What is difference between the Real estate and stocks?

Overview: Real Estate vs. Stocks

It is up to you to decide whether or not you want to invest in stocks and real estate. You can be sure that more people invest in stocks than in real estate. This may be because it takes less time and money to purchase stocks. You will need to save money and invest a lot of money to buy real estate. Stocks are a way to buy a small piece of a company. Stocks can be used to make money in one of two ways: dividends or value appreciation.

You acquire real estate when you purchase land or property. Most real estate investors make money by collecting rents (which can provide a steady income stream) and through appreciation, as the property's value goes up. You can also leverage real estate to increase your holdings, even if cash is not available.

Real estate appeals to many potential investors because it is tangible and can be managed with diversification. Property investors can hold themselves accountable for the tangible asset they have purchased. Note that real estate investment trusts (REITs) are a way to invest in real estate and are bought and sold like stocks.

When deciding whether to invest in stocks or buy real estate, there are many factors that investors should consider.

Which strategy is better to grow wealth? Investing in stocks or real estate?

A lot of Americans do both. According to the U.S. Census Bureau, 65% of American households are owner-occupied. The Bureau of Labor Statistics reports that 55% of American workers have a retirement plan. You are likely to have some exposure in the stock market if you're one of them.

However, if you are looking to invest more in either type of investment or if you are new to investing and trying out both of them, it is wise to understand the pros and cons of each strategy.

You don't have any obligation to make a choice. It's possible to buy shares in real estate investments without dealing with the hassles of managing and selling properties.

Investing in real estate

Traditional real estate investments can be broken down into two broad categories: residential properties -- like your home, rental properties, or flipping homes to buy, then resell for a profit -- and commercial properties, such as apartment complexes, office buildings, and strip malls.

The pros

• It is simple to invest in real estate. Although the process of buying a home can seem complicated, it is easy to understand. You will feel more in control of your investments if you own a tangible asset than if you buy shares in stocks.
• Real estate is more secure than investing in debt. You can also refer to this as your "mortgage" and you can either make a 20% down payment or finance the remainder of the property's costs. Margin trading is a risky investment that only experienced traders should make.
• As an inflation hedge, real estate investments are a good option. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation.
• Property ownership can have tax benefits. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $1 million in mortgage debt. There also are tax breaks when you sell a principal residence, such as an exclusion that may allow you to avoid capital gains taxes on net proceeds of $250,000 if you're single (or $500,000 if you're married and filing jointly). You may be eligible to avoid capital gains if you sell commercial property and reinvest the proceeds in another type of property. Investment properties may be eligible for tax breaks by depreciating or writing off the property's wear and tear. Learn more about tax breaks related to homeownership in this tax guide.

 

The cons

• Real estate investing can be more difficult than stock investments. Although it is simple to purchase property, maintaining the properties, particularly rental properties, can be difficult. Property ownership requires more effort than stock and stock investments such as mutual funds.
• Real estate can be expensive and very volatile. Even if you borrow cash, investing in real estate requires a substantial upfront investment. It is more complicated than buying and selling stocks to make your real estate investments resaleable.
• High transaction costs are a hallmark of real estate. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. This is a substantial cut when compared to stocks, especially since most brokers don't charge fees for stock trades.
• Diversifying your real estate investments can be difficult. Real estate investing is about location. While sales may plummet in one location, values can soar in another. The average investor doesn't have the means to diversify the purchase of real property properties by type and location (a mix of commercial and residential), so it is important to have deeper pockets.
• It's not possible to guarantee a return on your investment. Although property prices tend to increase over time, there is always the possibility of a property being sold at a loss. The 2008 financial crisis is an example of this. Stocks are also at risk.

Stocks investing

Before you take the plunge, it is important to consider all pros and cons of buying stock shares.

The pros

• Stocks are extremely liquid. Investment cash can be held indefinitely in real estate. However, you can purchase or sell shares of public companies at any time. It's easier than real estate to see the value of your investment anytime.
• Diversifying your stock portfolio is easier than diversifying in other investments. It's difficult to find enough properties in real estate to cover enough locations and industries to provide true diversification. With stocks, it's possible to build a broad portfolio of companies and industries at a fraction of the time and cost of owning a diverse collection of properties. Perhaps the easiest way: Purchase shares in mutual funds, index funds, or exchange-traded funds. These funds can buy shares in many companies and provide fund investors instant diversification.
• Stocks have lower transaction fees if any. While you'll need to open a brokerage account to buy and sell stocks, the price war among discount brokers has reduced stock trading costs to $0 in most cases. Several brokers offer an assortment of mutual funds, index funds, and ETFs that are free-of-transaction fees.
• A tax-advantaged retirement account can help you grow your investment. Your investment can grow tax-deferred, or even tax-free by purchasing shares through an employer-sponsored retirement plan like a 401k or an individual retirement account.

The cons

• Stock prices are more volatile than real property. Stock prices can fluctuate much more quickly than real estate prices. If you don't take a long look at the stocks and funds that you buy for your portfolio, volatility can make it difficult to digest. Instead, you should plan to buy and hold even if volatility occurs.
• A capital gains tax may be imposed on stocks that are sold. A capital gains tax may be due when you sell stocks. You may be eligible for lower taxes if you have held the stock for longer than one year. You may also have to pay taxes on dividends that your portfolio received during the year. (Understand more about taxes on stocks.)
• Stocks can be a trigger for emotional decision-making. Stocks are easier to sell than real estate, but that doesn't necessarily mean you should. Investors often sell stocks when markets are weak. However, a buy-and-hold strategy usually yields higher returns. It is important to take a long-term view of all investments, even building a stock portfolio.