When it comes to growing your investment portfolio, investors have two solid options for building their wealth: real estate and stocks. Both investment opportunities offer potential.
The real estate and stock markets have performed well throughout 2021. After the global pandemic took a toll on the markets in 2020, they bounced back to post-record highs that gave investors big returns.
But when it comes to your hard-earned money, where should you invest it? Read on for a breakdown of the pros and cons of investing in real estate and stocks to find out which option is best for your long-term financial goals.
Investing in Real Estate
Investing in real estate takes shape in many forms. You can invest actively by buying and flipping a property, being the landlord of rental properties, and developing parcels of land for residential or business purposes. You can also invest passively by purchasing shares of a real estate investment trust (REIT) or joining a crowdfunding platform.
Pros of Investing in Real Estate
Investing in real estate is a tried-and-true practice for building wealth. It can be done as simply as owning your home rather than renting and by owning property or shares purely for investment purposes.
Real estate is a physical asset, which makes it a safe investment. Even during dips in the economy or crashes in the stock market, the property will retain value.
You can further maximize your return by making smart investments. For example, by investing in properties in up-and-coming neighborhoods, you can see an increase in value beyond the national averages. You can find additional savings by working with contractors or real estate agents that charge lower rates and commission fees.
Also, if you own investment properties — such as rentals, home-flipping, or development — you may be eligible for tax deferment through a 1031 exchange. This IRS code allows you to defer paying taxes on the income on the sale of real estate investments if you reinvest the capital in like-kind property. This is applicable no matter what state you’re in, from Colorado to Alabama.
Cons of Investing in Real Estate
No investment opportunity comes without its qualms. For example, once you take into account inflation, property values typically grow in value annually by about 1.5%. That is a larger rate of return than leaving your money in a standard or high-yield savings account, but it isn’t as high as the return potential on stocks.
If you borrow money for your real estate investment, you must own your home for at least two years before you see a return. A large portion of your payments goes toward interest during the first 24 months of a fixed 30-year loan. In some cases, you may also have to pay tax penalties.
Owning property comes with additional expenses over time, such as paying for repairs and maintenance, which can cut into your profits. Also, you can expect to pay a portion of your earnings in annual taxes and fees to trust managers or realtors. Find out what you can expect to pay out in commission fees and factor that into your long-term investment potential.
Investing in Stocks
Trading in the stock market allows you to buy a piece of a company, also known as a share. With thousands of companies publicly traded on the stock market, you can have your choice of investing in any number of industries.
Pros of Investing in Stocks
With so many companies on the stock market, you can build a diverse investment portfolio by buying and trading shares. The stock market also works more quickly and fluidly. Except for some holidays, you can trade shares in minutes most days of the week.High-dividend stocks have bigger and faster growth potential than real estate. Factoring in inflation, stocks tend to grow in value annually by about 7%.
Cons of Investing in Stocks
The biggest concern with investing in stocks is the potential for the market to shift downward. While real estate will maintain some value over time, stock shares can go from soaring to zero overnight, depending on a lot of factors.
Successfully investing in the stock market also requires active research and attention. Although you can receive assistance by hiring a broker or manager, you can also expect to pay handsomely for their expertise. Discount brokerages will provide some assistance with trading, but you’ll be in charge of doing your research.
Investing in the stock market also has fewer tax advantages. Except for 401(k) and IRA plans, which typically defer tax payments until retirement, you will be taxed for any income earned on taxes. You can offset some of your real estate investment income by claiming expenses, but you won’t have that option with stock income.
Ultimately, when it comes to growing your wealth, the real estate and stock markets both offer investors great potential along with risks. When deciding how to invest your money, take all of the factors into consideration.
Investing in real estate tends to offer more long-term stability with lower risk over time. At the same time, playing the stock market can give you big profits or losses in an instance.
If your financial goals are to provide financial stability and security throughout your adulthood or to build a nest egg that you can cash in on for retirement, there’s one clear winner. Investing in real estate can provide you with all of that and more.
Whether you own your own home or own multiple investment properties, savvy real estate investment can also give you a bigger payday than expected with less risk. To find out how you can maximize the financial benefits of investing in real estate in your area, you can start by researching properties on a reputable real estate app. If you still have questions, reach out to a top-rated real estate expert who can give you insight into your local market.