Many people who are aspiring to get rich are drawn between real estate and stocks. However researching this topic is extremely difficult for some. Therefore I will take you through Stocks Vs Real estate and I promise it’s not as difficult as you think!
General Information
Before we can accurately pinpoint which method of investing is the best for you, here is some general information about the two methods.
When you purchase real estate you are either purchasing a property or a piece of land. On the other hand you purchase shares of a company when investing in their stock.
Real estate investments feel more real to the investor, because there are certain costs to pay such as preservation costs, expansion costs and property taxes. It is also possible to go and visit your property or land at any time. More control is allocated to you and the value of the property depends on your actions. Such as if you renovated the property or if you took proper care of the land.
There is another type of real estate investing that is called commercial real estate. Commercial real estate has two different classes: apartment complexes or commercial buildings. Apartment complexes are for families of one to four, condos or offices designed for businesses.
The only focus of commercial real estate is to generate as much profit as possible. This is made possible by acquiring land or buildings on the decline. Profits are most commonly generated by building properties that are then rented out and by building houses on empty land that was acquired for a cheap price.
Investing in the stockmarket is entirely different. More research has to be done to determine which stock to purchase. However the purchase is not difficult at all and can be done fairly quickly. Stocks are shares of a company that either go up in value or go down in value, while at the same time maybe enabling you to get a dividend payout every month.
As a result of the easy acquisition process they are naturally more easy to liquidate. You are not employed by the company you invest in and you don’t actively help run the business. Every once in a while there is a meeting that is required by law where the shareholders can attend. The more shares you own the more your voice matters. If I own 60% off a company my will is stronger than the other shareholders combined. So if the other shareholders want to issue new shares of stock I can veto that.
Stocks are easier to acquire loans for as well, because of how smooth the acquisition and liquidation process works.
Good to Know
Whatever investing method you elect is a personal choice. It depends on how much money you have available, how risk tolerant you are and what you hope to accomplish.
Stocks are often preferred by investors, because the capital needed is much less and it’s easier to purchase stocks. When buying real estate most people need to finance the purchase by borrowing money from the bank and in order to get a loan you need to put down a certain amount of money.
Purchasing stocks has more benefits that increase the probability of increased gains. For example your employer helps out with a 401k plan by depositing an amount of your paycheck every month. It is important to note that not every employer offers this as there is their own right to refuse. Stocks are difficult to predict and without the knowledge and experience it can be very difficult to see sufficient returns.
Stocks vs Real estate Historical Returns
The S&P 500 Index has calculated that on average the return on real estate in the United States is 10,6%. Commercial real estate returns differ slightly from this and the return on average is 9.5%.
Stockmarket investments offer an average return of 10% per year historically. The benchmark for this is the S&P 500.
Key Differences
The most important differences between stockmarket investing and real estate are:
- Stockmarket investing requires less capital
- Stockmarket investing is easier to purchase and sell
- Real Estate investing appreciates more in value on average
- Real estate investing feels more real, because you can visit your property or your land
- Development costs and property taxes apply to real estate
Which investment is better?
Now that you have gotten more of an overview about both stock market investing and real estate investing it is time to elect which one is the better option for you.
To pick the right option for you there are certain criteria you should meet for each investing method in order for you to obtain the best results.
To become a real estate investor you need to be able to pay for the land or the property by yourself or have a certain amount of money to put down for a loan. Then you should have money for renovations and property taxes right now or make sure you obtain this money by either getting a loan or renting out the property. Typically you need to be able to put down 5% upfront before acquiring a loan. If you want to borrow money for your real estate purchase go to different banks and try to get the best deal. Make sure to tell them you are evaluating other banks as well this makes them work harder to obtain you as a client.
In order to become a stock market investor you need to either be knowledgeable about the market or dedicate significant time towards researching stocks. You don’t need a huge budget. My suggestion is to have at least 200 dollars liquid before purchasing any shares. Now you just have to select which stockbroker you want to use. Before selecting a broker you need to know how much commission they charge for buying and selling, what they need to know about you and what they are required to report to your country’s tax agency, for example the IRS.
Buying real estate vs stocks is a difficult conundrum for many investors. They get influenced by so many different opinions from friends, experts and news articles. So which is the better option?
Feel free to contact us with any questions regarding this article!
