Real estate vs stock market
Stocks and Real Estate are some of the oldest investment options available. They have been bought and sold for decades each with different returns. There have been numerous attempts to compare the two as alternatives but this can only go as far as outlining the pros and cons of each option. The main difference between real estate and stocks is that the former offers a tangible asset in form of land or buildings, the latter is represented by an ownership document only. Here are some of the differences in the two.
Initial capital outlay
Investing in real estate is a cost intensive activity whether you are buying in cash, credit or even through REITs. Land has always appreciated in good times and does rarely depreciate in value. It is also a diminishing resource and as such tends to get expensive by the day. Buying a house or a rental property is not any better. You need to be well funded to able to pay the down payments and mortgage installments which can run into years. Stocks on the other hand don’t have to be expensive. You can buy as little as 5 shares of a company. You basically decide how much you want to invest as per the market rates and you can build your stock over time without having to buy at once.
Liquidity
Any investor would like to hold asserts that can be liquidated with a short notice in case of a cash crunch or when a better deal emerges. Real estate is largely a long term venture and you will be lucky if you get a buyer within a short notice. Selling land or buildings can take months or even years. Stocks are relatively more liquid than real estate. The market is always abuzz with activity and selling can take a very short time. Real estate is for those who have the financial muscle and resilience to endure long periods of waiting before a deal can go through. Rental properties better for cash flow because rental income keeps flowing into the owner’s account on monthly or quarterly basis depending on lease specifications.
Personal involvement
Owning a stock in a company does not require you to get involved in the day to day running of the business. You are only entitled to vote in shareholder meetings while the rest of the work is done by managers and directors. As a shareholder, you don’t even need to know how the company runs for you to qualify for dividends or appreciation of the stock. Real estate is not so, owning rental units require personal input especially in resolving tenant’s issues. Some of these issues may happen at midnight or when you are on holiday. You need to keep abreast with the happenings in your properties whether you have employed managers or not. In this sense, real estate calls for more personal involvement than stocks.
Running costs
Real estate investments come with additional costs besides maintenance and repairs. There are always taxes to be paid and these fall due whether your property is occupied or idle. Empty rental houses can be a strain on the investor who needs to service a mortgage and depends on the rental income. You don’t pay taxes on stocks except when receiving dividends. The taxes are normally withheld by the paying company and paid directly to government without much involvement by the investor.
Risk of loss or depreciation
The values of both real estate and stocks tend to rise over time if the economy is growing. However, due to their nature stocks are subject to many more shocks than real estate. A major risk factor is mismanagement or change of technology that affects the performance of a company in which stocks are held. This may lead to loss of part or even the entire value of the stock especially if the company goes bankrupt. Real estate can hardly result in total loss. It can only happen in cases of fraud. In most cases, real estate feels more secure as you can see and interact with the property at a personal level and mitigate possible losses through insurance.