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?
I would like 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 convey my preference between these two types of investments.
1) Tangible Asset: It takes a lot of pride owning an investment property. This is a form of asset that you can feel, touch and see before your own eyes. 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 of real estate is its eternal demand specially 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 lead 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 increases. While other investments are considered risky, a rental property still generates steady income.
1) Eternal Responsibility: Constant financial obligation such as property tax, insurance, maintenance fees and employee salary for life.
2) Inadequate Insurance Coverage: In times of natural disasters such as earthquake, tornado, flooding etc., without adequate insurance coverage is catastrophic for any investment property investors.
3) Difficult Tenants: You will encounter tenants who are delinquent and unable to pay their rents for months and others cause vandalism to your property. (Screening of potential tenants is a must.)
4) Illiquid. The main drawback in real estate 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. It might take you months, years or even pull it off the market as you’re unable to sell it.
1) Ownership stake in a company: You can own a piece of a company once you buy some of its shares.
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.
3) Stay ahead of Inflation: Stocks has a historical annualized return of 8% or better. It does mean that you should have a long-time horizon, patient, consistent, and discipline 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.
5) Liquidity: It is easy to sell your investment during market hours. It will take approximately 2-3 days after your sold your security to clear then its converted into cash. At this point you can then transfer funds to your checking or savings account.
1) Time-consuming: For many individuals they find that investing in 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 potential to huge risk during market downturn or economic slowdown that you will lose the value of your investments. Additionally, when the company 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 their investments for fear of losing their investments.
My Final Thoughts
There are definitely good points and drawbacks between the two types of investments. I also believe that it comes down to personality. Some investors prefer real estate over stocks and vice versa. Undoubtedly, many investors who have the resources are capable of doing both, which is an excellent portfolio diversification.
Personally, I prefer investing in the stock market over real estate mainly for all those reasons I’ve mentioned owning an investment property. You can avoid the pitfall in 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 a form of Real Estate Investment Trust (REIT). A REIT is a security that makes direct investments in real estate. It is traded in the stock market, so they are easy to buy and sell. They pay dividends regularly either quarterly or most of them monthly. For this reason, a REIT investor still receive regular monthly cash flow in the form of dividends without the headaches of being a landlord.