the decision maker and are in full control of your investment. Now comparing this investment to stocks, it is important to remember the people in control are supposed to be experienced professionals. For real estate to be good to you, you to want to become educated and experienced, or hire professionals to help insure you are properly executing a great investment and the ongoing management of it.
People who invest in real estate, do so for these benefits:
Every investor has their own objective of what they want from an investment. They tend to all be found in one or more of the 5 wealth building principals.
1. Income or cash flow
2. Deductions or tax benefits (a dollar saved is a dollar earned)
3. Equity building through principal reduction of the purchase price with consistent or rising values
4. Appreciating assets
5. Leverage, the ability to finance or use other people’s money to finance the investment
How Real Estate Investing Meets All FIVE of the Wealth Building Principles
Real estate investors believe that real estate is the ideal investment. Spelled out in the acronym are the 5 wealth building principles as laid out above. Only real estate has the capacity to give an investor a return on all 5 of these wealth building principals. When real estate is purchased with financed money and held for a long term investment it delivers a return on all 5 of these wealth building categories.
#1 Income: Real estate can return positive cash flow every month as can stocks
#2 Deductions or tax benefits: Real estate is the best vehicle to capture tax deductions through expense write offs and depreciation
#3 Equity build up: The tenant essentially reduces your loan balance each month creating more equity which continues to provide returns based on the initial value
#4 Appreciating assets: the 50 year trend is almost a 6% annual appreciation rate (stocks too can climb in value)
#5 Leverage: the ability to finance or use other people’s money to finance the investment while you reap the rewards of the entire asset
While stocks may provide one, two or perhaps even three of these wealth building principals, only real estate is capable of providing all 5. To be fair, a GREAT stock may perform well enough with one or two of these wealth building principals to give a great overall return, but they tend to be much more speculative in nature.
Owning a tangible asset that provides the safety and when purchased correctly the sustainability of all 5 wealth building principles is what entices investors to invest in real estate.
Most of what you hear is opinion.