Pros of real estate investing

The phrase “real estate” describes any type of property, consisting of both land and buildings. It could be anything from a single apartment unit to a multistory office building. The four main types of real estate are residential, commercial, industrial, and raw land. Here are the three biggest pros of investing in real estate.

The biggest pro of investing in real estate is that, when you buy a property, you have total control over it. This allows you to come up with creative ways to boost the property’s value. For example, you can renovate the building, tear it down and build something new, or subdivide the land and resell it. There are almost unlimited possibilities when it comes to maximizing the use of your asset. On the flip side, when you own a stock, you can vote in corporate elections but that’s about it.

Another benefit of investing in real estate is that it offers two different types of returns for investors. First, it can appreciate in value over time, and, second, it can create cash flow (typically by renting out the property to a tenant).

While a handful of stocks technically offer both of these advantages, most usually offer one or the other. Investors buy growth stocks for capital appreciation or dividend stocks for cash flow.

People will always need a place to live. Since the world population is growing exponentially, real estate will most likely be a key asset for years to come. Companies, on the other hand, come and go all the time.

With that said, investing in real estate is not without its disadvantages. Let’s take a look at some of those.

Cons of real estate investing

To buy a property, you’ll usually have to pay anywhere from 5%-20% of the property’s value as a down payment. However, if you plan to use that property solely as an investment then you need to put 15%-25% down, according to Stessa. Depending on the value of the property you’re buying, this can be quite a big roadblock for many investors.

Buying or selling a property can take months, if not years. For example, if you want to buy a property then you need to research it, get an appraisal, make an offer, conduct different examinations, get approved for financing, and close the deal. This doesn’t even include the time spent on negotiations. Real estate’s longer time horizon can make it slightly riskier than stocks.

With that in mind, let’s shift our focus to investing in the stock market.

Pros of Stock Investing

When you buy a stock, you are buying a tiny slice of ownership in a corporation. As a shareholder, you share in the success of a company through stock price appreciation and dividends (if the company pays them).

One of the biggest pros of stock market investing is that it’s incredibly easy to get started. These days, it only takes a few bucks and a smartphone to buy a stock. Even better, if the market is falling and you want to sell your stock then you can do so at a moment’s notice. Compare this to real estate, where it can take months to sell your property.

In the stock market, it can be very easy to make money quickly. For example, it’s not uncommon for stock prices to rise 20% or more in a single day. Granted, it takes skill and a little bit of luck to cash in on these movements. But, it’s entirely possible to make more money off one stock trade than a year’s worth of real estate investing. Keep in mind that this also means that you can lose money quickly in the stock market.

Not all stocks are created equal. This allows you to create different portfolios based on your individual investing goals. For example, you could buy high-growth stocks for capital appreciation, dividend stocks for income, or index funds for diversification. You can also use tools like stock options or margin to increase your leverage and potential returns.

Cons of Stock Investing

When you buy a stock, you are buying a tiny slice of ownership in a corporation. As a shareholder, you share in the success of a company through stock price appreciation and dividends (if the company pays them).

As mentioned earlier, stock prices can be much more volatile than real estate. This is a good thing when that volatility is trending upward. However, it’s not so fun when the market is crashing downward.

The biggest con of investing in the stock market is the lack of control. Sure, you can use different strategies to try and protect your capital. But, at the end of the day, you have no control over the companies whose stock you are buying. You cannot convince the management to introduce new products, pivot to a different industry, or warn them of a new competitor. In this sense, when you buy a stock you are placing your financial future into other people’s hands.

Real estate vs the stock market: Final Decision

It wouldn’t be fair to label one of these asset classes as better than the other. They are simply different assets that both offer pros and cons. This is why it’s important to first determine what your financial goals are. From there, you’ll be able to pick the asset class that’s best for you.

If you are someone that wants to get started investing as quickly as possible with little upfront capital then the stock market is best for you. It takes less than a day to open a brokerage account and start buying stocks.

However, if you are someone that doesn’t mind putting in extra effort to create a sustainable long-term return then real estate is likely the best asset class for you!