real estate or stocks?
Should you put your money into stocks or real estate? You need to know the pros and cons of both investments.
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The U.S. Census Bureau says that 65% of U.S. households are shareholders, and the Department of Labor says that 55% of American workers take part in an employer retirement plan. Many Americans do a little bit of both. If you’re one of them, you probably get some stock market exposure.
But if you want to double down on either type of investment or are new to investing and trying to decide between the two, you should know the pros and cons of each. You should also know that you don’t have to choose. You can buy shares in real estate investments so you don’t have to buy, manage, and sell properties yourself.
Putting money into real estate
Traditional real estate investments can be put into two main groups: residential properties, like your home, rental properties, or houses that you buy and then sell for a profit, and commercial properties, like apartment complexes, office buildings, and strip malls.
The pluses
It is easy to figure out how to invest in real estate.
Even though the process of buying a home can be hard, the basics are easy: Buy a property, take care of repairs and tenants if you have more than one property, and then try to sell it for more than you paid for it. Also, owning a physical asset can make you feel like you have more control over your investment than buying shares of stock in a company.
Real estate is a safer way to invest in debt.
You can buy a new property with a 20% down payment or less and finance the rest of the cost. This is also called your “mortgage.” Margin trading is investing in stocks with debt. It is very risky and should only be done by experienced traders. Putting money into real estate can be a way to protect yourself from inflation.
As home prices and rents tend to rise with inflation, owning real estate is often seen as a way to protect against it.
There are sometimes tax benefits to owning a home.
Homeowners may be able to get a tax break for the interest they pay on their mortgages on the first $1 million they owe. When you sell your main home, you may be able to avoid paying capital gains taxes on the net proceeds of up to $250,000 if you’re single or $500,000 if you’re married and filing jointly. If you own commercial property and sell it, a 1031 exchange could help you avoid capital gains (if you reinvest proceeds in a similar type of property). Depreciation, or writing off the property’s wear and tear, can give tax breaks for investment properties.
Negatives
Investing in real estate can be more work than investing in stocks.
Even though it’s easy to understand how to buy property, that doesn’t mean it’s easy to keep the property in good shape, especially rental property. Owning a property takes a lot more work than buying stocks or investing in stocks through mutual funds.
Property is expensive and hard to sell.
Even if you borrow money to invest in real estate, you still have to pay a lot of money up front. Getting your money out of a real estate investment by selling it is much harder than buying and selling stocks, which you can do with just a few clicks.
The costs to buy and sell real estate are high.
A seller can expect to pay a lot in closing costs, which can take as much as 6% to 10% off the top of the sale price. Compared to stocks, that’s a big cut, especially since most brokers no longer charge fees to trade stocks.
Real estate makes it hard to spread out your investments.
When investing in real estate, location is important. In one place, sales may go down, while in another, prices may go through the roof. To buy real estate in different places and of different types (like a mix of residential and commercial, for example), you need a lot more money than the average investor has. The top city in Maharashtra from an investment point of view is Nashik, Mumbai, Aurangabad, Pune, etc. strat your investment in Nashik at 3 BHK flats in Nashik, which can be the next IT park in Maharashtra.
You can’t be sure that your money will come back.
Even though property prices tend to go up over time, you can always lose money when you sell a property. The 2008 financial crisis is a good example of this. This is, of course, also true for stocks.
Putting money into stocks
Before you jump in and buy shares of stock, it’s important to think about the important pros and cons.
The pluses
Stocks are easy to buy and sell.
Real estate investments can tie up your money for years, but you can buy or sell shares of a public company whenever you’re ready. It’s also easier to know the value of your investment at any time, unlike with real estate.
It’s easier to spread your money out when you invest in stocks.
Few people have the time or money to buy enough real estate properties in enough different places or industries to have true diversification. With stocks, you can build a diverse portfolio of companies and industries in a lot less time and for a lot less money than if you bought a bunch of different properties. Buying shares in mutual funds, index funds, or exchange-traded funds may be the easiest way to do this. These funds buy shares in a wide range of companies, so fund investors can instantly diversify their holdings.
There aren’t many (if any) fees to buy and sell stocks.
To buy and sell stocks, you need to open a brokerage account. However, the price war between discount brokers has made it so that most stock trades cost nothing. Many brokers also offer a range of mutual funds, index funds, and ETFs that don’t have any transaction fees.
Accounts for retirement that help you save on taxes can help your money grow.
Negatives
The prices of stocks change a lot more than the prices of homes.
Prices of stocks can go up and down much more quickly than prices of homes. This volatility can make you feel sick to your stomach if you don’t buy stocks and funds with a long-term view, which means you plan to buy and hold regardless of volatility.
When you sell stocks, you might have to pay a capital gains tax.
You might have to pay a capital gains tax when you sell your stocks. But if you’ve owned the stock for more than a year, you may be able to pay less tax. Also, you might have to pay taxes on any stock dividends your portfolio gave you during the year. (Find out more about how stocks are taxed.)
Stocks can make people act based on their feelings.
Even though it’s easier to buy and sell stocks than it is to buy and sell real estate, that doesn’t mean you should. When markets are unstable, investors often sell, even though it’s usually better to buy and hold. Investors should look at all investments, like building a stock portfolio, from a long-term point of view.
REITs are an alternative to regular real estate.
Don’t want to buy and sell houses or build a large number of rental properties? Real estate investment trusts, or REITs, are an easier way to invest in real estate.
REITs are companies that own real estate that brings in money, like apartments, warehouses, offices, malls, hotels, and office buildings. Often, they also run these properties. The most reliable REITs have a long history of paying dividends that are both big and growing. Many online brokers sell REITs, REIT mutual funds, and ETFs that are traded on public markets.