Investing in Stocks Vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 5 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Annual Return

From 1975 through 2015, a 40 year period, the S&P 500 (US Large Stocks) returned growth of 8.1% annually.  During the same exact period, the US Residential Real Estate prices returned growth of 4.8% annually.   You can see the difference that makes long term by looking at this basic chart. 1.

If you are looking for a way to get the biggest financial return for retirement, my opinion is that your best option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock

 



References

  1. Iskyan, Kim. “What Is the Historical Return of Real Estate vs Stock Investing?” TrueWealth Publishing, 31 Aug. 2016. Web. 12 May 2017.
  2. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

 

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