Real estate or stocks: Which is a favourable option for investment?

Financial planning involves investing in a reliable option to let your wealth grow over time. Investment is also prominent for securing your financial future, too. There are various options available, but the two most important tools significant for investment are real estate and stocks. These two are highly considered because of their potential investment returns. But both have their pros and cons. In this article, we will learn about the advantages and disadvantages along with the factors that should be considered while investing.

See also: 8 benefits of hiring a real estate agent to sell your property

 

Investing in real estate

Advantages

Appreciation potential

Investing in real estate can be a good option because of the market unpredictability. Considering the past trends, it has been observed that investing in real estate can appreciate its value in the long term. This allows for capital gains for the investors. You can thoroughly assess the market and the location in which you are interested to invest in. When selling the property you can expect capital gains.

Income is steady

Once you invest in a real estate property, you can build the property and rent it alongside for an extra and steady income throughout. You can have monthly rent payments, and cash inflow from the property or the real estate you invested in. It provides financial stability and in case economic health results in inflation, you have an edge in funds over others.

Diversification in portfolio

Investing in real estate allows investors to diversify their portfolios. You can invest in different types of properties like commercial, residential, and industrial. You not only invest in different types of fields but can also invest in different locations to spread the risk and ultimately lower it, enjoying potential gains from the sale proceeds.

Tax advantage

Individuals investing in real estate enjoy tax advantages, which include deductions in mortgage interest, and tax deductions in property, and can expect tax-free capital gains. You can enjoy tax benefits upon selling a residential place.

Leverage through investing

Individuals investing in real estate can leverage their investments made in real estate by obtaining mortgages. This could increase your gains and returns on the capital borrowed. So investing in the real estate market can provide leverage benefits, too.

 

Disadvantages

Transaction costs are higher, and illiquidity

There is a factor of illiquidity present in investing in real estate. There are lengthy legal processes, and complexities, involved in real estate investments. It takes a long time to buy or sell a property and various other factors like inspections, negotiations, and meetings with the potential buyers or sellers often delay the process.

Capital requirement is high

To invest in the real estate market you need to save a lot of costs. The costs are down payments, mortgage, closing costs, maintenance of the property, and other potential renovation costs. These are just a few costs and you can expect another cost as the process proceeds further.

Sensitivity in the market

The local market conditions are the main factor in assessing the real estate values. Other factors that change the prices of real estate include economic conditions, historical trends, demand-supply, and economic fluctuations.

 

Investing in Stocks

Advantages

High returns potential

The trends have shown that investing in the stock market can provide you with higher returns in the future. The long-term benefits are highly expected from investing in stocks. This contributes to and increases the wealth of the investors.

Liquidity and easily accessible

Investing in stocks offers higher liquidity than investing in the real estate market. This means individuals can easily buy or sell shares in the market and their shares are highly liquid which they can benefit from. This provides flexibility and there is ease in transactions, too.

Diversification

You can diversify your investments across the stock market by investing in different sectors, fields, industries, and geographic locations. This helps in limiting the risk by spreading across different fields and also enhances portfolio diversification.

Professional management

Individuals investing in stocks can get professional management by skilled fund managers in mutual funds or EFTs. This reduces your need to actively participate in the stock market. For professional guidance, the fund managers work on your behalf for investing in stocks. 

Income from dividends

Investment from stocks provides regular dividend income. It is beneficial for investors who are interested in steady income. This income can act as an additional income when the market appreciates.

 

Disadvantages

Market risk

There is a risk associated with investing in stocks. There is a high possibility of fluctuations in the stock market. The factors that contribute to these fluctuations can be economic instability, events related to geopolitics, the performance of the company, and market sentiment.

Lack of control

The company’s operations are not in control of the investors. Other factors that are out of the control of the investors include management decisions, the overall performance of the company, and the investors having to rely on the company’s reputation for investing. 

Economic factors

The most important economic factors that can prove to be disadvantageous include inflation rates, increased interest rates, and overall economic instability. This makes the investment returns of the individuals to decrease in the future.

 

Real estate or stocks: How to make a choice?

Several factors can help you choose between investing in real estate and stocks. These include: 

Risk tolerance

It is significant to assess how much risk you are willing to take to invest in real estate or stocks. Understand the risks associated with both options and then make a decision. You can also consider the track record of the company while investing in stocks and should consider the past trends of the locations in real estate. 

Financial goals

The investment decision should align with your long-term financial goals. You are investing only to get future potential gains from any of the options. It is recommended to invest in the option that best aligns with your future financial plans. Investing in real estate can provide steady income and appreciation of investment over time. On the other hand, investing in stocks can provide high returns and capital growth. 

Risk management

Choose an option that provides greater diversification while investing. Check both the options, and compare the risk management and diversification. This can potentially reduce the risk and give you higher gains.

 

FAQs

In which option should I invest for the long-term?

This decision and choice depends on your individual financial goals and how much risk you are willing to take.

Does investing in real estate assure lower risk?

It does not provide the surety of lower risk but generally offers lower short-term risk and stability while investing in stocks that have higher long-term volatility.

Is it recommended to invest in both options?

Yes, you can invest in real estate and stocks at the same time, this will diversify your risk and can provide higher future gains.

Does investing in stocks provide any tax advantages?

No, investing in stocks does not provide any tax advantages like investing in real estate.

Which option requires less initial capital?

Stocks generally require less initial capital and investment as compared to real estate which includes payment for many costs.

Is it feasible to obtain steady income from stocks?

Yes, it is possible to generate steady income from stocks as from real estate. You need to invest in a company, the track record of which is perfect and gives you higher returns.

How can I manage risk in both options?

The risk in investing in real estate and stocks can be managed by diversifying your portfolio and by increasing your investments across industries.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com