The real estate industry is well-known for its dependability as a stable and profitable source of income. It remains one of the two most popular forms of investment people traditionally turn to as a means to gain financial independence. So it’s unsurprising that the question of whether real estate is a better form of investment than stocks (the other popular option) regularly comes up in conversation.
In this article, we’ll take you through an in-depth analysis of the difference between stocks and rental home investment to help you determine which is the better option.
To effectively compare both prospects, we’ll be evaluating them based on the following 7 categories:
- Getting started
- Maintenance cost
- Susceptibility to change
1. Getting started
When it comes to the capital new investors require to get started, stocks come out on top. Anyone can buy mutual funds or own a piece of publicly held stocks with as little as $100. Fintech apps are even making it more accessible and cheaper by allowing you to buy into the market at as low as $10. So low to moderate-income earners can easily tap into the stock market.
On the other hand, real estate requires more stable financial backing to get started. Although there are hacks to get around having a small capital, there’s no way to get into real estate with only $10 in the bank. Moreso, you also have to consider the costs of renovations, marketing to attract tenants, and other miscellaneous expenses before you start making a profit through rent.
When most people compare real estate and stocks as alternatives, they often refer to profitability. It is not only in terms of which yields more money but also how steady the cash flow is.
With proper management, rental properties are a guaranteed source of income. As a landlord, you can rely on weekly or monthly payments from your tenants. But that’s if your buildings are occupied. If your property remains empty, you’ll still have to pay taxes, and some other utilities out of pocket, which can make you run at a loss.
Stocks may or may not provide a steady income, depending on whether or not you get dividends payment. Most stocks are profitable in the long term when the company grows, and you sell your shares. Others pay their shareholders dividends on a monthly or quarterly basis. But the profit in both scenarios is still dependent on the performance of the stock. If it doesn’t perform well, it could also lose value.
3. Maintenance cost
A significant concern for investors is the cost of maintenance, as this factor affects your net profit. Property owners have to bear the cost of utility bills, insurance, repairs, taxes, and others. As highlighted in the previous point, even if you have vacancies or unexpected events like a pandemic crop up making you unable to evict non-paying tenants, you still have to cover these costs.
In comparison to the cost of maintaining a rental property, stocks are relatively cheaper. Most of the expenses you incur come down to brokerage or management fees.
Another essential factor to consider in weighing your options is the level of supervision you can provide. Real estate requires more time and effort to attend to tenant complaints, rent collection, and meet with staff. Of course, hiring a property manager reduces the amount of hands-on supervision required; you can’t still get rid of it completely.
On the other side of the equation, stocks require very little supervision. You’re more like a silent partner of the company, with no administrative duties. That doesn’t mean owning stocks is totally hands-off. You still have to do your research, ensure the company remains profitable, and follow up on other promising stock options.
5. Susceptibility to change
Your risk appetite could serve as an essential factor in deciding which investment option is the best for you. The real estate industry is well-liked by investors with a low tolerance for risk because of its general stability. Baring incidences like a pandemic that could stall rent payment for months, landlords can rely on their rental property as a steady income stream. Moreso, real estate tends to appreciate over time and mostly manages to stay ahead of inflation. On the off chance that they do depreciate, such trends could take years to significantly affect your investment, giving you plenty of time to buy out of such neighborhoods.
The stock market is a lot more volatile because it depends on other factors outside your control, like the weather, specific events, and the decision of others. While some stock options are more stable than others, there’s always a level of uncertainty surrounding your returns.
Sometimes the need arises to turn your investment into cash, either to invest somewhere else or to settle a reasonably large bill. Liquidity refers to how quickly you can convert your investment to currency.
On this basis, stock easily comes out on top. You can bypass the process of looking for an interested buyer before you sell off your holdings. It doesn’t matter whether you own 0.005% or 40% of a company; you can trade your position in a matter of minutes or hours for cash. The processing might take a couple of days, but it’s a lot faster compared to real estate.
If you plan to sell a property, you could be on the waiting list for months. Even after finding a buyer, the elaborate process of conducting an appraisal, signing documents, and officially transferring ownership can also take months.
Diversifying your portfolio is a healthy and safe idea to avoid putting all your eggs in one basket. As highlighted earlier, stocks are easy to acquire with small capital so that investors can have a small piece of several companies. But you still have to do a lot of research to ensure each of your positions is valuable. You also have to follow up because of how volatile the market can be.
Unless you’re a tycoon, it’s harder to diversify with real estate because of the significant financial backing you need. But with thorough research and carefully selected properties, even a few investments can reward you with a large profit margin.
As you can see, there are several benefits and risks in real estate investment, so it’s nearly impossible to say with 100% certainty that it is a better alternative to stocks. Multiple factors, including your risk tolerance, level of involvement, and financial standing, affect which option is a more viable solution for you.
Still, whatever investment venture you do decide on–be it real estate or stocks, you’re better off if you’re well informed. With rental properties, finding a skilled property management company could help mitigate some of the cons of being a landlord and help you achieve greater profitability.