Rental properties and stocks remain some of the most popular investment strategies for those who are looking to grow their capital. While both of these options can help you increase your wealth, you should know that each of them comes with pros and cons.
If you are like most Americans who participate in their employer retirement plan, you are probably familiar with stock investments to a certain extent. The good thing is that you don’t necessarily have to choose between stocks and real estate - as both of these forms of investment can reap a profit if done right.
Whether you are a seasoned investor or just starting out, this article will help you figure out what type of investment works for you and to avoid any unnecessary mistakes along the way.
Is rental property a better investment than stocks?
This is a common question among would-be-investors who are trying to figure out where to place their savings. The answer depends on your wants and needs, your financial situation, and the amount of time you are willing to invest. While a rental property is often considered passive income, it requires a substantial amount of time and financial investment.
Successful property managers devote a considerable chunk of time to managing their real estate, staying up-to-date with the recent real estate trends, and following the real estate market.
Investing in the stock market, on the other hand, demands a lot less work than real estate. But don’t assume that you can simply buy a bunch of stocks and forget about them while your investments continue to grow passively.
The stock market is seen as riskier, as it can turn volatile in a matter of hours because of military conflict in another country or a tricky political situation that could undermine the world’s economy. Even speculation, which triggered the Great Depression in the U.S., can stir up panic and bring the market to its knees. Indeed, smart stock investors know when to invest and when to cash in their shares before the market turns for the worse.
Here are a few insights that will help you figure out the right form of investment for you.
Why should you invest in rental property or stocks?
Investing money into rental property or stocks is a great way to build a solid portfolio and watch your investments grow over time. If you are ready to roll up your sleeves, do the research and work hard to become a successful investor, this is the right option for you.
What is the best investment, property or shares?
Whether you want to invest in property or shares depends entirely on you. There are many factors to consider, and if you want to make the best choice, you should carefully assess your situation and look into recent economic trends and the overall global market projections.
Is owning an investment property worth it?
Owning a real estate property is worth it if you are ready to invest time and money into your business. Besides having capital for a downpayment, taxes, and potential repairs, you should also plan to put in the work to generate a steady income.
Turning a profit on a piece of real estate also requires a fair amount of patience, as you have to wait while your property appreciates before you could sell it for profit.
Is now a good time to invest in stocks?
It’s never a bad time to invest your money in shares of high performing companies. While you can’t guess how well their shares will perform, you are likely to see substantial growth over time. Your goal here is to place your capital in companies that you believe (based on your research) are going to perform well over time.
The pros and cons of investing in real estate
As a real estate investor, you can place your money into commercial or residential properties. Commercial property could be an office building, a strip mall, or an apartment building with a few or multiple units.
Real estate investment can help you weather recession
Unlike stocks that can tank during the recession, a strategically positioned piece of real estate can help you get through bad economic times and earn sizable profit along the way.
During an economic downturn, when people cut back on pleasure and entertainment, most money is spent on necessities such as housing, food, and transportation.
After all, people always need a place to live. If you own an apartment building in a desirable area and price it competitively, you can generate a consistent income stream.
Real estate is a great way to write-off your mortgage
As a real estate owner, you could qualify for many benefits such as various tax breaks along with tax deductions for mortgage interest. Also, you can write off certain expenses associated with running a property, such as repair and maintenance bills.
Real estate is a tangible asset
Unlike stocks that fluctuate because of factors outside of your control, a piece of real estate is a tangible asset, and for the most part, you have complete control over it.
As a real estate investor, you can pick the location of your property, dedicate a specific amount of time to maintenance, communicate with your tenants, and monitor your progress.
Real estate is simple
Real estate is pretty straightforward: You buy a property, you put in the time and effort to run it, and generate a steady cash flow that offsets your expenses. In the meantime, your property appreciates, and years later, you sell it for more than you paid for it. While it might not always be the case, it is the perfect scenario to which every novice real estate investor should try to aspire.
Real estate is a commitment
Unlike a trendy stock that can be sold at a moment’s notice, owning real estate requires commitment that could take years to grow in value, and let alone, sell.
When you invest money in a piece of real estate, you have to understand that not only do you have to carve out time to spend on running it, you also need to stay put for a couple of years, and when you finally want to sell it, spend time to get it market-ready.
While you can turn your real estate investment into passive income with the right tools and a proper management system, you will have to stay put and stay on top of your game to create a successful enterprise. This requires discipline, patience and constant learning.
Investing in real estate presents unique challenges
While buying a real estate property is straightforward, it comes with certain risks that could potentially result in a financial loss.
That’s why, if you don’t have significant experience in real estate, it’s wise to consult with someone who knows the industry well.
Here are some of the pitfalls to watch out for:
- Buying at the wrong time - If you buy a property at the time when prices are over-inflated, you could be looking at mounds of debt when prices drop a few months later, and your property goes underwater.
- Buying a property in a bad location - Before you make a purchase, research the area and take a close look at stats such as demographics, crime, and household incomes. This could provide you with a good snapshot and help to avoid the area that doesn’t attract tenants with disposable income.
Other factors to consider are a nearby school district, grocery stores, and amenities that could boost your chances of success, if you plan on renting your property to families with children.
- Liability risks - As a landlord, you could be liable for accidents that occur on your property. That’s why it is critical to get your property inspected regularly and invest in insurance that would cover you in case your tenant files a lawsuit.
Your property tied to a specific market
When you buy a property, you are tied to a specific location, and if something happens in the area, or the neighborhood, chances are, your property’s value could be affected.
This could present a big problem, because if you have committed a significant investment in your property, you could take a big hit.
Not all tenants are equal
A good tenant is like a goldmine: he or she pays rent on time, keeps the place clean, and is polite and courteous to you and other residents. This is an ideal scenario, and while you can ensure it by screening your potential tenants, it might not always be the case.
Some tenants could be a nuisance, cause damage to your property, and disrupt other residents on your property. As a landlord, you should be prepared to file an eviction, go to court, and renovate the property after tenants leave it in a bad condition.
Also, some states and cities have “tenant-friendly” laws that could cost you a lot of time and money in court. You should become familiar with these regulations before investing your money into a rental property.
Investing in stocks, pros, and cons
There’s an adage which states that you can make a lot of money by investing in stocks. While you can certainly make a good income from the stock market, there’s more to it than just buying a bunch of stocks and sitting on them while they are creating a passive stream of revenue. Investing in stocks has its pros and cons, and before you bet your money on them, you should weigh the benefits of both sides.
- Stocks are liquid - Stocks are liquid, while real estate is not. You can sell your shares at any moment during trading hours. On the contrary, you could list your piece of real estate on the market and not see a single potential buyer for months, only to be lucky to break even.
- Low barrier to enter - While you need thousands of dollars to make a downpayment on the property, you can buy some stocks for as low as pennies on a dollar and watch them grow over the years. This means that anybody could enter a stock market and make money on the side.
- Stocks are easy to diversify - Because you can buy as many stocks as you want, it’s easy to diversify your portfolio. This, on the contrary, couldn’t be said about real estate, which requires a significant upfront investment, making it tougher to put your money somewhere else if you have a big mortgage.
- You can generate a lot of money - Over time, stocks can bring in a lot of profit because the stock market generates about 10 percent in annual gains on average. And the good news is you don’t need to be a financial analyst or a stock market pro to manage your stock portfolio successfully. One way to do so is to go for low-fee index funds that often yield similar returns to a stock market.
- Stock market is volatile - Stock market shares are considered a more risky investment because of their unpredictable nature. While you can sell them quickly, you also have to study and stay on top of the recent trends and global events that often dictate the direction of the stock market.
- You are not guaranteed to make money - Stocks are a great investment tool, but they are rarely predictable. The stock market is quite volatile, and you need to closely monitor the situation and pull your money out when conditions are less than favorable. This can accompany a lot of worry and stress.
- Generating serious wealth takes time - Sure, you can make a $100 here and there, if you want some quick cash, but if you want to become wealthy, you need to have patience. Some stocks have grown by thousands of dollars over the past decades and if you eat to succeed, you should invest your money and learn to watch it grow.
- You need time to do your research - Smart stock traders are always trying to research and educate themselves on the current situation and get ahead in the game. If you are a small investor who is buying stocks on your own, be ready to learn how to interpret financial records, annual reports, and monitor the stock market daily.
Why is real estate better?
Real estate is considered a safer bet by many, because of its perceived stability and low risk. While many stocks could yield better results in the short term, real estate could bring a significant return on investment over time.
Investing in real estate can diversify your portfolio, if you already have stocks. In addition to generating monthly income from your rentals, you could also benefit from long-term appreciation and take advantage of the number of benefits such as tax write-offs and various deductions.