Stock Vs Real Estate: Deep Dive Comparisons Of Two Most Popular Investments
There is no perfect asset. All assets have their pros and cons. The choice of investing in stocks or real estate will depend significantly on three factors:
- Your personality
- Your financial goals
- The size of your savings account
Let’s see in details, the characteristics of real estate and shares, and, based on this information, you can then choose, in which asset you should invest.
Control
When you invest in real estate, you are the boss, the CEO. You have the power to remodel the property by making improvements and annexes. Similarly, you incur the risk of decreasing its value if you do not know what you are doing. It is very common the fact that many people take the work of “architects” themselves, to do property remodeling and end up destroying value. You can also optimize maintenance costs or increase rent.
In short, you have a series of variables within your sphere of control that allows you to increase the return on your investment. When you invest in stocks, you are a minority investor who is putting his faith in the administration of the company. You do not influence the direction of the organization.
Leverage
Leverage means using other people’s money for your own benefit. In this case, you can use the bank’s money to invest in properties without having all the required cash.
For example, in the United States and Canada, you can invest in residences, and we set aside with only 2-3% of the initial (down payment). In the Dominican Republic, 20% is necessary. With the actions, you can also leverage using margin, but not the same proportion. A broker usually lends you only 50% of the value of your portfolio.
It Is A Tangible Asset
You can see, smell, feel and touch real estate. These characteristics provide a feeling of possession and belonging quite strong.
Instead, the actions are abstract. We can only see them on the computer screen. If any calamity occurs, real estate represents one of the three pillars necessary to survive: food, clothing and roof.
Easier To Analyze
Investing in real estate is quite simple. If you can estimate the recurring costs of the property with some precision and estimate the income derived from the income, it is quite easy to determine the ROI of the investment. For example, if you take a 5% loan, and the return is 7%, you have found a winning investment.
On the contrary, to invest in shares, it is necessary to understand the financial statements of the companies. It is also essential to understand how the company earns money, its business model, the market in which it participates, competition, etc.
Less Volatility
Real estate, like all assets, its price is determined by the forces of supply and demand. The price of real estate, like that of the shares, varies continuously. The big difference is that in the actions, the price is shown to you 24 hours a day on TV and the Internet.
As the price of real estate is not quoted in real-time, it is easier for the investor to maintain his position, even when the economy, in general, is not doing well.
More Focused On The Local Market
The price of real estate is more local. If you buy a property in a city that enjoys economic growth, even if the national or global economy does not go well, your investment will be successful.
Instead, the actions are influenced by national, regional and global events, which often has nothing to do with the company’s business per se.
Points In Favor Of The Actions
Higher Return
Historically, the stock market has had an average return of ~ 10%. In the case of real estate, the yield has been 4-6%. In the long term, it is more profitable to invest in stocks.
Greater Liquidity
The shares are an asset, practically, equivalent to cash. We can sell and liquidate stock samples at any time. On the other hand, real estate is nothing liquid. They require a long process, which can take years to settle.
If you have a financial problem, and you need to liquidate your property, you will practically have to finish it off and lose money on the way out.
Lower Costs Per Transaction
At the time of buying or selling your shares, regardless of the amount traded, your costs will not exceed USD 10.00.
On the other hand, when you buy or sell a property, you have to pay a commission of 5-6% of the value of the property.
Less Work
When you invest in stocks, you forget that and collect your dividends (assuming you have a long time horizon).
With real estate, the story is different. Real estate requires your continuous attention and dedication since there is never a lack of leaks, complaints from tenants, conflicts with neighbors, or vacating the property. If you are not “above” the property, you lose money.
Invest In What You Use
One of the fascinating aspects of the actions is that you can invest in the companies that manufacture the products you consume and use.
If you are crazy about the Toyota brand, and all your cars have been Toyota, you can not only enjoy their products, also invest and make money along the way.
You Protect Yourself Easier
If you want to protect your portfolio of shares from the vicissitudes of the market, you should only invest in short or buy put options.
In the case of real estate, it is possible to buy disaster insurance. But, the problem is, in case of an accident, you must collect the insurance. And this, my dear friend, is the hard part. Legally there is the burden on the client to prove the policy claim. If you win the case, you will take a long time to collect the policy.
Summary
Both options are good (stocks and real estate). I do not think that, in general, one option is better than the other. The correct strategy is to have an investment portfolio composed of both types of assets. The younger you are, you should invest at least 80% of your capital in shares. If you go beyond 50 years of age, then, you should begin to decrease the proportion of your shares and place capital in something more stable like real estate.
