The question everyone wonders when they think about investing:
"What is better? Investing in real estate or the stock market?"
When people ask this question the one thing they look for straight away is what is going to give me the bigger return for my money and make me rich! And although one may give more return for your money it may be more volatile or require much more time than the other.
Hence why I think the best way to view the debate between real estate and the stock market is to look at the pros and cons from each. And from here you can then go on to making your decision about what you think will suit you best.
In my opinion I think a more stable investment path would be real estate due to it historically being less volatile than the stock market. However the stock market due to its huge volatility can propose huge opportunities to smart investors who can take advantage of these ups and downs. For this reason I do too look for opportunities that arise form the share market.
You are investing in a tangible asset. That is you can physically go to the property you have invested in and touch it. Now this can be very important for some investors who are very conservative and wary about where their money is going. If you are investing in real estate you know exactly where your money is going and what you are purchasing.
The historical returns of real estate are very solid! Now this is a pro for both real estate and the stock market as the stock market too has a long historical return but none the less this still needs to be noted. That is real estate roughly gives a 7-10% return on investment per year. This number however differs between what type of property was purchased in what area and country! So it should not be used as a rock hard number for return on your money. This number can be much more or much less it all depends on a number of factors!
The power of leveraging! Now I can bet that majority of people out there won't sensibly have $500k sitting aside in cash to buy an investment property when the opportunity arises. But how about $100k for a 20% deposit? Now I know this is a lot of money still but did that huge goal not just become slightly more achievable? Yes! And that is due to the power of leveraging which is most commonly used when investing in real estate. That is the ability to go to a bank in order to apply for a loan to be able to purchase your desired property. Now this is a pro when it comes to investing in real estate due to the ability to buy more expensive assets which in can in turn can create a greater return.
Tax benefits when investing in real estate are a huge pro! I won't go into too much detail about it as it can differ from country to country. But it is important to know that depreciation and ongoing costs to maintain your investment CAN become tax deductible on your own personal income. The other major way you CAN benefit from tax reductions is that if your investment property is negatively geared. That is that the income coming from your property is less than the ongoing expenses from the property. This difference can then be deducted off your personal taxed income.
When putting it side by side with the stock market real estate is way more expensive. That meaning to start investing in real estate you are going to need a fairly large sum of money to enter this market. With this also especially if you are looking to leverage your money you are going to need to prove to the lender that you are able to pay back this money that you are borrowing. Leveraging your money can become very difficult if you struggle with managing your money and have an unsteady income.
Real estate is/can be a much more active investment. Once you purchase a property it then becomes your ongoing responsibility to maintain it (that's if you are a good landlord!) If you are choosing to make your return off having a tenant living on the premises it is then your responsibility to chase up payments and fix any issues or damages arising from the property. However this can be delegated to a property manager which is a very common measure of making this type of investment less active. This of course is not free! And they do take a percentage of the rental return so take that as you will.
Real estate is a much less liquid investment opposed to the stock market. That meaning once you make your property purchase the ability to access this money again becomes a bit of a process. That is you have to sell your property, which normally involves enquiring with a real estate agent to get a listing going, then have open inspections and the auction. Not to mention all the legal and contract work behind the scenes. Due to this real estate becomes far from a liquid asset. This can lead to investors panic selling for much less than what it is worth in order to get access quicker to their money. This ALSO can result in the investor losing money which is the worst possible result.
If you decide to take out a mortgage and leverage your money this can be a con. Why? Well because you've essentially taken on this pile of debt that won't leave you until it is paid. Smart investors and financially minded people know that this is not necessarily a bad thing but for an average beginner it is a point to be careful about.
Stocks are a liquid asset. You can simply buy and sell a stock within minutes. That being if you decide to invest in stocks and a few weeks later decide you actually need that money you can simply sell the stocks and have the money within the hour. Now this sounds awesome does it!? However the prices of stocks can be against you. That being, say if you quickly decide you need your money so you sell your stocks however they are at a lower price than what you bought them then bad luck! You have just lost your money.
Stocks are much more affordable than real estate! This being that you can enter the stock market for literally a few dollars. (Depending if your brokerage allows this). For a majority of brokers (in Australia at least) they will ask for a minimum $500 investment. Still! $500 is much less than thousands of dollars when comparing it to real estate.
Diversification is key! Or so they say when it comes too investing. And that is true for the most part. Diversification is a pro when it comes to stock market investing as it is made very easy. You can quite simple have shares in a financial, consumer and energy sector for a very little amount of money. Diversification is very easy when it comes to investing in the stock market.
Volatility is crazy when it comes to the stock market especially in comparison to real estate. You can truely be riding a roller coaster when it comes to investing in the share market. One morning you can wake up with 20% off your money gone or suddenly wake up with 20% more. Clever investors know to ride the waves and take a long term approach when it comes to investing in the stock market if you can get over this then volatility will not be a bad thing for you.
Now being a liquid asset is a pro for the stock market however it can also be a con. Why you may ask? Well when it comes to the stock market acting on emotions can be very dangerous. The stock market goes up and down with any tiny bit of good or bad news. If you decide to follow these trends and panic sell when bad news comes up you will start to find yourself losing much more money than you can imagine.
Choosing which path you want to go down can be extremely challenging and daunting. It is no easy choice due to the fact this is your hard earned money on the line. Some questions that may help you decided which path you want to take are:
Do you want your investment to be active or passive?
Have you got the mental strength to watch your portfolio lose value and not panic sell?
Do you prefer seeing what you have invested in?
How much money have you got aside to invest?
Overall it all depends what risk you are willing to take and what investment journey best suits your goals. I personally believe investing in real estate is a much bigger commitment opposed to the stock market as you are more likely to be taking on large amounts of debt that becomes your duty to pay back. Not saying that it is a bad thing! As the returns can be much higher than the stock market, but it is a point that should be considered.
There is also many aspects to each wealth creator that should be explored further. For example growth stocks opposed to dividend paying stocks. Or investing in real estate for rental return opposed to investing for capital growth in the future. As an overview looking at the pros and cons for each can give you a rough idea of what path you want to start to go down. But as always you must further research before you choose your wealth creator!
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