Before we get into the heart of the article, let me answer the question by saying that one investment is not better than the other. The fact is that one could be better for one person and the other better for another. It does highly depend on your needs, personality type, and even budget.
That said, you have to understand what goes into the various investment strategies so you can decide for yourself which one is going to work for you. After all, buying ETFs in Canada will be a lot different than buying property in California.
It also depends on how much you plan to invest as the strategies of course change according to the amount of money that you plan to use. In this article, we will go over several of the differences and things that you need to know to be successful in whichever strategy that you use.
Real estate vs stocks
Let’s take a look at the main differences between the two systems along with some of the similarities before we dive into how they work when you decide to invest.
The major difference between the two is that a stock is a share of a company. These shares are publicly traded and give you a stake in the company when you buy them. The more you have then the more chance you also have of having a vote when shareholders get to decide on the direction of the company.
Property is physical and almost always the case is that you buy an entire property. Though there are funds that can be bought in which you buy a share of a property but this is just like buying any other kind of stock in many ways.
With stocks, when the value of the company rises, so does the value of your share or shares. Now, there is one scenario in which you don’t make as much money off of your stock even when the value of the company rises. The board of directors of a company decides how to use the profits. In some cases, they decide to reinvest it and use it for the expansion of the business. Or, it can be given out as cash dividends.
In the case of the profits being reinvested, you won’t see the value of the stock until you sell it. Which can be substantial in the case of a company like Amazon or other big companies.
In this way, it is similar to investing in real estate. When you buy a house or piece of property you don’t get any of the equity from it until you sell it. There are no cash dividends being issued as the value increases over time. The property could be cash-generating from rent but that is different than an amount of money that comes in quarterly and is tied to the value of the investment as stock dividends are.
Advantages of real estate
One of the biggest benefits of buying an investment property is that it can begin generating cash right away. Waiting for the value of the property to rise so it can be sold for a profit can take quite a bit of time. Look for real estate that has a high potential for rent in an area that has a shortage of rentals and the income can be more than your expenses of owning the property.
It is also more accessible to most people to invest in since you can use debt to purchase the property. Using debt to buy stocks is a terrible idea but is completely normal when buying a house. Especially with interest rates as low as they are right now.
Also, inflation doesn’t affect the investment as much as other types considering the buying power of the dollar are diminished over time.
Advantages of buying stocks
Buying stocks has a proven track record of being the best generator of wealth that there is. Even with all of the crashes and depressions, if you hold onto a stock long enough then you should see a profit. Alternatively, if you are very good at spotting trends then you can use the troughs in the market to make even more money. By selling when a stock is highest before a crash and then buying other stocks after the crash can generate wealth on a grand scale.
Stocks are also very passive. Real estate can be passive but at a cost of hiring a management company. Otherwise, you have to work on maintaining the property.
As the value of the company grows, so do your dividends which can come in quite regularly. If you reinvest these dividends then you can see your portfolio grow exponentially.
One of the best features of buying stocks is liquidity. If you buy a house and then need the money, it can take quite a bit of time to sell it and then receive the money from the bank. You can have the money from your stocks shortly after selling them. And finding a buyer can take seconds.
How to choose?
One thing to keep in mind is that you can lose money in either venture. Buying a house during a housing bubble can see the value of your property tumble when it bursts. Likewise, if you have stocks that you plan to sell for whatever reason can also crash and burn just as you were planning to sell.
There is no guarantee that you will not lose your money from investing in anything. It does take doing some homework and due diligence before you decide to invest in any type of strategy.
Instead of thinking of which one is best and then choosing one, it makes more sense to invest in both. It is important to diversify your investment portfolio and there is room for both certainly. Just make sure to not dive into either without a solid end game planned out ahead of time.