Real Estate Vs. Stock Market Investing | Making Money in Real Estate vs. Stocks

INVESTING: REAL ESTATE VS. STOCKS

By Linda Hoffstader

As someone who owns my own house and has a retirement account that is invested in the stock market, I can see the value in investing in both real estate and stocks. There are positives and negatives with both asset classes, but you really can’t go wrong.

It’s similar to choosing whether BMW or Mercedes-Benz makes the better car. Each person asked that will have a different preference, and no one is really wrong. Real estate and stocks have their own benefits and warnings, in that it’s someone’s personal attitude of risk, control, and time horizon that seems to determine a preference for one or the other.

Let’s take a deeper look into both asset classes so you can understand the differences in stocks vs. real estate investing to help you decide which asset class would be best for your situation and financial goals.

Making Money in Real Estate

Both asset classes, equities (stocks) and real estate, are good long-term investments, but you have to play both games by different rules. Real estate is much more expensive to get into, but it can be a very good way to make money – whether you own a house and live in it, investment in a property and rent it out, or own an undeveloped parcel of land with plans to have it developed.

There are ways to make money in real estate, but since property is something tangible, it takes regular maintenance and regular payments to keep it going. There is a large initial investment to get into real estate (say, a minimum 20-percent down payment, which means at least $40,000 on a $200,000 home); plus, you will be expected to pay taxes and insurance, a mortgage, and any maintenance costs over the years that you own the property.

Despite all that, on an annualized basis, real estate as an investment can average 4-5 percent of value per year (a good ROI for real estate would be 6 percent or more), which means it can stay ahead of inflation. Translated, this means you can make $10,000 in value each year on your $200,000 property, and you will be lowering the principal of the mortgage each year through payments, so the “equity” (the difference between the value of the property and the balance on your mortgage) will grow by more than $10,000 each year.

Of course, this is an average; real estate, like most assets, will have runs either positive or negative in valuation based on market forces and not so much on whatever improvements you may make to the property.

Image source: Bigstock

Real estate is better as a long-term investment, but in the short term it can be a source of income (if you own an apartment building or a commercial property) and would be a relatively stable asset in terms of value – essentially, the value only changes when you actually go to sell the property. And as a long-term investor, the short-term horizon means your “value” is basically the amount of your mortgage when you buy the property, and then you build equity each year you pay down the principal of the mortgage.

To get started in real estate, it often takes hard work and focus to come up with the initial investment, and it takes that same kind of personality to be successful in real estate. Virtually no real estate is worthless or ever will be, so as long as there is diligence to find a good deal on a piece of property, it can make you a modest return on investment (ROI) over time.

Because it is very difficult to take your investment out, you can get larger gains and deeper losses in the market. This is why understanding the importance of location is vital – and why it is often best to get advice from a real estate broker or agent to help you find the right property, the right location, and the right price in order to invest and have the best chance of success.

You also benefit from property ownership with Uncle Sam. The money you spend on interest payments on your mortgage can be deducted off your taxes at your existing rate, which gives you essentially a “discount” on your interest rate.

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Making Money in Stocks

The stock market can be a great money-maker in the long term. Annualized over its 100+ year history, the stock market has averaged about 10-percent growth per year, which is about 2.5 times of the average annual inflation rate. This means you would be clearing 6 percent every year. Your money adds up fast.

However, unlike real estate, you do not need a large initial investment to get in. Many stocks and mutual funds require less than $1,000 to invest. The money invested in stocks is also quite liquid, which means it is easy to pull the money out of the market and put it back in; usually, a transaction can take minutes, if not seconds. Also, the transaction fees are usually quite low, so any trade can still leave you ahead in the end.

You do get nice tax advantages with the stock market, in that you could write off some losses, and any gains are taxed at the capital-gains rate, which is significantly less than the income-tax rate (at least by current U.S. law).

The Investment Personas

While there are people who can (and should) invest in both stocks and real estate, the type of person or purpose for each investment can be different, especially if there is to be success and a good ROI. You may well have both of these types of investor inside you; it’s just a matter of the purpose for which you want to invest in each asset.

If you are looking for an income stream and/or a place to call your own, you are willing to put in a hefty initial investment, and you are a conservative “buy-and-hold” investor, then real estate can be a great investment. With property, you are in control of the asset increasing in value, you are in control of the maintenance and management, and you can touch it, see it, and show it off to others as something you truly “own.”

And if you are more advanced in life, real estate can be a more conservative and reliable source of income and/or equity that can benefit you for your retirement years, as long as you don’t need the money that is invested in the property and instead can live off the income.

You also have to keep in mind that if you want to get out of real estate investing, you have to plan ahead – it can take weeks, months, or even years to sell property; you can’t ride any market volatility, and the time it takes to sell can put your investment at real risk of loss, as timing is everything.

If you like to play around, keep an eye on politics and business issues, like to take some risks, and are willing to weather daily, weekly, and monthly volatility, then the stock market may be a good play for you.

The market does not take much money to get involved, it is very liquid, and you don’t have to be in control. You can rely on people more experienced than you to make the decisions regarding your asset. The stock market will fluctuate more wildly than any housing market, so as long as you have a long-term goal in mind, you can generally make 10 percent a year in annualized returns, which means you double your money in about seven years. In other words, it takes less money to play the market than invest in property, but the money you invest can double and triple much more quickly over time, which can give you a chance to “catch up” with a property owner in asset value.

Image source: Bigstock

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Know the Risks

While both real estate and stocks have histories of positive growth, they are not without their risks, and you have to take this into consideration when you decide which route to go with your investment dollars.

For real estate, there is a risk of losing your investment in a property through poor maintenance, bad renters, bad neighborhood, or maybe you get more mortgage than you can actually afford and suffer a foreclosure. Think about it – what if you lose your job and don’t have the income to make the mortgage payments or pay for maintenance of the property?

There is also a risk that inflation may go up – it is down around 2 percent now and the all-time average is near 4 percent. As inflation increases toward its more normal level, you run the risk of barely breaking even on your property in the short term, and perhaps losing money if hyperinflation kicks in. You are in control of your property, and you could be at risk if you do not know how to manage property; mismanagement can adversely affect your investment.

With the stock market, the volatility of the market can affect your investment on a daily, weekly, or monthly basis. While real estate is rarely worth nothing, it is possible for a company’s stock to be worthless at any time (look at Enron or some of the dot-com companies when that bubble burst at the start of this century).

With stocks, you are not in control of the price or managing the value of the stock – you rely on the company and the market, and there can be a risk that you don’t know the competence of those in charge, and you can do nothing about the price of the stock; market forces dictate that. You may do nothing and lose everything. And you run the risk of acting emotionally and buying when the market is going up and selling when it drops – when the rational move is the opposite.

What Works for You?

While I am invested in both real estate and the stock market, I do so for different reasons, and those reasons really have nothing to do with each other, other than the similarity that I am riding both of them for the long haul. I am not looking to make a quick buck nor am I jumping in or out of stocks on a whim trying to “time the market.” While you can make money in the short-term in the stock market, and you have the flexibility to do so, and real estate is often difficult to ride waves, both asset classes have strong track records of profitability over a long-term time horizon.

About the Author:

Linda Hoffstader is a former mortgage broker, real estate investment advisor, and loan underwriter for financial institutions such as Prudential and Merill Lynch.

Now, slowing down, she works as a consultant for the home loan company Franklin First Financial while also finding time to do some freelance writing. As a grandmother of four, she enjoys spending her days poolside at her community pool in Boca Raton.

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