Stocks vs. real estate: Which investment is best for you?
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- Stocks and real estate are popular options for investing and growing money, and there are some key differences to consider when making a decision.
- Stocks are best for short or long term investors. They have high growth potential and can easily be converted into cash.
- Real estate investments are better suited for longer term investors and can be more expensive (especially if you are buying real estate).
- If you don’t want to buy real estate, consider investing in real estate investment trusts (REITs). Unlike other real estate investments, publicly traded REITs can be easily converted into cash.
- Read Business Insider’s Guide to the Best Investment Apps You Can Use Right Now.
Stocks and real estate are both top options for investing and growing your money. But how do you decide which one is better for you?
Read on to learn more about the differences between stock and real estate investing – and remember, you can always invest in both.
Stocks are stocks or parts of public companies that have made their businesses available to all investors (companies must go public or go public in order to go public). These companies typically sell stocks to raise money for internal development and business growth. This means that when you buy shares, you acquire a stake in or ownership of a company.
There are two types of stocks: common stocks and preferred stocks. The main difference between the two is that common stocks give you voting rights, but preferred stocks do not. Common shares – also known as voting shares – allow you to vote for a company’s board of directors and other policies.
But both types of stocks sometimes pay off. Dividends are typically cash payments that companies give out for every share they own. For example, if you own two shares in Target and Target pays dividends on its shares, you will likely receive a cash raise on both shares.
Stocks are available on exchanges around the world, but it can be difficult to trade on international exchanges at times. If you live in the US, you can buy stocks on US stock exchanges like NYSE or NASDAQ, among others.
Benefits of investing in stocks
One of the greatest advantages of stocks is that they are highly liquid assets, which means they can easily be converted into cash without losing a large chunk of their market value. Other examples of liquid investments include stocks, bonds, mutual funds, ETFs, and money market funds.
Another benefit of stocks that both short- and long-term investors can benefit from is their potential for growth and capital appreciation. Capital appreciation is when the market value of an investment increases. For example, if you buy a share of a company for $ 100 and sell the same stock for $ 500, your investment increases by $ 400.
As mentioned earlier, some stocks also pay dividends so you can get additional payouts out of your own stocks. Companies typically either pay cash dividends or offer bonuses in the form of additional shares.
Disadvantages of investing in stocks
One of the disadvantages of stocks is that, like most investments, market prices can fluctuate. This means that the value of your investment can rise and fall and economic, political and environmental events can affect the success of your business.
You also need to pay attention to capital gains tax. You may have to pay this tax selling stocks, but you will pay less if you’ve held your investment for more than a year (tax rates on capital gains generally range from 0% to 20%).
There are basically five types of real estate: commercial, residential, retail, mixed-use and industrial real estate.
When you invest in real estate, you also have five options. You can invest in real estate investment trusts (REITs) through stock exchanges and brokers, buy and manage your own rental properties, turn houses for profit, invest in real estate investment groups (REIGs) or use online brokers and crowdfunding real estate platforms.
If you’re looking for more of a hands-off approach to real estate investing, REITs might be worth considering. According to Investor.gov, REITs allow you to generate income from commercial real estate ownership without having to buy the commercial real estate projects yourself.
Real Estate Investment Trusts are companies that own and / or operate income-generating real estate-related projects. Such projects can include hotels, apartments, mortgages, medical centers, warehouses, and other facilities. You can invest in REITs through most online brokers, and real estate crowdfunding platforms like Fundrise also offer them.
Companies become REITs when they buy and operate real estate and sell shares of those assets publicly (and sometimes privately) to investors. Private REITs are also known as non-exchange-traded REITs. You will need to purchase them through a broker or financial advisor who will provide the untradded version (these are also very illiquid so you cannot convert them as easily as a regular REIT).
If you’re not interested in REIT stocks or non-traded REITs, you can also diversify your real estate investment portfolio by buying shares in REIT mutual funds and REIT ETFs.
Benefits of investing in real estate
Real estate investments offer several advantages to investors. For one, you can get tax deductions on the properties you manage. This allows you to deduct expenses such as property tax, maintenance and administration costs, and property insurance.
Real estate investments are also commonly viewed as an inflation hedge. Inflation usually increases the property and rental value, which increases your return on investment (ROI).
One advantage of REITs is that they provide easy access to commercial real estate investments. Because REITs are companies that have already invested in real estate, you can avoid the lengthy process of selecting and financing the real estate yourself.
Additionally, publicly traded REITs are highly liquid so you can buy and sell them at your disposal. Real estate is illiquid and cannot easily be converted into cash, but REITs are.
To qualify as REITs, companies must pass at least 90% of their taxable income on to investors. This 90% rule enables companies to avoid corporate taxes and results in higher dividend payments for you.
Disadvantages of investing in real estate
One downside, however, is that your REIT investment is still exposed to economic risk. In fact, commercial property prices dropped significantly in early 2020 due to the coronavirus.
It can be difficult to prepare for unforeseen events. However, if you want to lower your risk, you should also consider REIT mutual funds and ETFs.
Stocks and real estate investments differ in terms of growth potential, dividend yield, time horizon and level of risk.
Stocks can be great for both short-term and long-term investors. These investments are also very liquid and can produce high returns if the company you have invested in is successful.
REITs might be a good fit for you if you want to get into the property investing game but aren’t interested in finding and buying the actual properties yourself. Real estate investments tend to be illiquid and require you to buy and hold a property for at least five years. However, REITs can easily be converted into cash.
However, you don’t have to choose (and you don’t have to choose) one above the other. When stuck between investing in stocks and real estate, keep in mind that you can invest in either. Indeed, investing in stocks and real estate could help diversify your portfolio and improve your overall return.
Rickie Houston is a wealth creation reporter for Personal Finance Insider specializing in investment, brokerage and wealth creation products.