Many investors have traditionally turned to the stock market as a place to place their investment dollars. While stocks are a well-known investment option, not everyone is aware that purchasing real estate is also considered an investment. In the right circumstances, real estate can be an alternative to stocks, offering lower risk, higher returns and greater diversification. Whether planning for retirement, saving for a college fund or earning residual income, individuals need an investment strategy that fits their budget and needs.
Comparing a real estate investment to buying stocks is a good place to start. Investing in real estate or stocks is a personal choice that depends on financial situation, risk tolerance, investment objectives and investment style. It can be assumed that more people invest in the stock market, perhaps because it does not take as much time and money to buy stocks. If you are buying real estate, you will have to save and put a considerable amount of money into it.
When you buy real estate, you buy physical land or property. Most real estate investors make money through rental income (which can provide a steady stream of income) and through appreciation as the value of the property increases. In addition, because real estate can be leveraged, it is possible to expand your holdings even if you cannot pay cash. For many potential investors, real estate is attractive because it is a tangible asset that can be controlled, with the added advantage of diversification.
Real estate investors who buy property own something concrete for which they can be accountable. Note that real estate investment trusts (REITs) are a form of real estate investment and are bought and sold like stocks. There are a number of considerations for investors when choosing between investing in shares or buying real estate as an investment. The following are some of the things to consider when it comes to real estate and the risks associated with it.
The most important risk that people overlook is that real estate requires a lot of research. It is not something you can just casually jump into and expect immediate results and returns. Real estate is not an asset that can be liquidated easily and cannot be cashed in quickly. This means that you cannot cash out when you are in a bind.
For homeowners or rental property owners, there are risks involved in managing repairs or rentals. Some of the main problems you will encounter are the costs, not to mention the time and headache of dealing with tenants. And you may not be able to put them off if there is an emergency. But if that country's economy is in trouble, or a political problem arises, that company's shares may suffer.
Stocks are also subject to the economic cycle, as well as to monetary policy, regulation, tax revisions or even changes in interest rates set by a country's central bank. Other risks may come from the investor himself. Investors who choose not to diversify their holdings also expose themselves to greater risk. For most investors, a large cash infusion is not necessary to get started in the stock market, which makes it an attractive option.
Unlike real estate, stocks are liquid and can generally be bought and sold easily, so they can be relied upon in an emergency. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio. But, as mentioned above, stocks tend to be more volatile, which makes investing more risky, especially if there is a panic sell-off. Selling shares can give rise to a capital gains tax, which makes your tax burden much heavier.
Some stocks move sideways for years Buying real estate requires more upfront capital than investing in stocks, mutual funds or even REITs. However, by buying property, investors have more leverage on their money, allowing them to buy a more valuable investment vehicle. Real estate that generates monthly rental income can increase with inflation, even in a rent-controlled area, which offers an additional advantage. Another aspect to consider is taxes after the sale of the investment.
The sale of shares often gives rise to capital gains taxes. Real estate capital gains can be deferred if another property is acquired after the sale, which is called a 1031 exchange in the tax code. Investing in the stock market receives a lot of attention as a retirement investment vehicle, especially for people who regularly contribute to a tax-advantaged account, such as a 401(k) or an individual retirement account (IRA). However, diversification is important, especially when saving for the long term.
Investors should opt for a variety of asset classes or sectors to reduce their risk. Investing in real estate is an ideal way to diversify your investment portfolio, reduce risk and maximise returns. Keep in mind that many investors invest money in both the stock market and real estate. And if you like the idea of investing in real estate but don't want to own or manage the properties, a REIT may be worth a look.
Real estate investments can be more work than stocks. While buying property is easy to understand, that doesn't mean that the work of maintaining properties, especially rental properties, is easy. Owning real estate requires a lot more work than buying stocks or stock investments such as mutual funds. In real estate investing, there are many variables.
The type of property you buy, the location of the property, decisions about whether to manage the property yourself, all affect the value of your investment over time. Another point to consider is whether you want to rely on cash flow or equity to grow your investment. How do you prefer to take ownership? Because of the specific risks associated with real estate investment, it does not make sense for all investors. Smart investors can accumulate a great deal of wealth by "trading their real estate portfolios without ever having to pay tax on the capital gains they earn.
Although it is easier to buy and sell stocks than real estate, that doesn't mean you should. For the average person investing in residential real estate, cash flow is almost always the most important variable to focus on. While investment cash can be locked up for years in real estate, buying or selling public company shares can be done at the moment you decide it is time to act. It is impossible to properly compare the returns on individual real estate investments in private hands with the stock market in general.
Guerrero points out that since tax auctions and distressed property sales are on hold, real estate investors who would normally snap up properties at auction "have to go to the open market to get homes". Finally, if you find yourself in a hot real estate market and on the verge of a bidding war, you may consider a cash offer as an opportunity to close the deal quickly. Since real estate is not as liquid, you cannot rely on the immediate sale of properties when you may need them. Individuals do not always realise that they can get the benefits of owning real estate without the increased risks of being a landlord.