Many of my friends, colleagues, and family asked me and encountered this discussion many times in personal finance forums: Which investment is better: Real Estate or the Stock market?
Allow me to address the key differences between the two and will try to be objective as much as I can. At the end of this post, as an investor, I will disclose my preference between these two types of investments.
Rental Property
Advantages:
1) Tangible Asset: It takes a lot of pride owning an investment rental property. This is a form of asset that is tangible – you can feel, touch, and see before your own eyes. Along with, It’s something that you can show to your family and friends the hard work you put in for such an investment.
2) Regular Cash Flow: This gives you passive income streams from rents and the possibility of future rent increases. The undeniable reason for real estate is its eternal demand especially in prime locations.
3) Diversification: As the saying goes, “Don’t put all your eggs in one basket.” A very compelling reason is portfolio diversification. You build other sources of income and not necessarily relying on one income stream.
4) Inflation Hedging: Inflation is simply the rise of the average price in goods and services. An increase in inflation essentially leads landlords to increase in rents, as landlords pass the inflationary pressure to tenants. Therefore, maintaining the purchasing power of the real estate in the form of capital appreciation.
5) Recession Resistant: During recession or market downturn home ownership might decrease but demand for rental properties might increase. While other investments are considered risky, a rental property still generates steady income.
Disadvantages:
1) Eternal Responsibility: Never ending financial obligations such as property tax, insurance, maintenance fees, and property management cut if you don’t want a hands on approach.
2) Inadequate Insurance Coverage: In times of natural disasters such as earthquake, tornado, flooding etc., without adequate insurance coverage is catastrophic to any rental income property investors.
3) Difficult Tenants: You will encounter tenants who are delinquent and unable to pay their rents for months and others may cause vandalism to your property. (Screening of potential tenants is highly recommended.)
4) Illiquid. The main drawback with rental property is illiquidity. The difficulty of converting an asset into cash. There are times that you want to sell the property not necessarily due to market conditions but unable to liquidate your asset quickly. It might take you months, years or even pull it off the market as you’re unable to sell it as what happened during the 2008 housing market crash.
Stock Market
Advantages:
1) Ownership stake in a company: You can own a piece of a company once you buy some of its shares and have voting rights that may help decide the direction of the company.
2) Easy to Buy: It is a lot easier to buy shares of companies. All you have to do is open an account with any brokerage whether through an institution, financial planner or online brokerage. With the advancement of technology these days, opening an account with an online brokerage is the easiest route. You can even start investing a small amount.
3) Stay ahead of Inflation: Stocks have a historical annualized return of 8% or better. It does mean that you should have a long-time horizon, patient, consistent, and disciplined investor.
4) Make money in two ways: As a dividend income investor I always consider it as a “double-edged sword”. You make money through capital appreciation and dividend income. You may follow our TFSA dividend income and our TFSA Portfolio.
5) Liquidity: It is easy to sell your investment during market hours. It will take approximately 2-3 days after you sell your security to clear. Following that, it is then available as cash. At this point you can then transfer funds to your checking or savings account. You may also want to check this No fee bank accounts.
Disadvantages:
1) Time-consuming: For many individuals they find that investing in the stock market is time consuming and a complex task. It takes a lot of research and understanding stock investing terminology, reading financial statements and monitoring your investments.
2) Potential risks: There is a huge risk during market downturn or economic slowdown that you will lose the value of your investments. Additionally, when the company is also experiencing financial difficulties stock price could decline.
3) Emotional roller coaster: Stock price goes up and down every second during market hours. The price fluctuations make irrational behavior for a lot of investors to react by selling for fear of losing their investments.
My Final Thoughts
In summary, there are definitely good points and drawbacks between the two types of investments. Additionally, I also believe that it comes down to your own goals and the kind of investor you are. Some investors prefer real estate over the stock market and vice versa. Undoubtedly, many investors who have the resources are capable of doing both, which is an excellent portfolio diversification.
Personally, I love doing both. However, if I have to choose one, I prefer investing in the stock market over rental properties mainly for all those reasons I’ve highlighted above. Moreover, you can avoid the pitfalls in the stock market if you educate yourself and steer clear of emotional investing.
These days however, I won’t miss out on the real estate market as I am able to invest in Real Estate Investment Trust (REIT). A REIT is a security that makes direct investments in real estate. Uniquely, It is traded in the stock market, so they are easy to buy and sell.
In addition, It pays dividend regularly either quarterly and many Canadian REITs pay monthly. For this reason, a REIT investor still collects regular monthly rent in a form of dividends. A pure form of passive income without the headaches of being a landlord.
If you like to build your monthly passive income through dividends and sign up using this link and add money to a non-registered personal account, you will earn a cash equivalent of two random stocks and I will earn a cash equivalent of one stock. See more details with this link .
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