Investors have a lot of choices to make. An investor can choose to hold or keep their investment, or they may have to choose between multiple financial vehicles. Two of the main types of investments are: real estate and stocks.
Which is the better investment?
You can also opt to invest in a real estate stock, such as an REIT.
Overview: Real Estate Vs. Stocks
While both real estate and stocks are investments, they’re not directly comparable. Stocks aren’t tangible – you can’t touch them. Real estate is an investment that you can touch, visit, improve and will never go away.
Stocks are investments in public companies where you lack control of the stock. If the company goes bankrupt, your investment is gone. If your investment home burns down, you still own land that can be sold.
Liquidity of Real Estate and Stocks
Stocks are fairly easy to sell off with one exception: massive amounts of the same stock. In most cases, you can liquidate your stock in a day or two to fund other investments. There’s also a low threshold to invest, with some stocks worth a few pennies or dollars and others worth significantly more.
Real estate, on the other hand, sells slower than a stock. The average home can take 50 to 75 days to sell when escrow and closing are considered. Raw land can take significantly longer to sell.
How Real Estate Generates Income
Real estate may be harder to liquidate, but it also offers multiple ways to generate income. First and foremost, you’ll have direct cash flow from renting the property. It’s possible to rent out commercial and residential property.
And over the years, the value of the property will appreciate, leading you to have an asset that generates even more income if sold.
Let’s look at an example of a home that is worth $200,000 today and rents for $1,000 a month. In this case, the home may:
- Generate $120,000 in income in the next ten years if the rent remained the same, even though this is not likely.
- Appreciate in value at a rate of 3.8% per year or 38% in 10 years.
At the end of the ten years, your $200,000 home will be worth $276,000 if it appreciates 38%, allowing you to sell the property for $76,000 more than you paid for it.
How Stocks Generate Income
Stocks gain value based on the performance of the stock market. Volatility can occur where prices rise and fall rapidly. You can own dividend stocks, which generate income quarterly in most cases.
But dividend stocks don’t offer a guarantee of a payout.
If you have regular stocks, they only offer you income when you sell them. Since you have no control over how the stock’s company operates, the stock may gain or lose value and there’s nothing you can do about it.
Both real estate and stocks are a good part of an investment portfolio. Diversification is the key to a healthy stock portfolio. What’s the better investment? It depends on your goals. Stocks and real estate can help you make a lot of money.