The best choice will depend on your lifestyle, how comfortable you are with risk, and your personality. Here is a list of pros and cons to help you understand how investing works and to help you determine which one is best for you.
Timing Is Everything
In both real estate and the stock market, timing is everything. If you purchased the beachfront property in California in the 1970s, even if it meant accruing a ton of debt, and then you cashed in on it in the 1990s, you would have made a fortune.
Conversely, if you had the foresight to invest in Apple, Microsoft, Walmart, or Amazon when these companies were first starting out and you reinvested your dividends, you would have made more money than you could have made in real estate.
The tricky thing about timing is that it is impossible to accurately predict. There are too many factors that come into play.
For example, in early 2020 investing in Zoom may not have seemed like the path to financial security. However, the COVID-19 pandemic in March changed everything. Now, Zoom is one of the fastest-growing companies out there.
The Pros and Cons of Investing in Real Estate
There are several rewards associated with investing in real estate. Some are tangible, and others… not so much.
Pro: Invest Using Other People’s Money
Real estate can be financed long-term using fixed-rate mortgages. This means that you can finance several properties while only needing to spend a minimal amount of cash. If you rent those properties, they produce income right away.
You can tap into a property's equity via a 1031 exchange. This allows existing investments to finance property improvements and upgrades.
Pro: Cash Flow Equals Passive Income
If you carefully analyze the carrying cost and acquisition cost of your property, you can create an ongoing cash flow that gains in value over time. You may find that smart refinancing allows you to increase your margins each month. If your properties are well managed, they can be a source of residual income for decades to come.
As with any investment, there are no absolutes in real estate. There are several potential negative things you should consider before you invest.
Con: Real Estate Has a Steep Learning Curve
If you don’t have a real estate background, it may take time for you to familiarize yourself with financial, commercial, and legal concepts. While you don’t have to be an expert in property management and the mortgage process, it is important to have some familiarity with these subjects.
If you want to learn more about real estate, there are plenty of resources online that include articles, podcasts, and online courses. It is vital to ask lots of questions when investing in real estate.
Con: Property Management Is Challenging
If you have never been in property management, you may lack the marketing expertise and the understanding of fair housing laws needed to properly manage your property and maintain a good profit margin.
Many real estate investors have seen the value of using the best property management software to help them track essential aspects of their real estate investment.
The Pros and Cons of Investing in the Stock Market
The stock market can be an amazing place to make money if you know how to do it. It is good to weigh its potential risks and benefits. Investing is not a get-rich-quick scheme, but rather a way to consistently grow the wealth you already have.
The good news is that even though investing is a way to grow your wealth, you don’t have to have a lot of money to get started.
Pro: The Ability to Make A Lot of Money in a Short Amount of Time
People are attracted to investing in the stock market because they dream of finding the next company like Google or Apple and getting in on the ground floor. If you play your cards right, it’s possible to generate wealth through the stock market.
Pro: Unparalleled Liquidity
Unlike Investments like real estate, you can quickly access your money in the stock market. With a click of a button, you are able to trade, buy, or sell as you see fit. This means that if you need your money, you will not be waiting for months or years to get it.
As with all investments, the stock market has some pretty serious cons.
Con: The Market Can Be Volatile
The stock market consists of winners and losers. Winning means that you make a lot of money. But if you lose, you can see your investments disappear. Success means not being risk-averse but having a sufficiently stable financial position to withstand some losses.
Con: The Market Can Crash
Daily volatility is expected in the stock market. But every so often, there are colossal failures in the system. When they happen, it can take years for there to be a full recovery. One just needs to look back to 2008 and see how quickly the stock market can crash.
Investing in the stock market or in real estate can bolster your financial portfolio. They can create passive income for you now and help you put away funds that can be used for your retirement. However, that are both big commitments you have to make and stick to in order to reach the financial goals you have.
In the end, start with what you are most comfortable with and make sure you do your research. The best thing to do to learn about investing is to start with reading finance books, learn from close friends or family members who have experience with investing in their personal experiences and their personal thoughts, learn from professionals online by reading articles, and listen to finance podcasts.
The best thing to do is to be as prepared as possible and make sure there is no room left for mistakes.
Final Thoughts on Investing in Real Estate vs. Stocks
One of the wisest pieces of advice to make money is to keep a diversified portfolio. In order to weather the ups and downs of both real estate and stocks, it's smart to keep a long term approach. Invest your funds wisely in both.
About the author: The above article on investing in real estate vs. stocks was written by Amy Sloane. Amy is a passionate writer who enjoys publishing articles on a variety of topics including real estate.