Stocks vs Real Estate - A Detailed Comparison

“It’s not real estate, gold, stock, hard work, or money that makes you rich; it is what you know about real estate, gold, stock, hard work, or money that makes you rich. Ultimately, it is your financial intelligence that makes you rich.”

Robert T. Kiyosaki, an American businessman and author

The Beginning

Buying and reselling houses is seen as a fast money making method and has been around for a long time. Property ownership was the primary way of the affluent to ensure their wealth during the pre-colonial days.

Today, the real estate sector is dominated by the wealthy and influential developers as well as dealers who put considerable sums in developing big projects. These days, even small scale investments have expanded significantly and seen it as a means to make a profit when the interest rates are low.

The concept of stock trading came up when the trading between countries has started. The necessity to start large businesses raised the requirement of vast sums, which was beyond the capacity of a single merchant.

Then a group of investors put together their money and became co-owners of the company of these merchants. Thus, it formed a joint-stock company. Trading on companies started in 1602 on the Amsterdam Stock Exchange.

What is Real Estate Investment

Real estate investment refers to investing in any residential, commercial, or industrial structure to make a return out of it. It also refers to buying a piece of land. By investing in real estate, the investor becomes the owner of the property. There’re different types of real estate investing.

House Ownership: While buying a house, you're making a form of real estate investment. If the acquisition is for your own staying purpose, then you're neither going to make money actively nor going to increase your regular cash flow. Instead, you're making a long-term investment. But you need to pay taxes and insurance on the property regularly.

Rental Properties: Owing to a property to rent-out is another way of real estate investment. Rental income can give you additional financial stability, and you can invest this amount to achieve long-term goals.

You can rent out a bedroom, an entire house, or a commercial space. Expenses associated with rented houses are more as they require regular maintenance and repairs. Apart from these, the owner needs to pay taxes and insurance on the property regularly.

House Flipping: House flipping refers to buying a house at a very lower price. Develop it and then sell it at a high price. Here the house will be purchased to make money fast, i.e., sell it quickly. Usually, the period between the buy and sell will be a few months. The investors can flip the houses in these two ways:

• Buy a distressed property, whose value has the potential to go up after up-gradation.  After revamping, sell it at a significantly higher price than its acquisition price.
• Buy the property when the prices are on the upswing. Hold it for a few months (waiting for the price to go up further) and sell it at a much higher price without any modification in the property.

If done in the right way, flipping can fetch a considerable amount of money and at the same time, can be a good investment option.

What is REITs

REIT refers to Real Estate Investment Trusts. REIT is an unconventional way to invest in real estate. Here, the trust sells the shares to investors and in return, the investors get the dividend income and total returns.

REITs allow investors to earn through real estate investments without physically buying and managing a property. REITs invest in a broad category of real estate types ranging from houses to big infrastructures.

How do REITs make money?

REITs make money by leasing and renting the properties. They pay 90% of their taxable income to the investors.

How to invest in REIT?

Just like common shares, investors can buy the shares in a REIT from major stock exchanges. They can also invest in REIT mutual fund or ETF.

Is Investing in REIT Recommended?

If you're planning to invest in real estate through REIT, then you are not going to have control over the decisions. The trust takes all the arrangements. If you have time to manage the property, then the conventional way is always recommended, on the other hand, recommended for busy bees looking to make money from real estate.

What is Stock Market Investments

While investing in stock market, you’re not just putting money in the business of a company; instead, you share the ownership of that company with many other people. The shareholders enjoy many rights like voting right, right to inspect registers and documents, ownership, right to take part in the process of appointment of directors as well as auditors, dividend,  right to take legal actions against directors, etc.

Shares can either be common shares or be preferred shares. The common shareholders have voting rights but get the last preference in the money if the company goes bankrupt or the business got liquefied.

On the other hand, the preference shareholders get the preference in the dividend payout, but they usually have no voting rights.

Real Estate vs. Stock Market

Pros and Cons of Stock Investments

Stock Investment Pros

• Easy to buy/sell and offer a great flexibility
  
  Buying and selling of stocks are straightforward as they are very liquid. So the shareholders' money never stuck up in one place for a long time.
  
  They're highly flexible - the investors can reallocate them into another account very smoothly. The shareholders can easily change the ownership of the shares to another person or institution.
  
  Borrowing against stocks seems uncomplicated than that against the property.
  
  
• Diversification
  
  Diversification is very easy when it comes to stock than real estate.   In the stock market, investors have a choice to select from an enormous number of companies from different sectors. They've even the option of investing in growth stock, value stock, etc.
  
  Through diversification, investors can avoid the risks related to a particular sector or a company by switching to another one.
  
  
• Higher profits
  
  Share market investments can carry profits in two ways: Through capital appreciation and Through the dividend.
  
  Usually, the investments in blue chips and growth stocks witness a sharp appreciation in the value. These stocks have a history of paying dividends regularly.
  
  Value stocks help the investors to acquire the shares at a lower price and in a year or two, they have the potential to give very high returns.

Stock Investment Cons

• Volatility
  
  The share market is known for its volatility. The price of the shares witness ups and downs during the market hours. Any news (both positive and negative) can influence the price.
  
  The news can be sector-specific, company-specific, or maybe about political and economic issues. In short, there is no guaranteed return on share market investments.
  
  
• Proper research on companies is essential
  
  Proper technical as well as fundamental analysis is necessary to find good quality companies. Research on companies is not an easy task as they require an understanding of chart patterns and financial statements.
  
  Understanding the fundaments of the companies may take days, even for the experts, and most of the time, it's beyond the understanding of an average investor.
  
  
• It’s an emotional investment
  
  The price of the stocks moves up and down. Many investors take buy/sell decisions in a panic and that results in huge losses.
  
  While some get attached to individual stocks and won't feel like selling those stocks. It again impacts the potential growth of the portfolio value.

Pros and Cons of Real Estate Investments

Real Estate Investment Pros

• Tangible and real
  
  When you're investing in real estate, you're purchasing a tangible asset. You can see it, touch it and feel it. You can tell others that "This is my property.
  
  Real estate is straightforward to understand than many popular intangible options available in the financial market today. Not any complex algorithm or any theoretical concept involved in this investment.
  
  
• A hedge against inflation
  
  House values as well as the rent income move up with an increase in inflation. Thus real estate is a good hedge against inflation. Anyhow, rental properties should be re-leased every year to take the full impact of the up movement in the rental income.
  
  
• Control over the property
  
  Managing real estate is totally under the control of the investor. Through proper management, the value of the property can be increased and can create wealth.

Real Estate Investment Cons

• It’s a time game
  
  Real estate investments require a lot of research on the location, type of properties, potential return, etc. Many people make bad investment decisions due to lack of research, and as the reach takes a lot of time, some lose interest and give up the plan despite an enthusiastic start.
  
  The location of the property plays a vital role in real estate investments. It decides the demand and supply. Sometimes, due to oversupply, the price of the property remains subdued for an extended period, even though the location is excellent.
  
  The investors should avoid properties located in areas where the crime rate is high and also those areas which are vulnerable to natural calamities.
  
  
• Complex taxation process
  
  The tax system of real estate is very complicated and at the same time, different from any other investment. The income from rent gets the same treatment as the normal income.
  
  The amount paid on repairs and maintenance is deductible expenses. Suppose your rental income for a year stood at $15,000 and you made maintenance on the property worth $5,000. Then your taxable rental income will be $10,000 only.
  
  If you're selling a property within 12 months of its acquisition, then the gains will be taxed as per short term capital gain tax.
  
  The short term capital gains are considered as part of the annual income. Suppose you earned a short-term gain of $25,000 through the sale of a property and your annual income is $45,000. Then, you'll be taxed at 22% rate as your total income is $70,000.
  
  To make the gains eligible for long-term capital gains, it should meet specific prerequisites.
  
  The owner should stay in it at least two years of the five years leading up to the sale. An exemption of $25,000 in the profit from the long-term capital gain taxes if sold it as an individual and $50,000 if sold it as a married couple filing jointly.
  
  
• Vacancy risk
  
  Buying a property for renting out doesn't mean a quick cash flow. Many times, it may take a long period to get the tenant. It's one of the significant risks of real estate investment and results in negative cash flow.
  
  
• Risk of having a bad tenant
  
  Getting just a tenant won't guarantee any profitability. Some tenants make your house completely trash and you need to make significant repairs to make it habitable again. Some may not pay the rent for many months in a row. In such a case, you may deal with the evacuation process, which is costly and time-consuming.

Which is the better investment stock or house (Real Estate)?

Stocks and real estate investment have many similarities. They both are the game between the risk and reward. They both have the potential to make you either super rich or bankrupt.  They both are appropriate for long term investments.

Depends upon their choices, some select stocks while others go for real estate. But stocks always have the edge over real estate due to high liquidity, lower transaction fees, and less minimum investment amount.

See - Mutual Fund vs Stocks Comparison