Real Estate vs. Stocks

Which is the better investment, real estate or stocks? This question has been debated for generations. There are so many different factors that need to be considered. It can be difficult to determine which might be the better investment. Each investment is unique and has their own pros and cons. Let me try to compare the two investments so you can make a more informed decision on what’s right for you.

Returns

It’s difficult to compare the returns of real estate and stocks because both have huge variability. To put it simply, both real estate and stocks can generate significant returns. Some real estate investors have made millions flipping houses. Others have generated enough passive income through rental properties and no longer need to work.

On the flip side, the same thing has happened with some stock market investors. Warren Buffett has used the stock market to build an enormous enterprise in Berkshire Hathaway. Early investors in Tesla, Amazon, and Apple have generated huge returns on their investment, just to name a few.

The best way to increase the probability of generating high returns, for either investment, is to increase your understanding of them. The more you know, the better your odds of good returns. When it comes down to it, both investments have produced strong returns throughout history. It’s impossible to say which investment produces better returns.

Winner: Tie

Risk

Risk is always a major concern when it comes to investments. Both real estate and stocks come with their fair share of risks. The one major difference I will point out, though, is that you have a lot more control over your real estate investment than you have over an investment in a stock. With real estate, you can add value through repairs, additions, more efficient management, and many other methods.

Stocks don’t give you the same control. Stockholders are at the mercy of the management of the company. Stockholders don’t get to make the decisions like real estate investors do. Although, this can be viewed as a positive to some. Some might argue that the owners of this company are extremely competent and that they are the best people to have making the decisions. It all comes down to your personal opinion, here.

Winner: Real Estate (slightly)

Liquidity

Liquidity is another factor that must be considered when investing. How long will your funds be tied up in this investment? Many people might need access to these funds in case of an emergency. This is an important variable to consider before making a decision.

Stocks, in general, are much more liquid than real estate. Stocks are actively traded on exchanges and can be liquidated within days. Real estate is usually much less liquid, and it can potentially be months before you’re able to get your capital back.

I want to mention that there are some real estate investments that can be much more liquid. Real Estate Investment Trusts (REIT’s) and some crowdfunding investments allow you to get your capital back just as quickly as stocks.

Winner: Stocks

Time Commitment

A lot of investors are looking for a way to passively build wealth through their investments. They have a lot of other responsibilities and don’t want to be forced to spend all of their free time managing their investments. There are others, though, that might be looking to quit their job and become full-time investors. Either way, the end goal for most is to give yourself the freedom to do what you want with your time. Plus, passive investments are much, much easier to scale.

Stocks are very passive investments. Some might spend hours researching stocks and choosing which to invest in, but the actual investment is extremely passive. No management required, just invest and track how your investments perform. There are active stock traders (day traders), but that’s not the type of investor we’re discussing here.

Real estate investing can be either active or passive, depending on how you choose to invest. For example, buying an investment property that you manage yourself can be quite time-intensive. Finding tenants, collecting rents, maintaining the property, and other tasks can take up a lot of your time.

On the other hand, you can choose to invest in real estate passively through several different avenues. The two investments I mentioned earlier, REIT’s and crowdfunding, are just as passive as stocks. You can also passively invest in real estate through syndications or turnkey properties.

Winner: Stocks (slightly)

Tax Benefits

Another important factor to take into account is the tax benefits of each investment. From a tax standpoint, investing in real estate is much better than investing in stocks. There isn’t much of an argument here. Real estate investors can take advantage of a variety of tax deductions such as deprecation, mortgage interest, and many other write-offs. They also can use a loophole in the tax code known as a 1031 exchange to defer paying taxes on profits from their real estate investments.

Stockholders don’t get the same tax treatment. There aren’t really any tax benefits at all when owning stock. In fact, you might have to pay taxes on your stocks even if you didn’t sell them or receive any dividends from them.

Winner: Real Estate

Conclusion

The factors I have discussed above aren’t the only things to consider when investing. There are many other variables to look at that can influence your decision. When it comes to choosing an investment, there really is no right or wrong answer.

In my personal opinion, real estate is the better investment. As a real estate investor, I have the ability to determine what price I am willing to pay for a property. I have the ability to use my expertise to add value to the property and increase profits. Real estate also continues to provide a way to generate cash flow, whereas stocks dividends are becoming almost nonexistent.

Marcus & Millichap’s President and CEO Hessam Nadji was recently on Fox Business discussing why investors have been favoring real estate over stocks. You can watch the short clip by clicking here.