Investing has never been easier than today! In the current space of investing, many investors have been putting their eggs in several baskets hoping for growth in their investments in a given period. From forex to crypto, the investment spectrum has now become larger and more accessible globally.
With that being said, still many investors have turned to invest in the stock market – the most-well known investment option there is. However, a less familiar option not everybody knows about is investing in real estate. Under the right conditions, real estate can be a feasible and favorable alternative to stocks, providing investors with lower risks, better returns, and greater diversification.
Real Estate vs Stocks: Which Is the Better Investment?
Let’s take a closer look at what real estate is versus stocks. Just like any other investment decision, choosing between real estate and stocks is a personal choice. Several factors may affect the decision such as but not limited to timing and capital.
A stock is a type of investment that represents a share in a company. It simply means when you buy a stock, otherwise known as ‘equity’, you are buying a small piece of that company. How do you gain from investing in stocks? The answer is simple: buy low, sell high. Does that mean you need to sell your stocks too? Well, yes. That is the very essence of trading – stock trading. This is the buying and selling of shares in the stock market. What you can potentially earn from this is called ‘capital gains’. Though stock trading is not the only means to earn in the stock market. Corporations issue dividends to shareholders. This involves the distribution of the company’s earnings to their investors – that’s you! Some do it in the form of cash, some in the form of stocks.
Businesses and the stock market
Let’s pretend that Company Alpha, a private firm, is trying to raise money for their business. That money can be used for various initiatives – research and development, new product launch, operations expansion, or even to pay off debt. What they would do is sell shares of their business to raise money. They will conduct an initial public offering, or IPO using an investment bank, which then sells shares to investors.
The Who’s Who of Stock Trading
As a common individual, you cannot go straight to the public companies to buy stocks. You need key persons or entities to help you get the job done.
Online Brokers or Discount Brokers
They are stockbrokers who provide the least amount of fees to start investing. How so? They simply take your orders. The means of communication is merely done through the phone or the internet. The cost would usually be based on a per-transaction or per-share basis. This allows you to open an account with the least amount of capital. Another advantage with online or discount brokers is that you can buy and sell stocks or options instantly with just a few clicks. The downside is that you are basically on your own in terms of strategy, as this does not include any advisory services.
Discount Brokers with Assistance
This type of broker service is essentially the same as online brokers and discount brokers, only that they are more likely to charge a minimal fee for extra assistance. Don’t expect much as the assistance usually is limited to providing a bit more information and resources to help you with your trading experience.
Full-service brokers are licensed financial broker-dealer firms. They are those who take the time to sit down with you and plan out your stock trading roadmap. Their services extend to knowing you personally, even your spending habits, to your income, assets, debts, and risk tolerance. They are the expert planners who can also assist you with estate planning, tax advice, retirement planning, and other financial advice. Being the ‘full-service’ package they are, their fees are more expensive than discount brokers. Given the value added through a long-term relationship with them, the investment can be well worth the additional costs.
If you are looking for industry experts in financial management, a money manager may come in handy. They work like a full-service broker, specializing in managing your securities portfolio, and are highly skilled investment professionals. This is best if you would prefer someone to fully manage your investments while you are doing more important work. Hiring this caliber of manager also entails higher costs, as some would charge up to 1% a year of assets under management.
The dawn of the internet era has also pushed the stock market industry to innovate. One of which is the invention of Robo-advisors. They are smart digital platforms that provide automated, algorithm-driven financial planning services. They are best if you just want to set it and forget it. Using them can be as cheap as $1 and fees would be around 0.25% per annum of assets under management.
Means of Earning Through Real Estate
There are several ways to invest in real estate. Probably the most common real estate investment comes in the form of single family homes and rental properties. Buying and owning real estate is surely a satisfying and highly lucrative investment strategy.
Let’s say you decided to build or renovate an apartment complex. You’ve DIY’d your way and now you have become the landlord. As a landlord, you are responsible for several obligations, such as but not limited to paying the mortgage, taxes, insurance, maintenance, and finding tenants – the lifeblood of every rental property.
One way for you to make money is by collecting rent and making a cash flow. However, you do have to be smart and knowledgeable about the area, community and other contributing factors that come with a favorable rental rate. Another way for you to earn is through appreciation. If your property appreciates, you may be able to sell it at a profit, or perhaps borrow against the equity of your property to spend for your next investment. Just like any other investment, there are no guarantees whether your property will appreciate or depreciate through time.
|Regular income stream||Managing tenants can be a pain|
|Properties can appreciate||Property damage is inevitable|
|Maximizes capital through leverage||Reduced income from potential vacancies|
|Tax-deductible associated expenses|
Real Estate Investment Groups (REIGs)
Real estate investment groups are ideal for people who prefer to own rental properties but do not want anything to do with all the pains and hassle of managing them. Think of it as a small mutual fund where these groups invest in rental properties. To further expand, a real estate investment group might buy or build an apartment complex. They bring in investors to purchase these properties through their company, thereby making the investors part of the group. This does involve capital to start.
An investor owns a percentage of the property while the company operating the investment group takes care of managing, maintaining, promoting and bringing in tenants. In exchange, the company typically takes a percentage of the ownership in the property.
|Properties are management by someone else||Not a liquid investment|
|Steady income||Long term investment|
|Properties may appreciate in value||Need professional management of property|
Fond of watching reality TV where the hosts break off walls and counters with a sledgehammer? House flipping may be ideal for you, only if you also have significant experience in real estate valuation, marketing, and for obvious reasons, renovating. This is capital heavy too, as the expenses in renovation do not always hit the eye on budgets.
Property flippers often look for undervalued properties to ‘flip’ in less than six (6) months. On that note, pure property flippers who do not wish to spend on any improvements, also make sure that though the property may be undervalued upon their purchase, their investment must always already have intrinsic value to it.
|Higher margin of profit||Requires deeper market knowledge and connections|
|Quicker return of investment||Higher capital investment needed|
Real Estate Investment Trusts (REITs)
Real estate investments trusts are companies that own or finance income-producing real estate across different property sectors. They have to meet several requirements to qualify for REITs. These corporations use investors’ money to purchase and operate income properties. REITs are publicly traded like any other stock.
REITs own a wide scope of properties such as Apartment buildings, warehouses, commercial offices, medical facilities, data centers, retail malls, hotels, and even cell towers. They operate along with a straightforward model by leasing space and collecting rent on its real estate. The company generates income which is then paid out to its shareholders in the form of dividends.
|Investors earn income through dividends||Sensitive to interest rates|
|Tend to be long-term, cash producing leases||Long term investment|
The Difference Between a Broker, a Sales Agent, and a Realtor
The terms agent, broker, and realtor are often used interchangeably in casual conversation when talking about real estate transactions and listings. Moreover, these terms serve specifically for particular scenarios.
What is a real estate agent?
A real estate agent is a person who is licensed by the Real Estate Commission to act as an agent on behalf of a real estate broker and their clients. They must be sponsored by a licensed Broker to perform any real estate services. They can be involved in both residential and commercial real estate transactions.
What is a broker?
A broker is a licensed professional or entity who provides real estate services to another person in exchange for commissions. They sponsor and supervise real estate sales agents. They work independently because of their extensive knowledge and experience in real estate.
What is a realtor?
A realtor can be any licensed real estate sales agent or broker who is a member of the National Association of Realtors (NAR). Realtors are typically residential real estate brokers and agents.
Risks: Real Estate vs. Stocks
Like any other investment endeavor, both the stock market and real estate entail risks and opportunities. If there is one thing both share the uncertainty of, that would be time. Recall the housing bubble and banking crisis of 2008. That caused a decline in value for investors for both the stock market and real estate. Now with COVID-19, the same crisis can be felt, albeit for different reasons.
Real Estate Risk
The most important risk in real estate that investors often miss is that real estate requires a lot of research. Unlike stocks where you can casually trade and expect instant results. Investing in real estate requires careful planning and real estate space insights.
|Option to invest in one or more properties||Can be illiquid with lockup periods|
|Geographic diversification||Still have management fees|
On the other hand, the stock market entails several types of risks: market, economic, inflationary, politics. Other risks can also be rooted in the participating investors who choose not to diversify their holdings.
|Highly liquid and easy to diversify||More volatile than real estate|
|Lower transaction fees||Selling stocks can trigger big taxes|
|Easy to add tax-advantaged retirement accounts||Potential emotion-driven investing|
Generally speaking, you would make a larger rate of return when you do a good job investing in real estate. Buying and holding properties can outperform stocks. However, it can involve more hassle and more of your time even if you decide to hire a management company.
Investing in Stock vs. Real Estate at a Glance
|Liquid investment||Not a liquid investment|
|Typically thought of as a long term investment||Also a long-term investment|
|The average annual return over the past 50 years is about 8%||Average returns higher (15%)|
|Unless part of an IRA, dividends are typically taxed||Very little taxes|
|Taxes bring a total return to below 8%||Pretty stable returns|
|Stocks are generally volatile||Rarely a negative return|
|Some years you see negative returns and others you see a 20% return|
The Pros and Cons of Investing in Real Estate
Absolutely! There are pros and cons to real estate investing. Your task is to study the benefits that outweigh the risks involved in real estate investing.
You can leverage your investment
Being able to leverage your investment means you can purchase more with less. Leverage helps you maximize your return on investment when you experience growth. Often, real estate investing has 15% or more returns vs. 8% in the stock market. Additional return is a huge difference:
a. $50,000 invested for 20 years at 8% becomes about $233,000
b. $50,000 invested for 20 years at 15% becomes over $818,000
It is a safe and stable investment
Over time, properties may appreciate. With proper maintenance and marketing, your property will less likely be vacant for long periods. The property market as a whole tends to be less volatile compared to the stock market. A contributing factor includes the fact that there is always demand for real estate properties.
It can generate positive cash flow and build your equity
Once you rent out your property, you benefit from a steady stream of income at a regular period provided the rent can cover all your expenses and set aside a little income. Your property also appreciates through time with proper care and management.
Property expenses can offer tax benefits
Real Estate is great to grow your net worth. Real estate income, for example, is not included in the self-employed taxes. As for rentals, you can claim depreciation on the property which then amplifies your tax savings. Returns are largely tax-free or tax-deferred.
You can hedge inflation
Inflation occurs when prices increase over time in an economy caused by the lower value of money. Real estate prices tend to keep up with inflation. On the other hand, the cost of your fixed-rate mortgage each month does not increase.
When inflation causes the cost of living to increase, it also increases your cash flow. If inflation increases, so does the rent you charge.
The money is not liquid
Markets can be fickle. You have no guarantees. Properties take longer to sell depending on the area and timing. This lack of liquidity can be a con when you need quick access to your money.
Cash flow issues may arise with vacancies
Since properties are solely dependent on their tenants to earn money, vacancies can mean a challenge in cash flow. The current COVID-19 pandemic effects are a concrete example of this.
Bad tenants can be a nightmare
Not only will bad tenants affect your cash flow when they refuse to pay rent on time, but their demeanor can also be a factor in your whole operations
Is Property Investment Right For You?
As with anything else, there will always be pros and cons for real estate investing. If you are looking to grow your portfolio through real estate, Instant Equity Investments has off-market homes, rentals, and other investment properties for you to checkout at www.instantequityinvesting.com.