Real Estate vs Stock

Real estate and stocks are some of the most popular assets for investors. Both assets can generate profits. However, investors should choose the one that fits their investment objectives and risk tolerance best. 

The advantages and disadvantages of the two kinds of investment will help us better understand which asset is more appropriate for specific circumstances.

Real estate 

There are two types of real estate investment, namely residential properties like homes and apartments and commercial property like office blocks, shopping malls, and warehouses. These can either be bought and sold or rented on a monthly, quarterly, annual basis, etc.

Advantages

• The concept of real estate investment is simple: Unlike investing in the stock market, real estate is a relatively straightforward concept. Once you understand the market needs, you don't need to have technical analysis skills. In addition, you don't have to spend a lot of time in front of a computer watching the price action of an asset.

The biggest challenge in real estate is getting the required funds and providing the market with the type of buildings/properties it needs. Real estate also gives some investors the satisfaction of having a tangible asset in their portfolio.

• Investment debt is more secure in real estate than in the stock market: When you take a loan or a mortgage and invest it in real estate, your money is safer because you will typically have a well-weighted period to refinance the debt. The stock market, on the other hand, is riskier because you can lose a large amount of money within a short time through margin trading.

• Land-based assets offer a good cushion against inflation: Rental prices and the cost of buying homes and apartments usually appreciate during inflation. This means that the value of your real estate investment will rise in such times, thereby protecting your income.

• Tax benefits:  Earnings from the sale of your principal home may qualify for tax exemption under certain circumstances, allowing singles to free themselves from taxes on earnings of up to a quarter-million dollars and couples on earnings of up to half a million dollars.

On the other hand, you have to pay capital gains tax on the sale of your stocks at a profit. In addition, reinvesting your earnings from the sale of your commercial property may qualify for tax exemption under certain circumstances.

Disadvantages

• Real estate investments may be time-consuming: For those who opt to develop their property from the ground up, real estate can be quite tasking. The process of identifying an ideal location, mobilizing equipment, and supervising construction can be energy-supping. In addition, there's the maintenance work that comes with the property you've rented. These require a significant amount of time, besides the resources needed.

• It is capital-intensive and can suffer liquidity problems: Investing in real estate requires significantly large capital. Upon building or acquiring the property, you are never assured that you will get tenants to occupy it throughout.

In addition, it may take you a long time to get a buyer willing to pay the listing price. This can easily put your investment in a state of illiquidity. Stocks, on the other hand, can readily be sold within a short time after instructing your broker.

• The transaction costs in real estate investments can be prohibitive: You have to pay for many costs before owning property. Some are related to statutory deductions, while some may be related to paying your realtors.

In the end, such costs may constitute a significant portion of the acquisition, with some estimates showing that they can go as high as 10%. Transaction costs in the stock market are comparatively lower, with many brokers typically charging zero fees.

• The cost of diversification is higher in real estate: Diversifying in real estate implies having different types of property, including commercial premises, apartments, and mansions, etc., spread across different locations. This is not a cheap exercise and requires a  substantial amount of money. On the other hand, you can invest a comparatively smaller amount of money in stocks of companies in different market segments, ETFs, options, etc.

Stocks

Investing in the stock market can be very rewarding, but it also comes with potential risks, as discussed below.

Advantages

• Stocks have high liquidity: The stock market is active and open for business for at least five days each week. With thousands of traders always looking for opportunities to profit, you can easily tell your broker to sell your assets at a reasonable price.

Buildings and other land-based assets are comparatively more difficult to sell. You may be forced to hold on to your asset for a long time, in the absence of a buyer. This is not uncommon, with the 2008-09 housing crisis coming to mind.

• Stocks give investors better options for diversification: The stock market offers more options on the assets to mix in their portfolio. You can go for stocks in the tech sector, consumables, ETFs, index funds, etc. On the other hand, you would need a substantially larger capital to achieve variety with real estate.

• Stocks have lower transaction costs: In the era of fees-free stock trading, transaction costs for stock investment have significantly reduced, and the real estate sector pales in comparison. This extends to other related assets such as ETFs and mutual funds.

Disadvantages

• Volatility: Stocks are traded by the minute, and prices can move with wide margins over a short period. This can particularly be worsened when market fundamentals trigger panic in the market. This can send a stock rising exponentially or tumbling down quickly within a few hours.

The same cannot be said about real estate assets. For example, the value of a building cannot reduce by half in a day, but this is relatively common for stock.

• Taxes: Anytime you sell a stock at a profit, you are liable to pay capital gains tax. In addition, dividends earned on stock also attract taxation.

• Stock trading requires a deep understanding of the technical and fundamental operations of the securities market. Stock trading can be an emotionally draining affair, which makes it unattractive to some investors.

Bottom line

Stocks and real estate are investment options that can be both rewarding and costly.  Each of them has its strengths and limitations. You should evaluate these aspects and select the option that best aligns with your investment aspirations, as well as your own capabilities.