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The stock market may seem like some magical place where the “American Dream” of rags-to-riches is within reach.
While such success is possible, making a fortune is not as easy as it looks.
In 2020, after the pandemic was officially declared, the markets crashed and throughout the rest of the year new investors clamored to get in on the ground floor, with an estimated 10 million new investing accounts added by the end of 2020.
While the stock market is touted as the investment vehicle of choice, there are plenty of other investment opportunities such as precious metals, real estate, and bonds.
We’re going to give a simple comparison to stock and real estate investments in this article to help challenge the idea that the stock market is the means of investment.
To begin, let’s address some common beliefs about real estate investing.
First, real estate investing does not strictly mean having a conglomerate of properties, nor does it strictly consist of buying, fixing, and flipping houses.
Second, since real estate is a physical asset, it does not necessarily have to be sold in the same lifetime that it was purchased, nor be rented out, to capitalize on the investment.
Third, real estate investment is not something that is reserved only for individuals of a higher economic status.
Perhaps the biggest advantage in investing in real estate, is that it is more secure and stable than investing in the stock market because maintained properties seldom depreciate in value, and any depreciation that might happen still cannot compare to the potential for depreciation of stocks.
One strong factor to the reason that real estate has a strong position against depreciation is that its value is more directly related to the value of the dollar, so the barebones appreciation of real estate follows the rate of inflation.
For example, a well-maintained home purchased in 1991 at $100,000 should be worth about $190,000 in 2021 from inflation alone.
When factoring in any additions made to the home, and the continued increase in land development, it’s most likely that the home will be worth much more.
Another advantage that an investment in real estate has over stocks, is that the value of a house isn’t locked away until the house is sold, whereas in the stock market, the value can only be used once the stocks are sold.
Aside from standard upkeep of the property, real estate also doesn’t require constant monitoring and managing like stocks.
As a mortgage is paid off, the owner builds something called equity, which can then be used as collateral for future loans to secure lower interest rates on those loans than on loans without collateral.
These loans can be used for just about anything from a wedding, a vacation, a new car, to loans for education, and upgrades and improvements to the house that the loans are taken out against.
Another similar perk of investing in real estate over stocks, where the investment doesn’t have to be sold in order to benefit, is that you get to actually use your physical asset.
This is pretty obvious, but it should still be mentioned.
Some people may think that this isn’t that much of a benefit since there is a monthly mortgage payment and upkeep that is required.
The unfortunate reality is that in many cases, the costs of homeownership are competitive with the cost of rental housing where there is no additional benefit gained aside from simply having housing.
The entry to real estate investing and stock market investing is actually closer today than many people believe.
One of the most alluring reasons that people begin investing in stocks is that they don’t need to have a significant amount saved up, as is commonly believed to be required before buying any real estate.
As a matter of fact, there are many loan options that can make the investment into a home much more accessible, such as loans backed by the Federal Housing Administration, which offer lower interest rates, credit score requirements, and even down payments as low as only 3.5% rather than the traditional 20%.
There are loans backed by the department of veteran’s affairs that offer even more accessible rates from eligible service members.
Granted, unless you are using a VA loan, a bit of credit history is still going to be required for a loan and even a down payment as low as 3.5% may still be a larger sum of money than people can spare on a short notice.
Stocks do offer the ability to invest in them with as little as a dollar, or less in some cases.
The most notable upside of stocks over real estate, is that stocks do offer the chance of significant returns and in a much shorter time than real estate, and even other forms of investing.
Throughout the stock market’s history, there have been an incredible number of instances where a single stock increased its value by over 100% in a single day, and even still an impressive number of instances where stocks even increased multitudes of times over a few years.
The tradeoff is that massive returns are rarely actually seen in short terms but rather over longer periods.
For this reason, some of the most notable stock market rags-to-riches stories are when individuals inherit stocks, or forget they invested anything for a significant timeframe.
In terms of return, stocks have an average annual return of 9.2%, but it’s important to remember that there is no security to keep you from losing everything you invested.
Whereas real estate returns can be competitive to investing in stocks in some cases, and have the added stability of the value of the dollar.
So, in theory, your investment should continuously appreciate even if the rate is as low as the rate of inflation, which is roughly 2% give or take half a percentage.
To summarize, the discussed benefits of an investment in real estate compared to stock market investments are:
- Real estate is more stable, offers the ability to use earned equity as collateral for future loans at a lower interest rate, and offers itself as a home sometimes costing only a little more than the cost of renting.
- Stocks offer the potential for significant returns, the chance for quicker returns, and are accessible to new investors who may not have a large pool of funds.
All of this is not to say that investing in real estate is superior to stocks, because that simply is not true.
The truth is that each means of investing has unique benefits that make it desirable to people at different stages in their life.
It’s important to not discard either form of investment because of preconceived notions such as that it might feel too risky, or you don’t have a big enough down payment or high enough credit score.
Consider everything an equal possibility until you perform your own research and come to your own conclusions based on the circumstances you currently have.
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That’s a good comparison but you left out the many disadvantages of real estate investing. One, in almost all cases it becomes a second job in which you either do or arrange a wide range of mostly distasteful activities. Collecting late rent, unstopping toilets, evicting tenants, repairing hvac, etc. Few people can afford to give up most of their profits to a property manager. Two, with leveraged real estate it is not uncommon for people to go bankrupt when housing bubbles collapse or economic disasters stop renters from paying. With stocks the most you can lose is your investment, you… Read more »
Great points Steveark. I personally did not want a 2nd job as a landlord so my real estate investments are via syndications. I of course give up some profit for this convenience but for me I feel more comfortable letting professionals handle the day to day activities and property management and I collect mailbox money. I also invest in reits but one of the benefits of real estate ownership is lost (depreciation). REITs are more like real estate flavored stocks so they can behave very similar to stocks.
Which syndication did you use and how was the returns?
I have invested in 37th Parallel, MLG funds, Alpha investing, and origin income plus. The cash on cash distributions vary each quarter (covid did have an impact last year) but typically in the 3.5-6%). The big money is made when the property is sold/exited. In December my alpha investment did that and overall got over 35% annual return on it (during the hold period it had only a 2% return for most part)