Stocks Vs. Rental Real Estate: Which is Better for Wealth Building?
Around the world, there are a number of people who have found wealth by investing in stocks. Also, there are those who have made their fortune by investing in rental real estate. So which approach is best for you? Here, we will take a look at both the advantages and disadvantages of investing in stocks vs. rental real estate.
The advantages of stock investing
When it comes to investing in stocks, you can get started by simply opening up a broker apps and filling out a five minute application. However, there are some other great advantages to investing in stocks:
Stocks are highly liquid - Unlike real estate, you can literally invest hundreds of thousands of dollars or millions of dollars in seconds. Also, you can sell your investments and raise cash at the push of a button. You can not do that with real estate.
You can easily diversify - With stock investing, you can put your money in uncorrelated assets such as growth stocks, commodity stocks, dividend paying stocks and even treasury ETFs. This diversification can smooth out your returns over time.
You can use tax advantage retirement accounts - You can open a 401K account and defer your taxes until you retire. You do not have such an advantage with real estate investing
The disadvantage of stock investing
While stock trading has a number of advantages, there are a number of reasons why investing in stocks can be dangerous. Here’s a look at some of the major disadvantages of stock investing:
Stocks can be more volatile than real estate - Stock market crashes are more common than real estate crashes. Also, a 5% daily swing in the stock market is not uncommon. Also, individual stocks can crash at any moment.
Short term capital gains tax can eat away at profits - If you sell your stock less than 12 months after purchase, then you will have to pay short term capital gains tax that is pegged to your tax bracket.
Stocks are not good for emotional investors - Because of the volatility of stocks and the ease at which you can enter and exit trades, stock trading is not ideal for emotional investors.
The advantages of rental real estate
There are a number of reasons why real estate is a great investment idea. Here are the top three reasons to consider investing in rental real estate:
You can use debt to your advantage - With real estate investing, you only need to put down 20% of the price of the house and borrow the rest. This five to one leverage is not really advisable when it comes to stock investing.
Real estate is a great hedge against inflation - Real estate tends to go up during times of inflation. Also, as a landlord, you can raise your rents every year.
Investing is easier to understand - With investing, you don’t need to know about a company's financials or read stock market charts.
The disadvantages of rental real estate
Rental real estate can also offer some big disadvantages. Here are three reasons to consider steering away from rental real estate investing:
Requires more capital - In order to purchase a rental property, you will need to put at least 20% down. Since the average price of a home is about $300,000, you will need about $60,000 plus transaction costs to get started.
It’s more work than stocks - With real estate, you have to deal with home inspections, renting out the property, property upkeep, taxes, maintenance, evictions, and occasional vacancies.
Real estate is hard to diversify - If all of your money is tied into real estate, then your entire net worth is tied to the fortunes of the real estate market.
Finding the right investment for your wealth building goals
Be sure to consider the pros and cons of investing in real estate or stocks before making a financial decision. As always, be sure to talk to a financial advisor before making your final investment decision. Taking the right investment approach can be your key to excellent wealth creation.
REFERENCE:
https://www.nerdwallet.com/article/investing/real-estate-vs-stocks-which-is-the-better-investment
