Real Estate vs Stocks: Where to invest? Deciding where to invest your hard-earned money is a crucial choice that can shape your financial future. In this guide, we explore the compelling reasons why real estate may offer a more attractive investment avenue than stocks. From leveraging potential and stable cash flow to hedging against inflation, join us as we delve into the 11 key advantage that make real estate an enticing option for savvy investors.
If you're aiming to bolster your real estate investment portfolio, considering an investment in commercial real estate structured debt is a strategic move. Wondering why? The dependable and steady cash flow generated through fixed-interest payments forms the bedrock of debt investments. Borrowers continue to fulfill their monthly obligations regardless of market ups and downs. This stability plays a pivotal role in preserving the value of these investments over time.
Real estate refers to physical property that encompasses land and any structures or improvements built on it. This includes residential properties (houses, apartments, condos), commercial properties (office buildings, retail centers, hotels), industrial properties (warehouses, factories), and even land itself. Real estate can be bought, sold, leased, or developed for various purposes, such as investment, residential living, or business operations.
Stocks, commonly referred to as equities or shares, symbolize ownership within publicly traded corporations. When you own a stock of a company, you own a chunk of that company and have the potential to benefit from its financial performance and growth. Stocks are traded on stock exchanges, and their prices can fluctuate based on supply and demand as well as the company's performance, industry trends, and broader economic factors.
Returns
What is the stock market vs real estate returns? Real estate and stocks are two distinct asset classes with varying returns. Real estate returns often include rental income and property value appreciation, offering more stable and high returns. For instance, real estate structured debt offers an IRR of 18 percent. Stocks, on the other hand, yield an average return of 10% per year, as measured by the S&P 200 index. It yields returns through capital appreciation and dividends but comes with greater volatility. The choice between the two depends on your risk tolerance, investment goals, and time horizon.
Inflation hedge
Real estate is widely recognized as a resilient strategy to combat inflation over the long term. This strength stems from its ability to generate and augment income returns for investors, frequently achieved through leases tied to inflation metrics. On the contrary, stocks lack an inherent mechanism for inflation adjustment. Furthermore, stock prices often experience significant fluctuations, which can promptly erode the value of your shares.
Leverage
Among the various advantages inherent in real estate investment, leveraging stands out as the most valuable in terms of maximizing return on investment. For instance, consider an investor who bought a single-family home for $100,000 in cash. If the property's net operating income (NOI) turned out to be $10,000, the annual return on investment would be 10% ($10,000 NOI / $100,000 cash investment). Now, envision the same investor acquiring the same property using a conventional loan with a 20% down payment, which equates to $20,000 of the investor's own funds and $80,000 financed. With an $80,000 loan and a conservative first-year interest estimate of $4,000, the post-interest NOI becomes $6,000. Despite the lower NOI due to interest expenses, the first-year return on investment using leverage increases to 30% ($6,000 NOI / $20,000 cash investment)!
Generating Cash Flow
Another significant advantage of income-generating real estate is its inherent cash flow. As mentioned, your tenant pays a predetermined rent amount each month. It's important to note that cash flow doesn't necessarily imply surplus cash flow – not all properties perform well enough to cover expenses and yield additional cash. However, by entering into a lease agreement with a tenant, the investor knows the exact monthly cash inflow, potentially spanning multiple years with a long-term lease.
While dividend-heavy stocks can also offer cash flow, dividend payouts are determined by the board of directors, not shareholders.
Appreciation
The consistent cash flow from rent is just one avenue of profit for real estate investors. They also benefit from tax-deferred property appreciation. Essentially, the longer a property is held, the more likely it is to increase in value. Though real estate markets experience fluctuations, they're generally less volatile than the stock market's daily shifts. Consequently, over the long term, investors can reasonably expect property values to rise on average. Imagine an investor buying a rental property for $100,000. Assuming a conservative 3% appreciation rate (lower than historical averages), after holding the property for 10 years, its value could be around $134,000. This appreciation, combined with tenant rent payments over the decade and the amplifying impact of leverage, highlights the substantial profit potential in real estate investment.
Tax Benefits on Income
The cash received from stock dividends is subject to taxation at either the long-term capital gains rate or the ordinary income rate, depending on the dividend type. Rental income boasts two clear tax advantages over dividend income. Firstly, being passive income, it's consistently taxed at the more favorable long-term capital gains rate, potentially saving high-bracket investors 17%. Moreover, taxable rental income enjoys a significant advantage in the form of depreciation offset, a perk not available with stocks. Instead of allowing investors to deduct the entire property portion in the year of purchase, the IRS requires them to recover these costs over a span of 27.5 years for residential properties and 39 years for commercial properties. Suppose an investor acquires a $250,000 residential property (allocating $200,000 to the building, as land isn't depreciable). Even if leveraged, the IRS permits an annual depreciation expense of roughly $7,300 ($200,000 divided by 27.5 years)!
Tax Benefits on Capital Gains
Upon selling stocks, investors are liable for capital gains tax on any unrealized gains stemming from stock appreciation. Similarly, when selling appreciated real estate, investors are responsible for A) capital gains tax on property appreciation (at the applicable long-term capital gains rate) and B) depreciation recapture for the allowed depreciation (at a flat 25% rate). Nevertheless, real estate investors have a way to defer both of these taxes. Presently, Section 1031 of the Internal Revenue Code permits a like-kind exchange (also known as a 1031 exchange), enabling investors to sell a property, acquire another within a specified timeframe, and avoid recognizing any depreciation recapture or gains upon sale. Instead, these gains are transferred to the new property and deferred, and this process can be repeated without limitations.
Value-add Control
While owning a few shares in a publicly-traded company affords minimal influence over the company's management and focus, owning a rental property grants complete control over adding value. For instance, an investor might assess a property and conclude that its current state could fetch a rent of $1,000 per month, but with $50,000 in enhancements, it could command $1,750 per month.
The choice between these options is secondary. What's vital is the capacity to choose and determine when and where value is added.
Accurate Income Forecasting
This advantage aligns with the monthly cash flow secured through regular rent payments. Astute investors place considerable importance on long-term capital budgeting and tax planning. In essence, they determine how to deploy their funds for maximum returns and assess the tax implications of these choices. The stability and predictability of rental income, especially via long-term leases, furnish investors with a reliable means of forecasting income. While no investment is without risk, these projections enable real estate investors to plan with greater precision compared to the more volatile nature of stock dividends and returns.
Control Over Involvement Level
This benefit intersects with the value-add control mentioned earlier but with a slightly different emphasis. As a minority shareholder, your involvement is largely limited to passive observation. This curtails your ability to engage in a company's day-to-day operations, should you wish to do so. Conversely, real estate investors have the flexibility to determine the extent of their involvement with a property. On one end of the spectrum, they can delegate everything to accountants and property managers. On the opposite end, they could personally handle all financial and operational responsibilities linked to the property.
Irrelevance Risk
When investing in a company's stock, you're essentially betting that the company's technology, workforce, management, and strategic fundamentals will continue driving returns. But what if the technology becomes obsolete, or the company fails to innovate? What if local labor costs surge, prompting the industry to relocate overseas? In such scenarios, the value of the company's stock will inevitably plummet, potentially devastating an investor's portfolio. Residential real estate or grocery stores can't be outsourced overseas. Moreover, while real estate can become outdated, it isn't obsolete. People will always need housing and shopping facilities, even if the latter takes the form of local warehouses delivering goods via apps.
So, as can be seen above, in the realm of investment choices, real estate emerges as a robust contender, boasting ten compelling reasons that outweigh stocks. From leveraging potential and steady cash flow to inflation resilience and control, real estate's unique attributes present a solid case for investors seeking stability, growth, and financial security.
Assetmonk stands as a thoughtfully curated alternative investment platform, specializing in structured debt opportunities within the commercial real estate realm. Starting at a modest entry point of $12,000, Assetmonk provides tailored and exclusive investment avenues for its esteemed investors.
Q1. Why you should invest in real estate vs stock?
A. Investing in real estate offers unique advantages over stocks. Real estate provides the potential for steady rental income, acts as a hedge against inflation, and offers control over value-add improvements. It also offers tax benefits through depreciation deductions and can be less volatile compared to stocks.
Q2. How risky is real estate vs stocks?
A. Real estate and stocks carry different levels of risk. Real estate is generally considered less volatile due to its tangibility and potential for rental income. However, it can face risks from market fluctuations, property management challenges, and economic downturns. Stocks tend to be more volatile as they are influenced by market sentiment and economic factors. While they offer the potential for high returns, they also come with higher short-term risks. Balancing your portfolio with both asset classes can help manage overall risk exposure.
Q3. Is real estate better than stocks?
A. Whether real estate is better than stocks depends on your individual financial goals, risk tolerance, and preferences. Real estate offers advantages like potential rental income, tax benefits, and tangible assets. It can be a good option for long-term wealth building and providing a steady income stream. Stocks, on the other hand, offer liquidity, diversification, and the potential for higher returns, but they come with more short-term volatility and market risks.
Q4. What is more risky stocks or real estate?
A. Both stocks and real estate come with their own set of risks, and the level of risk can vary depending on various factors. Stocks are generally considered to be more volatile in the short term due to market fluctuations, economic conditions, and company-specific factors. This volatility can lead to significant price swings in a relatively short period. On the other hand, real estate is often seen as a more stable and tangible asset, especially when considering rental income from properties.
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