How does Investing in Real Estate Compare to Stock Investing? 

Are you thinking about taking the plunge into the world of investing, but aren’t sure where to start?

You’re not alone! In fact, there are a lot of different options available when it comes to investment vehicles, and it can be tough to decide which one is right for you.

In this blog post, we’ll take a look at two of the most popular options – stocks and property – and compare and contrast the pros and cons of each (I’ll do my best to offer an unbiased view!).

By the end of it, you should hopefully have a good idea of which option is best for your unique needs and circumstances. So let’s get started!

The Pros and Cons of Investing in Real Estate VS Stocks

Stocks are often touted as the best way to grow your money over the long term. But for many people, real estate investing offers a more appealing option.

Here are some of the pros and cons of investing in real estate:

Advantages of Real Estate over Stock Investing

1. You have more control over the value of your investment

With stocks, you’re at the mercy of the stock market.

But with real estate, you have more control over your investment – you can choose where to invest, and you can actively increase the value of your asset through things such as cosmetic or structural renovations.

2. Real estate is a physical asset that you can see and touch

Property is something all of us are exposed to starting from a very young age. Businesses and stocks on the other hand – not so much.

For this reason, it’s easier to understand the value of investment properties and get started in real estate investing, whereas stocks can be intimidating for beginners who are put off by the overwhelming amount of financial jargon involved.

3. Real estate has the potential to generate passive cashflow through rental income

Rental income passively provides actual cashflow through rent on a regular basis that you can see appear in your bank account balance. Although you have to becareful of the high expenses which chew up the rent received such as ongoing real estate agents fees, strata fees if you own an apartment, maintenance and repairs etc meaning your actual net cashflow can be quite low or non-existent.

Not all stocks generate passive cashflow, and even when they do (through things such as dividends), they aren’t as frequent and predictable in terms of amounts.

4. Investing in real estate can provide tax advantages

Investing in real estate can provide tax advantages not available with other investments such as stocks.

Some of these tax advantages include things such as:

  • Negative gearing
  • Claiming interest on your mortgage
  • Capital gains tax exemptions if it is your residence
  • Depreciation
  • Not having to pay tax on money you withdraw through equity loans

5. Real estate returns are more stable

Stocks tend to be more volatile than property, so your returns can fluctuate greatly in a short space of time. However, this also means that there is the potential for greater returns if you pick the right stocks. With property, on the other hand, your returns are generally more predictable, but they tend to grow at a slower rate.

However, truthfully speaking, the only reason why this is the case is that we don’t have real-time, daily, minute-to-the-minute, second-to-the-second price quotes for property. Can you imagine if everyone could see the values of properties going up and down every second like stock prices? Things would behave in a very similar fashion to the stock market.

6. Real estate returns can be magnified through leverage

Real estate returns on average, aren’t that great in terms of percentages. But because most people leverage (i.e. borrow money) to purchase properties they otherwise couldn’t afford with their capital alone, their returns are magnified. So for example:

  • if you put down a deposit (equity) of $100,000 to purchase a $500,000 property
  • and over time the property value increases by 10% to $550,000
  • you’ve made a return of $50,000 on $100,000 of initial capital (a 50% return on your equity)

You can leverage with stock investing too – but because share prices are more volatile, it carries a lot more risk.

Disadvantages of Real Estate Compared to Stock Investing

1. Real estate is a more illiquid investment than stocks.

Whereas you can sell a portion of your shareholdings almost instantaneously, you can’t just sell a room of your house – and even if you could (through something like subdivision of your land), it would be very costly and take much longer to happen.

2. Real Estate is a more hands-on investment than stocks

With physical assets come tangible responsibilities…

  • You need to be prepared for the possibility of vacancy, as you may not always have a tenant lined up to rent your property
  • If there are any damages or deterioration of parts of the property, you will need to fix them (e.g. blocked drainage, air conditioning breakdowns)

And to deal with all of the above, you may need to hire property managers and deal with tenant issues.

3. Even with leverage, you generally need a good amount of capital to get started

With investment properties, you will likely need to put down a large down payment, as well as pay for very high acquisition costs like government stamp duty, solicitors costs, and a myriad of other fees.

And this happens before you even start to see returns (if they happen at all), it can also induce a lot of stress dealing with legal paperwork and jargon — not to mention (in most cases) a lifetime of mortgage debt that’s likely to be paid off over the span of multiple decades.

4. It’s much harder to diversify

Because of the high price tag associated with investment properties, for most people, it’s difficult to diversify across multiple different investments unless they leverage even further.

For this reason, it’s very easy to have “all your eggs in one basket”, which at best will work wonders for your returns, but at worst, will leave you trapped with a failed investment you continue having to pay off. This is especially true when I see so many self-managed retirement funds literally hold one property since that is all they can afford, so their comfy retirement relies on this one investment to go well.

Which One’s Right For You? Real Estate or Stocks?

So now with the major pros and cons of real estate investing compared to stocks listed – what’s your verdict?

For me personally, I’m invested in both, but I lean more towards the stock investing and trading side (no surprises there!).

Not many people know this about me, but earlier in my journey, I actually started off investing in multiple investment properties. But what I found was that I was never ‘financially free’ as promised by all the gurus who sold me the idea. Not to mention, once you have a few properties, maintenance becomes a hassle as the properties get old – and although the passive gross cashflow sounded great, net cashflow was extremely poor because of the massive amounts of expenses involved (i.e. debt, maintenance, agent fees, strata etc.), so I never really felt like I had True Freedom.

In other words, I was asset-rich and very cash-poor.

My wife and I love to travel around the world, and part of that involves not having to monitor and maintain properties in Australia all the time, so I decided to sell almost all of them and focus my efforts on investing in an asset class I could take around with me on my laptop everywhere I went.

That’s not to say that’s what everyone should do though – that is my personal choice. You on the other hand, may enjoy the thrill of managing physical assets with a more hands-on approach.

So take all of the above into consideration – the pros, the cons, as well as your personal preferences for how you like to manage your portfolio.

As long as it works for you and it fits into how you like to operate, that’s all that matters 🙂

Related Article: There is a method to combine the best of both worlds by investing in something called a Real Estate Investment Trust (REIT). If you’d like to learn more about that, I highly encourage you to check out my post on REITs here.

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