Investors sometimes scoff at the concept of investing in stocks, and as a real estate investor who frequently contributes articles to other investors’ blogs, I can attest to this fact.
What’s the point of investing in the stock market when I can get bigger returns, which I can control, by investing in real estate? For what reason, exactly? Securities and real estate have their own set of advantages and disadvantages.
Fortunately, these strengths and weaknesses complement each other nicely, making a combined portfolio of equities and real estate both comprehensive and durable.
Benefits of Stock Investing
Investing in stocks has a number of advantages. When deciding on your perfect asset allocation, you should keep these advantages in mind.
Significant Historical Returns
U.S. equities have generated an average return of around 10% each year over the course of the previous century or so.
That is not an amount to be laughed at, especially considering that this asset class is completely undemanding of active management.
To be clear, average does not always equal typical. It’s very uncommon for stock prices to surge by 30% one year, then fall by 25% the following, and then recover by 35%.
The stock market frequently provides investors with a roller coaster ride, which can frighten many people into making rash decisions based on their emotions that end up costing them money.
However, if you don’t touch your stocks and instead engage in dollar-cost averaging, you can practically guarantee that you will come out ahead on stock indexes if you have enough time and patience.
Possibility of earning passive income
Investing in dividend-paying companies isn’t for everyone. But many do, which not only boosts your rewards on price increase but also adds a degree of stability to your stock purchases.
When it comes to passive income, dividend-paying equities and exchange-traded funds (ETFs) are even better options. The value of your investments grows as you get dividends from them.
As you approach retirement, you can use this strategy to manage the sequence of returns risk. You don’t have to worry about safe withdrawal rates if you don’t have to sell off assets to create retirement income.
ETFs and mutual funds can own tens of thousands of equities. With a mouse click, you may acquire shares of firms in any area of the world, in every sector of the economy, and in any size (market cap).
Spreading even a little sum of money over a variety of assets is made simpler as a result. In turn, this prevents a few bad eggs from ruining your entire collection. Because of Enron, it is important to have diversified one’s investments.
Reduced Entry Barriers
Stock portfolios used to be the domain of the rich and famous, who could afford to hire financial experts to look after their investments for them.
Stocks may now be purchased by anybody with as little as $10 via a no-fee brokerage account. Not only are there no monthly or yearly fees, but most accounts no longer charge commissions or transaction expenses for transactions at all.
Investing in stocks is easy because of the low financial threshold and the lack of expertise needed. The S&P 500 index fund is a good place to start if you’re unsure of what to buy.
With a free Robo adviser like M1 Finance or SoFi, you may let them choose some varied index funds depending on your age, goals, and risk tolerance. Stocks may be bought and sold with little or no effort and a little amount of money.
In addition to helping you select assets, Robo-advisors also take care of everything else for you. Automated recurring transfers from your checking account to your brokerage account are an option. It’s up to you if you choose weekly or monthly payments, but I prefer weekly.
The Robo-advisor then automatically invests your money in accordance with the asset allocation that is most suited for you.
And if your assets wander away from your ideal portfolio allocation over time, they rebalance it back to your goal allocation for you. They do this automatically.
You don’t even have to think about it; it takes care of the reinvestment of your dividends for you. That means you may focus on your profession and personal life without having to worry about your assets beyond the first setup.
In other words, if you own stocks, you can get cash out of them in a matter of minutes. Instantly in this scenario.
You may sell your shares with a simple click of a mouse. Transferring the money from your brokerage account to your checking account or accessing it directly may be possible depending on your broker. Additionally, the purchase process is instantaneous and free of costs or delays.
Simple Tax-Sheltered Account Use
The vast majority of online brokerages allow you to create tax-advantaged IRAs and Roth IRAs, in addition to regular brokerage accounts that are subject to income tax.
Some also provide more specialized accounts, such as health savings accounts (HSAs) and Coverdell education savings accounts (ESAs) (ESAs).
Your company-sponsored retirement plan, whether it’s a 401(k), 403(b), or SIMPLE IRA, is meant for you to invest in stocks. When compared to a tax-sheltered account, purchasing real estate might be more difficult.
The dangers of stock investment
Investing in the stock market carries a degree of risk. These are the dangers you need to be aware of before you put your money at risk.
Stock prices, as previously said, are subject to wild fluctuations. Watching your retirement funds collapse by 20% in a couple of days is a difficult thing to do calmly.
In response to these shifts, many investors make hasty, illogical investments that end up costing them money in the long term.
For retirees, volatility in stock prices poses additional problems beyond the risk of investing emotionally. Your money might be permanently damaged if the stock market crashes early in your retirement sequence of returns risk, even if the market recovers.
As a result, you should keep your money in the stock market for the long haul because returns are unpredictable. Spend less time worrying about long-term investments and more time planning for short-term liquidity needs.
Regional and Sectoral High Correlation
Another disadvantage to the high liquidity of stocks is that even diversified equities tend to tumble together. Even if there is no connection between them.
All too often, one region’s stock market falls, and then the next region’s stock market falls as well. However, some of that reaction is logical given the interconnectedness that we live in today.
In 2008, when house prices plummeted and millions of individuals throughout the world had shares in funds backed by mortgage-backed securities, stocks also plummeted.
It’s also unreasonable, but that’s not all.
Fear of a global stock market collapse prompts investors to sell, resulting in stock declines in wholly unrelated industries or economies.
That reduces the value of diversification across different stocks. You can still lose all of your investments even if you buy shares in a wide variety of firms around the globe.
The Returns are Hard to Control
As a shareholder, you have the right to attend shareholder meetings and apply pressure on the company’s leaders.
But when did you last do this? While attending the next board meeting, it’s unlikely that executives would take you seriously if you don’t possess a significant amount of stock.
There are only two things that most of us can influence when it comes to our stock investments; when we purchase and when we sell them. As a result, we do little more than making a purchase and cross our fingers.
Benefits of Real Estate Investing
A lot of the benefits and drawbacks of investing in real estate may be seen as mirror images of one another.
Consider the following while deciding whether or not to invest in real estate:
High Passive Income
Real estate, unlike stocks, tends to rise in value over time, but it’s a more income-oriented asset. Real estate, unlike enterprises, has a built-in value that people pay to utilize, unlike companies that emerge out of nothing.
When renting out a property, investors have the option of renting to long-term renters or short-term tourists. Using the asset on a regular basis generates passive income.
Because of this, income returns from real estate tend to be larger than dividends from stocks. A monthly revenue stream is generated without the need to sell assets.
Possibility of appreciation
When it comes to real estate, it should be obvious that it doesn’t always appreciate. That should be common knowledge to everyone who lived through the financial crisis of 2008.
It is true that the value of real estate generally increases. Real estate is extraordinarily robust, even in the face of downturns in the economy and falls in the stock market. For yourselves, here’s proof:
Although house values may not grow at the same rate as stock prices, real estate provides more long-term income than most investments.
Joint research between multiple American and German colleges found that real estate outperformed equities over a 145-year period, taking both income yield and appreciation into consideration.
Prevention of Inflation
Investments in real assets, such as real estate or gold, are more resistant to inflation than paper assets.
There is no matter what money you use or the value of individual currency units. Since people are paying with their own money, the value of their purchase will fluctuate.
If inflation increases by 10% one year, purchasers will just pay an additional 10% for a property since the true underlying value has not changed. Whatever tenants and purchasers are willing to pay for real estate is what determines its true value.
Alternative Investments to Stocks
The low link between stock and real estate markets. If one asset loses value, it doesn’t always indicate the other does as well.
A key goal of a well-diversified portfolio is to protect against the possibility of a market downturn that might wipe out all of your hard work. Your financial portfolio is built on several pillars, and you don’t want any of them to crumble.
For example, when the housing bubble burst and triggered the Great Recession and stock market meltdown, it was an exception to this norm. Real estate values seldom change after most stock market meltdowns.
Real estate investment trusts (REITs) that trade on stock exchanges tend to be highly correlated with the stock market. You shouldn’t expect these REITs to provide a genuine diversification from equities.
Tax benefits are inherent in owning property. In order to claim the standard deduction and deduct all of your property expenditures, you must treat them as a business expense.
This covers everything from your monthly mortgage payment to the cost of repairs and upkeep, property taxes, insurance, and the cost of a property manager, as well as the cost of running a home office and travel.
The cost of the structure and any changes you make to it are also deductible. There are 27.5 years in the depreciation period for real estate.
Capital gains taxes can be postponed in a plethora of ways for property investors. It’s possible to decrease, avoid, or delay paying taxes on your gains even after you sell your home.
You can learn more about tax deductions for real estate investors by checking out this article. A self-directed IRA allows you to invest in real estate if you’d like.
When you can utilize your IRA to invest in equities more readily, I think it’s a hassle that’s not worth it. Even so, it’s still an option.
When it comes to flipping houses or investing in income properties, you can correctly forecast the returns. That is if you have any idea what you’re doing.
The purchase price, after-repair value, and rental revenue are all known, and expenditures can be predicted with accuracy.
When it comes to predicting spending, experience matters since it increases your accuracy. In the future, you won’t have to worry about making the same mistake twice.
Control of Returns
With real estate investing, you have more control over your profits than with stock investing. Best practices in the business may help landlords reduce risk and increase profits.
Rent default insurance, regular inspections, and a proactive approach to property maintenance are all examples of these measures.
Renovating and improving their house might help them force equity. Investors in stocks, on the other hand, can only hope for the best when they purchase their securities.
Real estate investment risks
There are a lot of downsides to real estate investing, despite its many positives. Consider these points before putting down tens of thousands of dollars on a home.
Because flipping houses is an active business model rather than a long-term investment, I’m not focusing on it in the context of the following paragraphs.
High Need for Cash
According to the Federal Reserve, the median price of a home in the United States is currently $375,000. A down payment of $75,000 even if you borrow 80% of that, does not include closing expenses or any necessary property renovations.
That might leave you with an initial investment of up to $100,000. It’s not exactly a little change. If you’re looking for a more affordable option, of course. The down payment and closing fees are still $20,000 even if your home is worth $100,000.
A $50 investment in an ETF appears like a bargain in contrast. Why real estate crowdfunding sites have become so popular in recent years? It is possible to invest in real estate for as little as $10 with GroundFloor and $500 with Fundrise.
Issues of Diversification
If you want to incorporate real estate in your portfolio, that’s great. But if you have to put down $75,000 for each home, it’s difficult to do so.
That’s a lot of individual assets, even if you manage to acquire a few houses at that price. With an ETF, you may hold a piece of the stock in hundreds of firms.
High Skill Demands
Investing in stocks requires no knowledge or expertise at all. Robo-advisors enable you to establish an account with them and then let them choose a suitable, broad portfolio for you to invest in.
Alternatively, you may feel confident in your portfolio by purchasing shares in one large-cap U.S. fund, one small-cap U.S. fund, and one overseas fund.
Most individuals underestimate the difficulty of buying rental homes directly. Real estate investors make the error of assuming that since it is physical and concrete and because they have been around it all their life, investing in real estate is intuitive.
New real estate investors sometimes get into difficulty because of their carefree attitude. Their lack of knowledge of how to calculate cash flow is frequently so severe that they presume that landlords’ profits equal the rent less the mortgage.
Anti-landlord campaigners and would-be landlords often use this myth, although it is completely incorrect. Non-mortgage expenditures often account for half of your monthly rent, which is known as the 50% rule among investors.
To become a successful real estate investor, you must understand how to analyze a property’s profitability, identify excellent bargains, negotiate with contractors, and manage renters or property managers.
Years of practice are required to master the combined skills. As a result of all of this, real estate investing has become increasingly popular.
Significant Labor Needs
To make money in real estate, you need more than just a basic understanding of the market. It’s also important to keep practicing these abilities on a regular basis, which requires work.
Finding excellent bargains, keeping contractors on budget and on time, screening renters, enforcing timely payment from refractory tenants, conducting regular property inspections, and performing repairs and maintenance on physical properties all take time and effort. Rather than a passive investment, think of it as a side hustle or a hobby business instead.
Real estate has a bad reputation for being difficult to trade in. Selling a house may cost tens of thousands of dollars in closing expenses and take several months, while the cost of purchasing one is almost as high.
Take free and immediate stock trading as an example. In contrast to equities, real estate is a long-term investment because of its inability to be liquid.
How to Maintain a Proper Stock/Real Estate Balance in Your Portfolio
Every investor has a unique approach to financial planning and investing. I approach my combination strategy as a real estate and stock trader who is passionate about both.
In the first place, I like to invest in stocks because of their growth potential, and in real estate because of their potential for income. I view dividends from equities and real estate gains to be a bonus.
Because I intend to achieve financial independence at a young age, I intend to rely mostly on real estate and passionate income for many decades to come, and not sell off equities. Stocks are the second investment I make in my tax-advantaged accounts.
Self-directed IRAs allow you to invest in real estate, but I don’t see the point. With real estate, you don’t even need to use tax-advantaged accounts to take advantage of its inherent advantages.
For the third time, I don’t have to bother about my stock investments or the market’s changes at all. In either case, I benefit since market declines provide an opportunity to purchase equities at a discount.
In this way, I avoid being emotionally affected by stock market volatility or affecting my investment approach. Investing in real estate requires a lot of time and effort, so I keep my time and energy for that.
In contrast, my direct ownership assets are the only ones where this is the case. To save time and effort, I also invest in real estate indirectly, mostly through real estate crowdfunding, which allows me to automate the investment process.
Then what about bonds?
Instead of bonds, I use real estate in other people’s portfolios. That means I don’t have to put up with bonds’ dismal yields in today’s persistently low-interest climate and my investments don’t have to lose money to inflation.
Several factors allow me to get away with this. So, I’ve learned how to invest in real estate, first and foremost.
In addition, I save a significant portion of my salary and maintain a low standard of living. Achieving financial independence long before retirement is possible thanks to this strategy.
Having to worry about the sequence of returns risk is no longer an issue for me, which is yet another benefit of working toward financial independence at an early age.
In order to develop long-term wealth and passive income, you should start by investing in equities. Set up automated weekly or biweekly incoming transfers with a free Robo-advisor and let it all operate in the background.
Open a real estate crowdfunding account once that’s going successfully for you. GroundFloor, Fundraise, and Streetwise are a few that I’ve had success with, but it’s best to start with one and spend a tiny amount to get your feet wet.
As your confidence level rises, consider investing in more crowdfunding platforms and automating recurrent investments. GroundFloor is a lender that secures short-term hard money loans against single-family houses while Streitwise mostly invests in commercial real estate.
Fundraise primarily invests in apartment complexes. Direct real estate investment can only be considered as a side business if you are really interested in it.
In the beginning, you’ll have to put in a lot of time and work, and you’ll be taking on a lot of danger. For those who are ready to put in the effort, investment properties may provide substantial profits and good tax advantages.