While stocks are the most popular investment in the US, real estate is close behind. A CNBC survey found that nearly one-quarter of Americans believe buying a home is the best way to build wealth.
But is buying real estate actually better than buying stocks? Real estate has some important benefits, but it also has several major drawbacks that investors should think twice about.
In this guide, we’ll explore some of the reasons why investing in stocks can be better than investing in real estate. We’ll also look at several ways investors can incorporate real estate into their investment portfolio alongside stocks.
Stocks vs. Real Estate
The process of buying stocks and the process of buying real estate look very different for most investors.
To buy stocks, you typically put money in an online brokerage account, then enter trades on your computer or smartphone. You can buy a stock in seconds and sell it just as quickly.
To buy real estate, you need to go through a much longer process. Unless you can pay for a property in cash, you will need to get approved for a mortgage. You’ll also need to find a real estate agent and tour properties to buy. Once you find a property, you need to put in an offer and hope it’s accepted. Finally, you need to close the deal, which often involves signing paperwork in person. The whole process can take weeks or months.
While this isn’t the only way to invest in real estate—we’ll cover another way, buying shares of a real estate investment trust, later—it’s the most common approach.
Benefits of Stock Investments Over Real Estate Investments
Let’s explore some of the key benefits that stock investments have over real estate investments.
Liquidity is a measure of how easy it is to buy or sell an asset. Stocks are usually extremely liquid compared to real estate.
That’s because there are tens of thousands of buyers and sellers in the market for a stock at any given time and they can be anywhere in the world. However, there may only be a handful of buyers and sellers in your local real estate market at any given time.
This determines how the buying and selling processes for these assets work. As we noted above, you can buy and sell stocks in seconds during normal market hours. Buying or selling a house, on the other hand, can take weeks or months. During that time, your money is tied up and can’t be used for other investments.
This is important when thinking about risk management. If the price of a stock drops, you can sell it quickly and cut your losses. Most brokers even offer risk management tools, like stop loss orders, so you can limit the amount you can lose.
If the price of your home drops, however, you likely won’t be able to sell quickly. It’s very difficult to control how much money you could lose if no one in your local market wants to buy your home.
In addition, if you do want to sell, there’s no guarantee that you’ll receive the current market value of your home. If buyers think that prices will keep falling, they may wait to make an offer or make an offer far below your asking price.
Both stocks and real estate can create income for you. Stocks create income through dividends, while real estate creates income when you rent it out.
Importantly, dividend-paying stocks almost always pay out unless there’s a major financial crisis at a company. Real estate, on the other hand, can go through periods when it doesn’t generate income. For example, if you have a long period between tenants, you won’t be earning rental income.
You still have to pay for upkeep of the property and make payments on your mortgage even if you’re not generating rental income. So, your real estate investment could end up costing you money during these periods.
Another benefit to stock investing is that you don’t need a lot of money to get started. In fact, you can start investing with as little as $1 at some brokerages, although we recommend starting off with at least a few hundred dollars.
Real estate requires a lot more cash. It’s almost impossible to purchase a home with less than a 3% down payment, which equates to $12,000 down for the median home price of around $400,000. To avoid paying for private mortgage insurance, you typically need to pay 20% down, or $80,000. That’s a lot of money.
On top of that, most homebuyers will take on debt to buy a home. You’re responsible for making your mortgage payments every month or else you risk losing your property. That can create a lot of financial pressure and stress that stocks don’t have.
Work & Maintenance
Owning stocks is easy. You don’t have to do anything—in fact, one of the best strategies for stock investors is to forget about the stocks you have in your portfolio for a few years.
Owning real estate, on the other hand, requires work. You need to maintain the property to comply with the requirements of your mortgage and local laws.
If you do want to generate income by renting out your property, that takes work, too. You need to find tenants and respond to their needs. If something breaks, you’re responsible for fixing it.
Easier to Diversify
Building a diverse portfolio of stocks is relatively easy. You can simply buy shares of multiple companies or invest in an ETF that includes ownership of dozens of different stocks.
While it’s possible to build a diversified real estate portfolio, it’s much more difficult. For most people, simply owning one home is a financial stretch—there’s no question of buying two or more.
The range of diversification options for stocks is also greater than that for real estate. When investing in stocks, you can buy shares of companies from different industries or invest in companies in different countries.
If you’re investing in real estate, there are differences between regional markets. But for the most part, it’s likely that changing conditions in the housing market will impact all of your properties in similar ways.
Combining Stock and Real Estate Investments
Although we’ve highlighted some of the drawbacks of real estate investing, there are still many good reasons to invest in real estate. The real estate market has historically gone up and real estate prices can be less volatile than stock prices. In addition, real estate has utility—you can live in a house.
Many investors choose to own both stocks and real estate. This is an excellent way to diversify your assets since the stock and real estate markets don’t always move in the same direction.
If you already have a stock portfolio, you can avoid liquidating it when buying real estate and instead put less money down on your property purchase. You could also buy real estate now, then use your future investable cash to purchase stocks.
Another way to invest in real estate alongside stocks is by buying real estate investment trusts (REITs). These are companies that own real estate and operate them for income. You can buy shares of REITs in the stock market just like you can buy shares of other companies or ETFs. Most REITs pay dividends, but they can also experience price appreciation when the value of their properties goes up.
If you’re interested in investing in REITs and real estate stocks, check out The Motley Fool’s Real Estate Winners newsletter. This service delivers a new REIT or real estate stock investment recommendation every month to help you build a profitable portfolio of real estate investments.
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Conclusion: Stocks and Real Estate
Stocks have a number of important advantages over real estate investments, including greater liquidity, more certain income generation, and lower capital requirements. Stock investing also takes a lot less work and enables you to build a more diversified investment portfolio.
That said, one of the best ways to diversify your portfolio is to invest in both stocks and real estate. You can do this by owning both a property and a stock portfolio or by investing in REITs within your stock portfolio.