The famous debate is likely to never end—should an investor invest his or her money into real estate or stocks?
Any experienced investor will find a way to defend his or her choice for investment strategy, and rightfully so because every investor is different. Therefore, what investment strategy works for one investor may be completely different than the strategy that works for another.
However, when weighing the advantages of real estate investing over stock investing, there are some indisputable advantages to real estate investing.
Stocks are straightforward in the sense that you use your money to buy shares of a stock, and then if the value of that stock price increases or decreases, your investment follows suit. You can diversify in the sense of investing in various stocks, but the strategy is limited for diversification options. With real estate, however, not only is there a diverse set of strategy options, but there are diverse ways of executing each of those strategy options. This allows the investor to tailor their investing in any way that makes the most sense for them personally and for the investment. Having options for diversity also allows an investor to have more options for control.
Because of the varied number of options in real estate investment strategy and how many options an investor has for how to pursue that strategy, the investor has more control over their investment than they do with a stock investment. An investor can buy and sell stocks and move them around if he or she chooses, but outside of that, what are the other options for helping to control the fate of their investment? The worst-case scenario with a stock investment is the company the stocks are invested in declares bankruptcy. If this happens, the investor loses the money they invested into the stock shares of that company. Did the investor have any control over whether or not the company went bankrupt? Not likely.
Because of the flexibility that real estate investing offers, an investor can do any number of things to increase the value, or prevent a decrease in the value, of their investment. At any given time, an investor can sell a property, hold a property, renovate a property, restructure how the property is run, or refinance a property. All of these things are in the investor’s control and they all have the ability to change the fate of the investment.
Also contributing towards the ability to have more control over the investment is the fact that properties are tangible objects. You can see and touch your property, and therefore you can see opportunities to make necessary decisions to support your investment. You can only see your stock investments on paper.
With stocks, your returns are only on paper until you sell them. With real estate, you have the ability depending on your strategy to make monthly cash flow, in addition to the full value of your investment remaining with the house itself.
Stocks have one profit center—the price of the stock. Real estate investment strategies come with multiple profit centers. Residential rental properties, for example, have up to five profit centers: cash flow, appreciation, tax benefits, equity build via mortgage paydown, and hedging against inflation. They don’t make money in just one way; they can make money in several ways, which creates compounding income.
The tax benefits with real estate investing vary depending on the strategy you choose, but the tax benefits available on investment properties are some of the highest tax advantages available. One of the biggest tax benefits of investment properties is in the ability to win from losses. Losses in real estate are able to be written-off on the investor’s taxes. In addition to actual losses being written-off, “phantom” losses can also be written-off. Phantom losses are losses that can’t necessarily be seen by the naked eye.
Depreciation is the most well-known phantom loss. While depreciation is technically in the tax benefits category, it deserves a grouping all to itself as far as real estate investing benefits. The IRS believes that, for a buy-and-hold property, that property depreciates over time and it’s fair to write-off this “loss”. The depreciation write-off can be an exceptionally large write-off on many real estate investment properties.
The ability for financial leveraging in real estate is what’s created millionaires and billionaires throughout history. Not only does leveraging increase the returns on the actual money you invest, but consider a traditional mortgage loan from the bank: you buy a property with 20% down of the purchase price, leaving the other 80% to be covered by the loan. How does that play out for risk? You’re holding 20% of the risk and the bank is holding 80% of the risk. All while you are reaping 100% of the financial gain on the property. Who holds the risk on a stock investment?
You spend $5 on a stock share. No matter what the stock does, you’ll always have spent that $5. If you buy a rental property, your tenants are paying down that $5 while you hold the investment. Which means, at some point your returns can become infinite because not only did you reap the financial gains on the property, but your tenants just paid back your initial investment for you.
Hedge against inflation
When inflation hits, real estate values increase. This is above and beyond appreciation. No other asset class, including stocks, benefits from inflation like real estate investments can. Because the dollar is now worth less, and you bought a property for a fixed dollar amount, by the time inflation hits it means you bought the property for even “cheaper” than you thought.
Whether real estate investing is the right move for a prospective investor depends on that investor. But there’s no denying that real estate investing offers some major advantages over stocks.