REvsStockMarket2

Real Estate vs. Stocks

Finance
How to decide which type of investment is right for you

Asking the question, “Is it better to invest in real estate or stocks?” is like asking if a beach house in Malibu is superior to a cabin in Aspen, or if a Balenciaga bag is better than a Prada tote. While we wish we could tell you with absolute certainty that one option is better than the other, it’s just not that simple. There isn’t a right answer because what you do with your money really comes down to your unique preferences and goals.

Before you put your hard earned cash into real estate or stocks, it’s important to understand the positive and negative aspects of each type of investment. The more you know about how these investments work, the less likely you’ll be to get burned in the long run. Here’s a look at the pros and cons of investing in real estate and stocks.

Pros of Investing in Real Estate

  • Your property can provide a steady stream of cash flow in the form of rental payments.
  • There are tax benefits. The IRS allows investors to deduct the depreciated value of their properties from their taxes. Also, in most cases, property owners can deduct their mortgage interest.
  • If you’re renting your investment property you’ll benefit from inflation. It’ll drives rental prices upwards while your fixed mortgage rate stays the same.

Cons of Investing in Real Estate

  • Owning real estate can wind up costing you money every month your property goes unoccupied.
  • A real estate investment takes more time and effort to manage. If something goes wrong with your property, you’ll be the one who has to deal with it.
  • Real estate is an illiquid investment. This means your cash is tied up in your property and isn’t immediately accessible if you should need it.

Pros of Investing in Stocks

  • Stocks have the potential to do considerably better than real estate. It’s not uncommon for some companies to average 20% to 50% growth in a year.
  • When you invest in stocks you don’t need as much cash up front. Some companies, like ShareBuilder, allow you to buy dozens of stocks for a low monthly fee. Investing in real estate requires a lot more money.
  • Stocks are liquid investments. You can sell your stocks relatively quickly and easily if you need to.

Cons of Investing in Stocks

  • Stocks can be risky, especially when the economy hits a rough patch. If one of your companies goes bankrupt your investment will be dissolved.
  • Stocks are often emotional investments. As a result, your decisions within the market have a high potential of being irrational, sometimes resulting in the loss of money.
  • The stock market is unpredictable. Nobody really knows what’s going to happen. Stocks increase and decrease in value constantly, and timing is everything.

The Bottom Line

Both real estate and stocks have their benefits and drawbacks. Choosing the best investment for you will depend entirely on your overall financial situation, level of comfort, and long-term goals for the future.

Photo: Peter Beck/Corbis

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Kate Kasbee
Kate Kasbee is a blogger and freelance copywriter living in Los Angeles. She has a background in real estate marketing and has also written about a variety of subjects including pet care, how to adopt a vegan diet, and technology. Prior to living in sunny California, Kate spent eight years in Chicago where she lived in nine different apartments in five different neighborhoods. Though she’s not quite done exploring, Kate dreams of planting her roots and owning a home with creaky floors and plenty of land for starting an organic farm.
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