It’s important to understand that real estate vs stocks is not comparing apples to apples.
Real estate is a tangible asset that you can visit and touch. No matter what happens with the property market, your real estate will never go away.
A stock is a share of ownership in a publicly traded company. Most companies have millions of shares, so most investors own an insignificant share of the company. If the market tanks and the company fails, the stocks will no longer have any value which is one of the biggest risks in stock market investing.
The stock market does offer some advantages, though. Stocks are a more liquid investment because they are easily sold. Unless you’re trying to unload an enormous amount of stocks at once, you can typically liquidate your stocks within a day or two and have the cash back in a current account.
Investors can also get into the stock market with little money compared to real estate. Some apps even allow people to start investing in stocks with as little as $5. With the lower cost of entry, stock portfolios are easy to diversify across many different companies and index funds.
To decide which type of investment is best for you, we’ll look at how each one provides you with a return, then look closer at the benefits of each type of investment.
Sources of a return on investment are:
- Cash flow
- Capital gains
- Equity
One of the most attractive things about real estate investing is the cash flow. Whether investing in residential rental properties, multifamily properties or commercial real estate, the idea is to earn a profit each month from the rental income. The cash flow from real estate provides consistency in income, regardless of whether the real estate market is up or down.
The cash flow from real estate is used to calculate the capitalization rate, cash-on-cash return, and the internal rate of return.
Some stock investments pay dividends to investors. These dividends are usually paid quarterly and are a pro rata share of the company’s profits. ( Not all stocks provide a dividend )
The dividends are normally a fixed percentage of the current stock price, not the amount you’ve invested into it. If the market is down, your dividends will be low. If the market is up, your dividends will be higher.
Mutual Funds are often heavily invested in dividend-paying stocks. Some mutual funds allow investors to have their dividend payments reinvested into the fund to increase their returns even further.
CAPITAL GAINS
Capital gain is the profit earned from selling an asset for more than you paid. Most of the profit earned from stocks is from capital gains. You purchase a stock that you believe will increase in value over time. That’s where the term “buy low, sell high” comes from.
Capital gains can also be a significant source of income for real estate investors. If you buy a property when the market is down and sell it when it’s up, you can get a significant return.
More commonly, though, people earn capital gains in real estate by increasing the value of their property. By improving the property and increasing rents, you can force the appreciation of the real estate and earn capital gains.
A clear benefit that investors see in real estate over stocks is having control over how well it performs. With stocks, you’re relying on the market to improve so your stock value goes up. With real estate, you can increase a property’s value no matter how the market is performing.
EQUITY
Building equity is a benefit that’s more specific to real estate.
When you collect rent each month from tenants the rent collected is paying off the original investment amount and building equity in the property which normally would be also appreciating over time. Over time you can build a significant amount of equity that the tenants paid for.
Equity build is an often-overlooked benefit. Investors don’t usually consider the amount of profit they will earn when they cash out on the equity built while they owned the property but this is a huge aspect of owning property over stocks.
EFFORT IN REAL ESTATE VS STOCKS
Depending on your investment strategy, the amount of effort that goes into investing in real estate vs stocks can vary greatly. Somebody managing their own rental property will have to put a lot more time and effort into their investment than somebody who simply invests in an index fund that follows the S&P 500. This is why at Global Investments we work with excellent local management companies that take away then stress and time it can take in managing your own properties.
THE RIGHT INVESTMENT FOR YOU
Real estate investing has a ton of benefits, but the time, energy, and money that goes into getting started can be overwhelming. Finding the right property, negotiating terms, getting insurance then managing the property is a lot of work. This is one of the main reasons people may choose a company like ourselves to take the hard work away from investing in Real Estate. At Global Investments we hold your hand from finding the right property, getting a survey and inspection, negotiating with the seller, the hand over to your management company and also keeping in touch even after the property has closed.
