Many people who are ready to make their first investment for their future are confused about whether to opt for real estate or stocks. Unfortunately, there isn’t one simple answer.
To identify the right choice for you, you need to take into account your lifestyle preferences, personality, and how comfortable you are with taking risks, among other things. Timing is another key factor, but it’s something that simply cannot be predicted at the time of making an investment choice. It is only by understanding both types of investment that you can have the best chance of selecting the strategy that will best help your money to grow and ensure your long-term financial security.
So, how can you stand the best chance of making a safe investment with a high return? Should you opt for a real estate investment strategy, or are stocks the answer? Here, we take a closer look at the pros and cons of each.
Stocks Versus Real Estate
If you purchase shares of stock, you’re buying part of an organization or company. So if, for example, an organization has a million shares of which you own 10 thousand, you’re the owner of 1% of that company.
When the company’s shares grow in value, the stock value also grows, and some of the annual profit will be paid out to investors as a cash dividend. It’s easy, however, for stock to become under or over-valued. Therefore, you need to dedicate time to study the organization as a whole, calculate the dividend growth rate and pay attention to how much the board of directors is regularly paying out in dividends before you make a final decision about which way to invest.
Meanwhile, when you make a real estate investment, you’ll be buying physical property or land that may cost you money for each month you hold it. It may also generate cash in the form of a rental home, or apartment building when the tenant pays rent and you pay out the expenses and then keep the remaining money as profit.
Both types of investment have their own drawbacks and benefits, so we’ll look more closely at those here.
Why Invest In Real Estate?
There are several advantages to real estate investment:
- A Comfortable choice – for many people, real estate represents a safer investment choice in terms of exposure. Most people have heard about how important it is to own a home, so they’re more likely to be open to purchasing property than other types of investment.
- Reliable cash flow – rental properties bring in steady cash flow every month while other types of investment will often only improve cash flow when sold or in the long-term.
- Safety – traditionally, investment in real estate is a useful inflation hedge when it comes to protection from loss in the dollar’s purchasing power.
The Downsides Of Real Estate Investment
There are also several negatives to this type of investment:
- Effort and time – handling a real estate investment takes lots of work, even with a property manager on board.
- Ongoing costs – if the property remains unoccupied for any length of time you’ll still need to pay maintenance, tax, insurance, and utilities.
- Value – real estate’s value rarely increases when taking into account adjustments for inflation.
Why Invest In Stocks?
There are also several reasons why stock investments could be the right choice for you:
- Longevity – evidence shows that purchasing stocks, reinvesting dividends, and then holding onto them in the long-term is the best way to create wealth.
- Minimal effort – no effort is needed on your behalf to manage your stock investment portfolio, especially if you choose an option like the dividend aristocrats ETF which is an effective and simple way to build up an easy to manage portfolio.
- Access – investment in stocks is possible for relatively low amounts whereas real estate requires a large initial investment.
- Liquidity – it’s possible to sell your position in seconds while real estate must be listed for an extended period before a buyer can be found.
The Downside Of Stocks Investment
Of course, there are also some downsides to this type of investment:
Short-term volatility – in the short-term, stock prices can fluctuate wildly which can impact your ability to make money rapidly.
Stagnation – investing in companies with little room for growth or innovation may prevent your stocks from returning strong profits.
Real Estate Or Stocks – Which Is Right For Me?
Both stocks and real estate investments can provide financial gain in the long-term, but both have their risks too. When it comes to selecting the best strategy for investment for you, it’s always a good idea to take professional advice and to diversify as much as you can.