Are Stocks or Real Estate a “Better” Investment?

Investments in both stocks and real estate have created wealth… and lost it, too. They are similar and dissimilar. The better question is which is “better” for you? Investors often focus on an investment’s potential to make money or to avoid losing it. But the most successful investors consider BOTH the “dollars and cents” and whether the investment “makes sense” for them.

You might have a neighbor who made a fortune flipping houses. But if they are a general contractor and you’re better with Chat GPT than a miter saw, flipping houses may not “make sense” for you. You might have a friend who made a fortune day trading their Robinhood account. But if you lose focus reading page 1 of the Wall Street Journal and your friend watches MSN Money 24-7, day trading may not make “cents or sense” for you.

Socrates said, “know thyself.” To decide if stocks or real estate are better for you, you need to know what you know and what you don’t, what you’re good at, and what your limitations are. In the end, this isn’t an “either-or” decision. Even real estate moguls probably have a 401k or IRA account somewhere.

Whether you’re thinking about real estate to avoid the stock market’s difficulties or to simply diversify your portfolio, start with honest soul-searching because neither investment is without risk.  

Definition:

• Stock Portfolio: ownership stakes in publicly traded companies, portfolio value depends on the performance of these stocks in the stock market
• Real Estate Portfolio: investments in physical properties (residential, commercial, or industrial), income generated from rents or sale of appreciated property

The “cents “stuff”…

Upfront Capital Requirements: how much do you have to spend to start?

• Stock Portfolio: can require less upfront capital since stocks or mutual funds can be acquired with a small initial investment
• Real Estate Portfolio: typically requires a larger “down payment” for property purchase, maintenance, and other associated costs
  

Tax Implications: how much do you have to share with Uncle Sam along the way?

• Stock Portfolio: vary based on factors like dividends, capital gains, holding period, and the type of account (IRA, Roth IRA, brokerage account, etc.)
• Real Estate Portfolio: can offer tax benefits, including deductions for mortgage interest, property taxes, and depreciation

Income: getting paid along the way

• Stock Portfolio: some, but not all, stocks pay dividends, providing a source of passive income to investors
• Real Estate Portfolio: often generates rental income, providing a steady stream of income, real estate investors can also benefit from property appreciation over time
  

The “sense” stuff…

Liquidity: what if you need money?

• Stock Portfolio: easy to buy and sell stocks quickly through stock exchanges, easy to withdraw money if necessary
• Real Estate Portfolio: selling a property may take time and can involve legal and administrative complexities

Managing Risk Through Diversification: don’t put all your eggs in one basket

• Stock Portfolio: easily diversified by investing in different industries, sectors, or geographic regions
• Real Estate Portfolio: requires the purchase of multiple properties of different types and locations, may be costly given required “down payments”

Volatility: the ups and downs

• Stock Portfolio: The stock market can experience significant price fluctuations, leading to higher short-term volatility
• Real Estate Portfolio: real estate values also fluctuate but since you don’t get a monthly statement of your property value, short-term volatility is less obvious

Management and Effort: time, ability, and willingness

• Stock Portfolio: requires little effort to manage a stock portfolio
• Real Estate Portfolio: requires active management, including property maintenance, tenant management, etc.

What’s the Bottom Line?

Remember, there’s no free lunch in building wealth and all investments carry risk. It’s hard to watch your account drop day by day during a bad stock market run. But real estate values fluctuate too. Before you try “making cents” in real estate, make sure real estate “makes sense” for you.

• How will you feel if you experience a period of vacancy between renters? Will you be able to pay the mortgage without losing sleep at night?
• Are you cut out for dealing with a 1 a.m. tenant call when the toilet overflows? Do you have the financial discipline to set cash aside to replace the water heater when it breaks?

There are many different roads to building wealth so long as you have what it takes to make the journey successful. The good news is, you don’t have to select just one. Maybe real estate is “better” for you, maybe a stock portfolio is. Perhaps, you’re cut out to invest in both. The key is to objectively evaluate the risks and your ability to manage them. If you’d like to talk more about your situation, reach out to talk to a MoneyNav coach.

Commonwealth Financial Network® and MoneyNav do not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.