Real Estate Investing Education Center

Investing in Real Estate vs Stock Market

Are you considering expanding your investment portfolio and making it more diverse? Are you a new investor, but you don’t know where to start? Or are you a seasoned veteran looking for more reliable investment strategies?

If so, you might be wondering: is it better to invest in real estate, or in stocks?

The truth is that a lot of Americans already dabble in both. According to the U.S Department of Housing and Urban Development, around 65 percent of Americans are homeowners. And according to the U.S. Bureau of Labor Statistics, over 50 percent of all private industry workers participate in some form of employer retirement plan.

And whenever an employee contributes to their 401(k), they are in fact investing in stocks. And if the 401(k) includes shares in REITs, they are also investing in real estate as well. The reason most managed investment portfolios involve both real estate and stocks is simple: Savvy investors understand that both real estate and stocks have their strengths and weaknesses, and they shouldn't be considered as alternatives. In fact, they complement each other's strengths and help smooth out their weaknesses.

However, if you’re looking to either focus more on one of the two investment vehicles, or you don't know which investment to focus on first, it’s a good idea to understand how each of these two kinds of investment work. It’s also important to understand what exactly are their pros and cons, costs to get in, as well as the mechanisms that make them appreciate in value. 

By doing so, you’ll be better prepared to make wiser decisions, grow your wealth, and avoid common pitfalls. 

Investment charts over city

Stocks vs Real Estate 


Stocks and real estate are two very different assets with some obvious differences. Stocks are intangible, and somewhat abstract. Real estate is tangible, and easy to understand why it holds value and appreciates over time.

Stocks have a much lower barrier to entry, but they're subject to much volatility over the short term. However, they can be liquidated easily, and instantly. And unlike traditional real estate investing, stocks don't require much of your time and attention.

Real estate has a much higher barrier to entry than stocks, but it offers far more stability in the short and long term. And while it does require more direct input from your part to manage and maintain, it also allows you to actively take a part in raising its future value. 

In this article, we'll take a look at some of the pros and cons of stocks and real estate, as well a number of reasons why investing in real estate isn't nearly as difficult as it may seem at first. Especially when you work with a trusted real estate investment company.

What Are Your Investment Goals?


What kind of investor are you? Are you in the Warren Buffet school of thought, and prefer a long-run investment strategy? Are you early in your early working life?

How well do you handle risk? Are you risk averse or risk tolerant? 

What kind of lifestyle are you accustomed to and what kind of lifestyle do you want to have when you retire? Do you prefer a hands-on approach to your investments, or prefer to let your money (and others) work for you?

Before we begin talking about the nitty, gritty details, it’s essential that you have a clear idea of the kind of investor you are, your long term investment goals, and what kind of investment experience you have.

That’s because what’s better for you now, can be very different than what was better for you a decade ago.

It’s easy to use our power of hindsight, and think about what if scenarios for both real estate and the stock market. For instance, if you had invested in downtown LA real estate in 1996, and cashed out in 2006, you would have outperformed just about every single stock, and index fund out there.

And of course, you would have outperformed just about any kind of investment - not just real estate - if you had invested in just five companies early on: Apple, Amazon, Microsoft, Facebook and Alphabet (the same group behind Google).

Also, your success with both stocks and real estate are highly dependent on when you enter the market and when you decide to liquidate. 

While it would be nice to know where the next real estate hotspots are, and which companies will be the next Apple and Google, it’s sadly impossible to know for certain.

However, it’s not actually that difficult to analyze the historical trends of both stocks and real estate in order to learn lessons, understand the strengths and weaknesses of both investment types, and use these lessons to guide your actions.

Bullseye dart in dartboard

Investing In Stocks


Let’s start with stocks. When you invest in a company by purchasing shares in an initial share offer, you're usually helping fund that company's growth and expansion. 

And when you purchase stock already in play on a specific stock exchange, such as the NYSE, you're choosing to invest in a company that you believe that will continue to grow, appreciate in real (or perceived value) value, and will become a more dominant player in its industry.

Stocks are also valuable because they produce dividends at regular intervals each year. These can be used to acquire more shares in the same company - which will produce more dividends - or in other investments.

Pros


High liquidity - Stocks are very easy to purchase and sell. All it takes is a few clicks to buy or sell stock during regular stock market hours. The buying and selling process is so easy, that it can be largely automated. If you ever find yourself in need of emergency funds, you can quickly liquidate a portion of your stock portfolio.

Easy to get into - Today, there are more options than ever to start investing in stocks. From the traditional phone call to your broker, to smartphone apps that make purchasing and selling stocks as easy as clicking a few buttons.  And to begin, only need to invest a couple hundred dollars to start investing in stocks.

Easier to diversify - Because of stock’s high liquidity, it is very easy to purchase a large variety of stocks across different stock exchanges and industries. And, if you decide to invest in a mutual fund, index fund or ETF, all the diversification is done for you.

Fewer transaction fees - While you do need to pay a fee to open up a brokerage account to start buying and selling stocks, that’s potentially the only fee you may need to pay. Because of intense competition among stock brokers, stock trading fees have substantially dropped. In fact, in some cases, such as non-managed options, could cost you as little as $0 per transaction.

You can grow your investment in tax-advantaged retirement accounts - If you purchase shares through an employer-sponsored retirement account like a 401(k) (especially beneficial if your employer matches your contribution), or through an individual retirement account, your stock investment can grow tax-deferred, or even tax-free in some cases.

Easy to amplify your earning - Simple techniques such as reinvesting your dividends, as well as more complex tools like  margin investing (where you borrow money against your portfolio to purchase more stock) can help compound the gains made by your investments.

Easy to limit losses -
A stop-loss order can be used to automatically limit your exposure to the stock market. For example, if you have an investment of $10,000 and a stop-loss order to immediately sell your shares if they drop by 10 percent in value, you are able to mitigate your risks. 

Cons


Stocks are often volatile in the short-term -  If you’ve paid any attention to the stock market, you can see just how much stock prices fluctuate. For an inexperienced investor (and even professional ones, as we saw in the 2008 financial crisis), this can be nerve wracking. Since it’s so easy to buy and sell stocks, nervous investors can make emotional buying and selling decisions, and potentially shoot themselves in the foot. It takes a disciplined mind and nerves of steel to hold on to stocks through market ups and downs long enough, until the ups and downs balance out. 

Risk of company stagnation - It can be very easy to invest in “time-tested” companies that are already mature, and don’t have much room for growth or innovation. This can cause their stocks to remain stagnant, even over long periods of time.

Stock dividend taxes and potential capital gains taxes - You may be able to avoid transaction and management fees, but you might have to pay capital gains taxes when you sell stocks. Additionally, dividends are typically taxed as well, further eating away at your profits. 

Stocks are subject to political and economic cycles beyond your control - As this year’s election cycles, COVID-19 crisis and social unrest issues have shown us, even the most well run companies are subject to outside factors. 

Changes in monetary policy, tax revisions, changes in prime rates can affect companies and their stock prices. Of course, all investment types are affected by factors beyond your control. But what may affect stocks may not affect real estate, and vice versa.

Lack of control of your stocks' future
- While you can make the choice of which stocks to buy and which ones to sell, and you can cast a vote for the company's board of director, you have no control on its day-to-day operation decisions. This could mean that companies that are already over-leveraged, running on razor thin margins and facing disruption (as seen in 2020 with United Airlines and Marriott International) could see most of the value of their stock evaporating all of a sudden. 

Investing In Real Estate


When you invest in real estate you’re purchasing tangible, physical land and structures. Housing is also a necessity. No matter how good or bad the economy may be, people still need a place to live. In good economic times there are more home buyers and sellers. In economic downturns, the market may slow, but opportunities for investment may be more lucrative.

Real estate investments can be divided into two major categories: residential and commercial.

Residential real estate investments include buying and holding single family homes, renting multi-family units, or flipping properties. Commercial real estate investments may include renting apartment complexes, office buildings, malls, gas stations, leasing vacant land, etc.

Rent generated by real estate investments can be used to pay for maintenance, mortgages, and to acquire additional investments. 

Pros 


Real estate is easy to understand for the average person - Unlike stocks, everyone knows why houses are so valuable. 

It’s very easy for the average person to understand why investing in real estate is such a good idea. In fact, it’s safe to assume that at some point in our lives, our parents or grandparents taught us that it’s better to own than rent a home.

Ability to leverage - Mortgages allow you to tap into the power of leverage, and allow you to make more investments borrowing against the equity built up in other properties. This allows your investment to grow much faster, and also let you acquire more properties if you only use your own funds. 

Real estate is traditionally safer than other investments
- Housing is a basic need, and therefore an inelastic commodity - that means that supply and demand is affected less by cycles in the economy. In addition, land is a limited resource, and if you invest in particularly scarce and desirable real estate, such as waterfront or historical real estate, it is likely to retain its value even during economic downturns.

It can generate income and run itself if set correctly - Rental properties generate income each month. And if you hire a management company, you won’t have to worry about dealing with tenants, maintenance, and other landlord headaches. 

While this definitely cuts into your bottom line, your extra time can be used to pursue other income generating activities, or in managing other real estate investments.

Easier to inspect - It’s relatively easy to inspect a property, make sure the structure is solid, determine its current real market value, and investigate if it has any encumbrances or potential issues down the line. On the other hand, it can be much more difficult to determine whether a company’s stock accurately represents its actual market value, or it’s simply overvalued or artificially inflated.

Cons


Real-estate investing requires a lot of hands-on involvement - Stocks are as close as you can get to a “set and forget” investment. The majority of real estate investments, on the other hand, require far more involvement from your part.  Some forms of real estate investment, such as property flipping, can easily become (or even require outright) that you treat it as a full-time job. 

If you manage a rental property yourself, you have to deal with tenants, maintain the property, promote it, and other headaches. Sure, it’s possible to hire a management company and delegate most of your landlord responsibilities. But this cuts into your profits, and you’re never completely free from your landlord responsibilities.

Expensive - It’s much more expensive to get into real estate investment than in stocks. While you can use mortgages, and in some cases, even a 0 percent down payment loan to purchase a property, you have to deal with monthly mortgage payments, property taxes, maintenance and utility costs.

Highly illiquid - Selling a home for the best possible price can take months. Sure, this can be a good thing, since it prevents you from making rash emotional decisions. But if you find yourself in an emergency, you can’t easily tap into your home’s acquired value.

Continued costs - Even after fully paying off your mortgage, you still have to deal with property taxes and maintenance costs. 

High transaction costs - Buying or selling a home requires multitude of closing costs, marketing costs, agent fees, and so much more.


So where should I invest my money, stocks or real estate? 


There are so many variables to consider with both stocks and real estate (either of which deserve not just a few more articles, but at least two separate books). Not only that, but there are differences in each investors' own needs and circumstances. So the to the question, "where should I invest my money?" is a giant “it depends.”

A better question would be “which type of investment is the right one for me right now.”

If your investment portfolio is primarily made up of stocks and bonds, and you’re looking to diversify, it would be a good idea to look into real estate, especially income-generating properties. 

You have lots of choices here. But if you just want to get your feet wet, it might be a good idea to look into 2-4 family “plexes”. These units are considered residential real estate in most areas of the country, making it easier to qualify for a mortgage.

Since you’re dealing with several units, you’ll continue to receive rent even if your occupancy rate isn’t 100 percent. This wouldn’t be the case with a single family unit.

If you prefer the ease and convenience of stock ownership, but still wish to invest into real estate, you also have the option to buy shares in a real estate investment trust (REIT). Since these have relatively low correlation with other assets, they are another great option to diversify your stock portfolio.

On the other hand, if you’re already a home owner and/or a real estate investor, and want to get into stock market investment beyond your 401k, you have a huge amount of options too. 

If you’re risk averse, and don’t want to deal with the everyday volatility of stock prices, you can look into passively managed index funds or exchange-traded funds (ETFs). 

Because these investment vehicles invest in an underlying benchmark index (such as the S&P 500), they are already pretty diversified. And unlike actively managed funds, which try to outperform the market, index funds and ETFs rely on long term appreciation. Sure, such low-risk strategies do carry low gains in the short run. But for a risk averse investor, that may be just what they need.

You can invest in real estate for as little as $15,000


Real estate and stocks both present risks and rewards. Real estate investment is a proven investing vehicle that is easy to understand, and is relatively safe and stable. We already covered why share market investing is easier, and more attractive to most investors for short, medium, and long-term but it is obvious that real estate is a valuable channel for reliable long-term investment.  

For most investors, the idea of real estate investment seems out of reach, so even with the potential for big gains, the relative stability, and the sheer enjoyment of seeing something you're a part of be developed, most people don't consider real estate. 

Gatsby Investment offers accredited investors the opportunity to diversify with real estate for small investments starting at $15,000. 

Making Investment in Real Estate Easier


Experienced investors don't see stock vs real estate as an “either-or” dilemma, but as complementary to each other. And when you work with an experienced and knowledgeable real estate investment company, such as Gatsby Investment, you'll be able to invest in real estate with confidence. 

Whether you wish to flip homes, invest in multi-family complexes, or get into luxury real estate, Gatsby Investment will help you in all aspects of real estate investment.  These include, but are not limited to: market research and location scouting, buying and selling your property, interior and architectural design, purchasing materials and managing the construction team.
Gatsby Investment also handles all legal aspects of the real estate process. 

Contact Gatsby Investment today to find out how to get started with a real estate investment portfolio.