Which is the better investment: the real estate market or the stock market?
Many Americans already dabble in both. According to the US Department of Housing and Urban Development (HUD), around 65% of Americans are homeowners. And around 61% of American adults own stock.
Interestingly, many stocks are based in real estate, creating even more crossover. Investors can buy stock in real estate ETFs, real estate mutual funds, and real estate investment trusts (REITs).
But what if you want to deliberately focus on either real estate or corporate stocks? Which should you choose?
To answer this question, you need to know how each of these investments works. It’s also important to understand their pros and cons, costs of entry, and long-term appreciation potential.
By doing so, you’ll be better prepared to make smarter decisions, avoid common pitfalls, and grow your wealth!
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 it’s easy to understand why it holds value and appreciates over time.
Stocks have a much lower barrier to entry because the cost is typically much lower. They can also be quickly and easily liquidated. And they don’t require much time or attention. But they're also more volatile over the short term.
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 requires more direct attention to manage and maintain, it also allows you to actively take part in raising its future value. And, depending on your specific real estate investment, it may be more liquid than you’d think.
Plus, investing in real estate isn't nearly as difficult, time-consuming, or expensive as it may seem. Especially when you work with a trusted real estate investment company.
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.
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 will continue to grow, appreciate in real (or perceived) value, and become a more dominant player in its industry.
Stocks are also valuable because they often produce dividends (investor payouts based on performance). Dividends can be reinvested to acquire more shares in the same company, which will produce more dividends, or they can be spent or invested elsewhere.
Pros and Cons of Investing in the Stock Market
Benefits of Stock Market Investments
- High liquidity. Stocks are easy to purchase and sell. If you ever find yourself in need of emergency funds, you can quickly liquidate a portion of your stock portfolio to a willing buyer.
- Easy to get into. With online brokerage websites and apps, you can purchase stocks with just a few clicks or taps. And you only need a couple hundred dollars to start investing in stocks.
- Easier to diversify. Since each share is so affordable, you can invest in multiple stocks for a quickly diversified portfolio. You can even invest in bundled securities, like mutual funds, index funds, and ETFs, for automatic diversification.
- Lower transaction fees. While investors typically pay a fee to open a brokerage account to start buying and selling stocks, those fees are nominal compared to the closing costs of buying or selling a property.
- You can grow your investment in tax-advantaged retirement accounts. If you purchase shares through a retirement account like a 401(k) or traditional IRA, your stock investment can grow tax-deferred.
- Easy to amplify your earnings. Simple techniques (like reinvesting your dividends) plus 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 automatically limits your exposure to the stock market. For example, if you have a stop-loss order to immediately sell your shares if they drop by 10% in value, you mitigate your risks.
Downsides of Stock Market Investments
- Stocks are often volatile in the short term. Stock market prices constantly and wildly fluctuate. This can cause a lot of stress for investors. 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.
- Risk of company stagnation - It can be easy to invest in “time-tested” companies that are already mature and don’t have much room for growth or innovation. These stable companies may suffer from stagnant stock prices, even over long periods.
- Stock dividend taxes and potential capital gains taxes. Dividends and profits are typically taxed. You may benefit from the capital gains rates on profits if you hold the stock for over a year, but with stocks being so easy to buy and sell, many investors use them as short-term investments and pay earned income tax rates.
- Stocks are subject to political and economic cycles beyond your control. Elections, pandemics, supply chain issues, and social unrest can negatively impact stock prices.
- 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 directors, you have no control over its day-to-day operation decisions. This could mean that companies that are already over-leveraged, running on razor-thin margins, and facing disruption could see most of the value of their stock evaporating suddenly.
Investing In Real Estate
When you invest in real estate, you’re investing in tangible land and structures.
Residential real estate is particularly strong because housing is 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 investment opportunities may be more lucrative because buyer competition and prices often dip.
Real estate is also an impressive cash-flow generator. Rental income can be used to cover the mortgage, pay for maintenance, and acquire additional investments.
Plus, real estate tends to appreciate over time while also offering opportunities for forced appreciation.
Pros and Cons of Investing in Real Estate
For a complete breakdown, check out 12 Benefits of Investing in Real Estate (Plus 6 Potential Downsides). Here are some of the highlights.
Benefits of Real Estate Investing
- Real estate is traditionally safer than other investments. Housing is a basic need, and therefore an inelastic commodity, which means it holds its value. Additionally, land is a limited resource. This scarcity helps real estate retain and increase its value.
- Ability to leverage. Through mortgage financing, you can turn a comparatively small down payment into a high-value asset. Plus, you can tap your equity through home equity loans and refinancing to fund future acquisitions. This is a key principle of the BRRRR investment strategy.
- Passive income. Rental properties generate passive income each month. And if you hire a management company, you won’t have to worry about dealing with tenants, addressing maintenance issues, or other landlord headaches.
- Easier to inspect and appropriately value. It’s relatively easy to inspect a property, make sure the structure is solid, determine its current real market value, and investigate any encumbrances. Stocks, on the other hand, are much harder to objectively evaluate.
- Tax breaks. There are several tax benefits for real estate investors, including deductions, depreciation, and lower capital gains rates.
Downsides of Real Estate Investing
- Direct ownership requires hands-on involvement. Stocks are as close as you can get to a “set and forget” investment. But investment property ownership requires regular attention from you or your property manager. Labor-intensive projects like house flips can easily be a full-time job.
- High costs. Buying requires a lot of capital to complete the purchase, pay closing costs, and potentially renovate. Selling also comes with expenses for listing, marketing, and transferring the property. Don’t forget holding costs like property taxes and insurance premiums.
- Lower liquidity. Selling a home for the best possible price can take months. This can be a good thing because it prevents you from making rash, emotional decisions. But this can be problematic if you want to sell immediately.
Which Has Better Returns: Stocks or Real Estate?
This is a difficult question because there are so many ways to invest in real estate and so many ways to invest in stocks. But here’s some general info.
From 1992 to 2024, the US housing market's annualized average growth rate was around 5.5%. Over the same period, the S&P 500 returned about 8.27%. However, real estate has higher risk-adjusted returns than the stock market. This means that, while real estate doesn’t appreciate as quickly as stocks, there is a much lower chance of investors losing their savings in a sudden real estate crash.
Furthermore, some real estate investment strategies far outperform market conditions. For example, Gatsby Investment’s real estate portfolio has achieved average annualized returns of 23% for investors!
Should I Invest in Stocks or Real Estate?
With so many variables to consider, including your own needs and goals, we’re not going to tell you what to do with your money. We can, however, help you decide which is the likely better bet for you at this point in your investment life.
Real estate may be the better option for investors who:
- Already have a stock portfolio and want to diversify into real estate.
- Currently have at least $15K-$25K to invest.
- Are not looking to take on too much risk.
- Enjoy a hands-on approach to investing.
- Are interested in tangible assets.
- Seek ongoing tax advantages.
- Prefer investments that can generate rental income and long-term appreciation.
- Want the option to leverage their investment through financing options.
Stocks may be the better option for investors who:
- Already own investment properties and want to diversify into corporate stocks
- Have less than $15K to invest.
- Are willing to accept the risk of volatile markets.
- Want to set it and forget it.
- Prefer to quickly buy or sell investments without significant transaction costs.
- Seek exposure to a variety of sectors and industries worldwide.
Real Estate Syndication - The Best of Both Worlds
Real estate syndication combines the benefits of real estate investing with the benefits of stock market investing while minimizing the downsides of each!
Syndication allows investors to pool funds for equity ownership in a single real estate project, such as a single-family flipor a multi-family development. The project is professionally managed by a real estate sponsor, who handles every detail on behalf of the investors, from acquisition, through construction and eventual sale.
This structure gives you the tax breaks and low risk of traditional real estate investing along with the ease and passivity of stock market investing!
With Gatsby Investment, you can buy into a $1 million+ deal for under $25K. Our team of experts takes care of market analysis and location scouting, buying and selling your property, interior and architectural design, purchasing materials, and managing the construction team. Our investors consistently outperform both real estate and stock markets by leveraging our unique platform.