Asking the questions, “Which is a better investment—real estate or stocks?” There is no such real comparison between the two. A lot of it comes down to your personality, preference, and style.
When you invest in real estate you are investing in physical land or property. Some real estate cost you money and some others get your income. Say, for example, you are holding a vacant land with a thought of selling it to a developer someday but for now, it comes with taxes and maintenance to you. Similarly, some real estate is a cash-generating like an apartment building, a rental house or a mall where the tenants are sending you the checks from which you pay the checks and keep the difference as profit.
When you buy shares of stock, you are buying a piece of a company. Whether that company makes ice cream cones, sells furniture, manufactures motorcycles, creates video games, or provides tax services, you are entitled to a cut of the profit, if any, for every share you own. If a company has 1,000,000 shares outstanding and you own 10,000 shares, you own 1% of the company.
The company’s Board of Directors, who are elected by stockholders just like you to watch over the management, decides how much of the profit each year gets reinvested in expansion and how much gets paid out as cash dividends.
Let’s look at the pros and cons of each type of investments.
Pros of Investing in Real Estate
When you invest in real estate, you invest in something tangible. You can look at it, feel it, and drive by with your friends. For some people, that’s important psychologically.
It’s more difficult to be defrauded in real estate compared to stocks if you do your homework because you can physically show up, inspect your property, run a background check on the tenants, make sure that the building is actually there before you buy it, do repairs yourself, with stocks you have to trust the management and the auditors.
Using debt in real estate can be structured far more safely than using debt to buy stocks for trading
Cons of Investing in Real Estate
Compared to stocks, real estate takes a lot of hands-on work. You have to deal with the midnight phone calls about exploding sewage in a bathroom, gas leaks, the possibility of getting sued for a bad plank on the porch, and a whole host of things that you probably never even considered. Even if you hire a property manager to take care of your real estate investments, it’s still going to require occasional meetings and oversight.
Real estate can cost you money every month if the property is unoccupied. You still have to pay taxes, maintenance, utilities, insurance, and more, meaning that if you find yourself with a higher-than-usual vacancy rate due to factors beyond your control, you could actually have to come up with money each month
Pros of Investing in Stocks
It is proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world. Nothing, in terms of other asset classes, beats business ownership.
Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn’t require any work on your part. There are professional managers at headquarters that run the company. You get to benefit from the company’s results but don’t have to show up to work every day.
The diversification is much easier in stocks than in real estate.
Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer.
Cons of Investing in Stocks
Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors.
The price of stocks can experience extreme fluctuations in the short-term. Your Rs. 40 stock may go to Rs. 10 or to Rs. 80. If you know why you own shares of a particular company, this shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap or sell shares if you think they are too expensive.