Real Estate vs. Stocks

Read our Advertiser Disclosure.
Contributor, Benzinga
November 3, 2023

If you want to grow your net worth over time, which asset will produce better returns: stocks or real estate? Although many investors choose to invest in both types of assets for a more diversified portfolio, new investors might want to learn about the pros and cons of each asset to determine where to begin. Our guide will help you learn more about both stocks and real estate investments and help you choose where to start investing. 

Stronger Return Potential

The first important thing to note when comparing stocks and real estate is that stocks tend to increase in value more quickly. The S&P 500 index fund has traditionally produced an annual return of 9% to 10% of your invested amount, while real estate tends to increase in value by an average of 5.5% per year. This doesn’t tell the whole story, however, as real estate has additional potential in the form of rental income. Real estate investments also tend to hold their value more consistently, which can be a major bonus for those getting closer to retirement age. 

Understanding Investing in Stocks

Stocks are shares or ownership in a company. When you own stocks, you essentially own a portion of the company's assets and earnings. Stocks are bought and sold on stock exchanges, and their value can fluctuate based on various factors such as the company's financial performance, market conditions, and investor sentiment. Investors buy stocks with the expectation of earning a return on their investment through capital appreciation (increase in stock price) or dividends (share of company profits distributed to shareholders). Stock ownership also gives investors certain rights, such as voting rights in corporate decisions.

Stocks: Pros and Cons

Before you invest in the stock market, be sure that you understand both the benefits and the potential drawbacks. 

Stock Pros

  • Stocks are much more liquid investments: If you run into an emergency expense, it’s relatively easy to liquidate your investments in the stock market — especially if you’ve invested in a major index fund or exchange-traded fund (ETF). You can sell your shares in as little as a few minutes assuming that there is a buyer willing to accept your ask price. If you want to sell your real estate investment, you’ll need to find a buyer and wait until the sale clears before you receive your funds. This can mean months or even years of preparation time before you finalize the sale.
  • Stocks give you a more concrete estimate of your net worth: When you buy a share of stock, your brokerage account will automatically show you how your investment’s value is changing over time. At the end of the day, each stock that you’ve invested in has a definite value, which gives you a solid idea of your net worth. If you invest in real estate, the value of your investment might vary depending on local market conditions, the number of repairs that your home needs and many additional factors.
  • Stocks have fewer fees: When you purchase a property using a mortgage loan, you’ll need to pay closing costs in addition to your down payments. As a general rule, you can expect your closing costs to equal 3% to 6% of the total purchase price of the property you’re investing in. When you invest in stocks, you’ll only need to pay commission fees — and there are now plenty of brokers that offer $0 trading. 

Stock Cons

  • The price of stocks can change frequently: Stock prices are significantly more volatile than real estate prices. If you’re looking for an investment that will hold a relatively stable value over time, stocks might not be the best option for you.
  • Stocks can reach $0 in value: While your real estate investment might decrease in value, it’s very unlikely that any real estate you purchase will ever be worth $0. If a company you invest in goes out of business or gets delisted from a major exchange, your investment can plummet in value in a way that’s unlikely to happen with real estate.
  • Stocks have less functional value than real estate investments: After you invest in a property, you’re free to use the property however you wish. For example, you can live in it full time, use it as a vacation home or even rent it out to increase the value of your investment even further. Stocks have much less functional utility than property. 

Understanding Investing in Real Estate

Investing in real estate refers to the act of purchasing, owning, and managing properties with the goal of generating income or appreciation over time. It involves acquiring properties such as residential, commercial, or industrial buildings, land, or even real estate investment trusts (REITs). Real estate investments can provide various benefits, such as rental income, potential tax advantages, diversification of investment portfolio, and the potential for long-term capital appreciation. However, it also comes with risks and challenges, such as property management, market fluctuations, financing, and legal considerations.

Real Estate: Pros and Cons

Now, let’s take a look at some of the benefits and drawbacks that come with investing in real estate.  

Real Estate Pros

  • Buying a home is relatively simple: While there are many steps to the home buying process, its basic steps are relatively easy to understand. Choose a property you’re interested in, submit an offer, apply for a mortgage loan and attend a closing meeting. Researching stocks and each company’s future profit potential can be much more confusing and time-consuming.
  • Investing with debt is more responsible when buying a home: Most homebuyers don’t purchase their property outright. Instead, they bring a small percentage of the final selling price of the home, a “down payment,” to closing and borrow the remaining value in the form of a mortgage loan. Investing with debt on the stock market (commonly referred to as “margin trading”) can compound losses due to the volatility of the market and is risky even for seasoned investors.
  • Real estate investments can hedge against inflation: Real estate has traditionally acted as a hedge against inflation. This means that when inflation rates rise, the price of property and rent also tend to rise. 

Real Estate Cons

  • Buying a home is more expensive: Most stockbrokers allow you to invest in fractional shares of stock, and you can get started with just $1 in many cases. Property is significantly more expensive to get started with — not only will you need to save up for a down payment, but you’ll also need to cover closing costs, which can equal thousands of dollars. If you don’t have much money to invest, your real estate investment options will be limited.
  • Properties require more work than stocks: If you’re looking for a “set it and forget it” investing option, real estate likely won’t be the best option for you. Properties require continual maintenance and repairs in order to retain their value. If you decide to rent out the property, you’ll also need to be aware of local tenants’ rights laws and be sure that you’re abiding by them.
  • Real estate investments can be difficult to liquidate: If you run into an emergency expense, it’s relatively difficult to liquidate your real estate investment when compared to stock market investments. If you want to sell your home, you’ll need to make any necessary repairs, find a buyer, go through the closing and negotiating process and more before you receive the funds. 

Best Real Estate Investment Platforms

If you prefer to invest in real estate through an online investing platform, consider exploring a few of our favorite options below.  

Best Online Stock Brokers

If you think that investing in stocks could be right for you, you’ll need to open a brokerage account. A brokerage account allows you to buy and sell stocks using an online platform. Don’t already have a brokerage account? Consider a few of our favorite options below. 

Real Estate vs. Stocks: Which Is Right for You?

It’s difficult to say which is a better investment between stocks and real estate because each offers its unique benefits. If you’re looking for a passive, liquid investment, stocks might be the right choice for you. If you’re looking for an investment that may hold its value more consistently and that has utility, real estate could be a great option for you. 

Frequently Asked Questions

Q

Is real estate better than stocks?

A

Whether real estate is better than stocks depends on individual preferences and financial goals. Real estate offers the potential for steady cash flow through rental income and the possibility of appreciation in property value over time. It also provides tangible assets that can be leveraged for financing opportunities.

Stocks offer liquidity, diversification, and the potential for higher returns, especially in the long term. They require less active management and offer more flexibility in terms of buying and selling.

Q

Do millionaires invest in stocks or real estate?

A

Millionaires often invest in both stocks and real estate as part of their investment portfolio. While some millionaires may prefer one asset class over the other, diversifying investments is a common strategy among wealthy individuals. Stocks offer the potential for high returns and liquidity, while real estate provides the opportunity for long-term appreciation and passive income through rental properties.

Q

Is real estate or stocks more risky?

A

Both real estate and stocks have their own risks, but it is generally believed that stocks are considered to be more risky. The stock market can be highly volatile and unpredictable, with prices fluctuating rapidly based on various factors such as economic conditions, company performance, and investor sentiment.

The real estate market can experience periods of downturns, and property values can fluctuate. There are also potential risks associated with property management, such as unexpected repairs and vacancies.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.