Published on Monday, November 30, 2015 by Land Century
As with most things in life, the answer isnt black and white. That said, there are arguments for both sides of the equation, and in many cases, real estate is the better long-term option.
In the great real estate vs stock debate, were going to play the devils advocate and look at both sides of the table. Ready set fight!
Round 1: Risk vs. Return
Like with any other investment, its important to assess the risk versus the expected return when deciding whether to invest in stocks or real estate.
Generally, its easier to analyze the risk vs. return with stocks because you have historical data and past performance to go off of. And although things can change, past performance is often indicative of future results. While investing in a single stock versus an index fund is a calculated risk, the right move could produce higher-than-expected returns.
It can be difficult to quantify the risks when purchasing real estate. Yes, there is data available, which can include comparable home prices and average rent costs, the changes in the market can be unpredictable and sometimes costly. Ultimately, you may wind up owing the bank more than the property is worth if the market experiences a serious downturn.
As a landlord, repairs and vacancy issues can also eat away your profits. Thats why its important, as an investor, to calculate not only your expected mortgage, but your taxes and maintenance, and your operating costs. This will help you determine how much you can expect to earn in rental income. The answer will be different for every investor, but if you find the right property, the risk will be well worth the effort and the return that owning real estate provides.
Round 2: Required Capital
Required capital can be a hurdle for investors looking to jump into the real estate market. Generally, anyone can invest in stocks, but its much harder and more costly to invest in real estate. In order to purchase property, youll need to either come up with a 20% down payment on your own, or find partners to invest with you. While there may be special programs in certain states to lower down payment requirements, there are very few options for investors.
The initial capital required to invest in real estate is often what prevents people from diving into this market. Its not uncommon for properties to require thousands of dollars or more in down payment of costs. Youll also need additional capital to maintain the property. Stocks only require one initial investment, and you can purchase additional shares later on at your own discretion.
Round 3: Taxes
Taxes are another thing that needs to be considered when deciding whether to invest in stocks or real estate.
When investing in real estate, you will be required to pay property taxes quarterly based on the assessed value determined by the city. Property taxes are included in the mortgage payment, whether you decide to flip the property or rent out the structure, youll still be required to pay taxes on your rental income or on the sale of the property.
That said, real estate does have its own unique tax benefits. The interest that accrues on your mortgage is tax-deductible as is property taxes, operating expenses, depreciation, and insurance. The amount that you can deduct will depend on how much rental income you receive. But generally speaking, deductions that are higher than your rental income are prohibited.
Stocks also have tax consequences. Youll be required to pay a capital gains tax if you generate profits from selling stock. Even if you choose to hold onto your stocks, you still need to pay taxes on the dividends you receive. Both real estate and stocks have tax consequences, but the tax benefits that real estate offers may offset these costs and add to your return.
Round 4: Security
When comparing stocks and real estate, real estate does have one major advantage: its a tangible investment. Real estate also offers security. Its an investment that you can touch, see and use. Its also more difficult to become defrauded in real estate because can actually inspect the property and the building itself, run a background check on any tenants you rent to, and complete any repairs using professionals of your choosing. When investing in stocks, you have to put your trust in the auditors in the management.
While stocks can offer tremendous returns, they can also be volatile. In the short term, stocks can double or triple in price, or they can sink. Unlike real estate, stocks are not tangible. If you invest in a company and it goes down in flames, you may wind up with nothing to show for it. There will always be demand for real estate and land, although the value of the property you invest in may fluctuate over the years.
The Bottom Line
Stocks and real estate are both smart investments, but the right one for you will depend on your own personal preferences. If you prefer a tangible investment that offers security and can potentially be used in the future, real estate is the best option. If youre looking for quick high returns, stocks may be the better option for you.
Regardless of which one you choose, its crucial to ensure that you research the investment opportunity carefully. Real estate can offer great returns, but you need to choose the right property. The wrong property can lead you owing more than the property is actually worth. The same can be said for stocks. Invest in the wrong company, and you may see your investment go down the drain.