When evaluating if it’s better to invest is stocks or real estate, there really is no easy answer. Many factors go into your decision, including personality, comfort with risk, lifestyle wants and needs and more.

The decision to invest in stocks or real estate significantly depends on timing. You can find very few stocks that would have beat buying beachfront property on the West Coast in the 70’s using debt, then cashing in twenty years later. Virtually no real estate could have beat the returns you earned if you invested in shares of Amazon, Apple or Google early on in the companies’ history, especially if you reinvested your dividends.

When making investment choices, you don’t have a crystal ball and timing is impossible to predict. But understanding types of investments is crucial when choosing the best strategy to help your money grow and foster financial security.

Real Estate vs. Stocks

Purchasing shares of stock means you are essentially buying a piece of a company. For example, if a company has one million shares and you own 10,000 shares, you own 1% of the company.

As the value of the shares grows, the value of your stock in the company also grows. Stakeholders elect the company’s board of directors to watch over the management, and they decide how much of the profit each year gets reinvested in expansion and how much gets paid out as cash dividends.

Stocks can be over- or under-valued very easily. Before investing, be sure to study the company as a whole, paying particular attention to how much of their profit is paid out as dividends. A good rule of thumb is that if a company is paying more than 60% of profits as dividends, make sure you are comfortable with the risk that they may not have enough cash flow to cover unexpected changes in the market.

Investing in real estate means are you are buying a physical land or property. Real estate can either be cash-generating or a recurring cost.  Recurring cost real estate can require money every month, like in the case of a vacant lot that requires taxes and maintenance while you find a developer interested in purchasing it.

Cash-generating real estate can be apartment buildings, rental homes, or strip malls where you pay expenses, and the tenants pay rent to you as the landlord, and you keep the difference as profit.

Each type of investment comes with benefits and drawbacks.

Pros and Cons of Investing in Real Estate

Is real estate the right investment for you? Understanding the pros and con can help you decide.

Pros of Investing in Real Estate

• Cash flow. Real estate rent can provide steady, reliable cash flow on a consistent basis. Often, real estate investments only improve your cash flow in the long-term and then again when you sell them.
• Limiting fraud. It is more challenging to be the victim of fraud in real estate investing. You are able to literally see the building or property and inspect it, you can run background checks potential tenants, and complete or oversee repairs.  With stocks, you have to trust the management and the auditors to do their jobs correctly.
• Using debt. Using debt, or leverage, in real estate can be structured far more easily and safely than using debt to buy stocks by trading on margin.
• Safety. Real estate investments have long been a solid inflation hedge to protect against a loss in the purchasing power of the dollar.

Cons of Investing in Real Estate

• Time and effort. Real estate takes a lot of hands-on work when compared to stocks. There are many factors to consider, like managing tenant issues with repairs, gas leaks, the possibility of getting sued for building defects, and more. Hiring a property manager to take care of your real estate can mitigate some of the time investment but managing your property will still require occasional meetings and oversight.
• Continued costs. Real estate will cost you every month if the property is unoccupied. Items like taxes, maintenance, utilities, and insurance must still be paid. If you find yourself with long term vacancy rates due to factors beyond your control, you may end up losing money every month.
• Value. With a few exceptions, the actual value of real estate hardly ever increases when examined in inflation-adjusted terms. Keep in mind that even if the actual value doesn’t increase, you benefit from the power of leverage.

Pros and Cons of Investing in Stocks

Like real estate, investing in the stock market comes with its own set of pros and cons.

• Longevity. Over 100 years of research have proven that despite all of the downturns and crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth generator in history.
• Minimal work. Unlike running your own small business, owning part of a business through shares of their stock doesn’t require any work on your part (other than making sure the company is a sound investment). You benefit from the company’s results but don’t have to put in the time and effort to show up to work.
• Access. You don’t have to be wealthy with huge sums of available cash to begin investing in the stock market. With certain mutual funds or individual stocks, you can invest as little as $100 per month. You can also look into the growing variety of microsaving apps that allow you to begin investing for less than $26.  Real estate requires significantly more money for your initial investment, as well as the cost of maintenance and improvements.
• Liquidity. Stocks are far more liquid than real estate investments, meaning that during trading hours, you can sell your entire position, many times, in a matter of minutes or even seconds. You might have a real estate listing for weeks, months, or even years before finding a buyer.

Cons of Investing in Stocks

• Investing Emotionally. Though stocks have been thoroughly proven to generate wealth in the long run, many investors are too emotional and unsteady to benefit fully. Psychological factors can cause them to lose money, panic selling during downturns when they should instead be buying.
• Short-term volatility. The price of stocks can go through extreme fluctuations in the short-term. Your $90 stock may go to $20 or to $180. If you know why you own shares of a particular company, this shouldn’t alter your course. You can use the opportunity to buy more shares.  When you hold onto well-valued stocks over the long-term, the extremes are often smoothed out.
• Stagnation. If you invest in companies that don’t have much room for growth, then your stocks may not look like they’ve gone anywhere for ten years or more during sideways markets.

Should You Invest in Stocks or Real Estate?

Both real estate and stocks can provide substantial long-term financial gain, and both come with their own set of risks. When choosing the right investment strategy, the best way to mitigate against that risk while taking advantage of the potential gains is to diversify as much as you are able and work with professionals who can guide your investments to perform optimally.