How do the two most popular types of investments stack up against each other, and what should you be adding to your portfolio?

Real estate vs stocks is a very common debate that investors battle with often. While both are popular investments, there are some key points that may make one investment better. Let’s look at the main differences between real estate and stocks to help you make the decision that is best for you.

Real estate vs stocks

Before we begin, you must understand that when we compare real estate and stocks, we are not comparing apples to apples.

Real estate is a tangible asset that is real and utilized. No matter what happens with the market, your real estate will never go away. It will physically always be there.

A stocks, on the other hand, is a fractional share of ownership in a publicly traded company. Most publicly traded companies have millions of shares, so most investors own a small and insignificant piece of the company. If the market crashes and the company goes under, the stocks will no longer have any value whatsoever and you will have no recourse or insurance to gain your investment back.

That being said, the stock market does offer a few advantages. Stocks are a more liquid investment because they are easily and quickly sold. Once you decide to sell your shares, you can typically liquidate them within the same day.

You can also invest in the stock market with little money compared to real estate. There are even apps that will allow you to invest in stocks with as little as $5. With a lower cost of entry, stock portfolios generally easy to diversify across many different companies in different industries.

In order to decide which investment type is right for you, let’s look at how real estate and stocks provides you with a return.  Then we will look into the benefits of each.

An investment can pay you a return in the following ways:

• Cash flow
• Capital gains
• Equity

Cash Flow

Probably the most attractive things about real estate investing is the cash flow that the property receives each month. Whether your real estate investment is in multifamily rental properties, commercial properties or any other form of real estate, the goal is to generate a profit each month from the rental income the property provides. The cash flow from real estate investment provides consistent income, regardless of whether the real estate market is up or down.

The cash flow from real estate is used to calculate the ultimate value of the property.

Some stock investments pay dividends to investors. These dividends are usually paid quarterly and are based off of the company’s profits.

Typically, these stock dividend payments are a fixed percentage of the current stock price, not the amount you’ve invested into it. So, when the market drops, your dividends drop and vice versa.

Mutual funds are most often highly invested in dividend-paying stocks. Some mutual funds even allow investors to have their dividend payments reinvested into the fund to increase their returns even more.

Capital gains

Capital gain is defined as the profit earned from selling an asset for more than you paid. Almost all of the profit you receive from stocks is from capital gains. So, you purchase a stock that you believe will increase in value over time. Then you sell it at a high point.

Capital gains can also be a large source of income for real estate investors. If you buy a property when the market is down and sell it when it’s up, you can make a significant return.

More of the time, people earn capital gains in real estate by increasing the value of the property. When improving the property and increasing rents, you can force the appreciation of the property and earn capital gains.

A benefit investors see in real estate over stocks is having complete control over how well it performs. You can raise rents, improve the property, choose stable tenants, etc. With stocks, you’re relying on the market to improve so your stock value goes up and the company is run by someone other than you. In real estate, you can increase a property’s value regardless how the market is doing.

Equity

Building equity is a great benefit that’s more specific to real estate. Since real estate is easy to leverage, meaning you can invest with the bank’s money by obtaining a mortgage, you are able to profit from the equity you build over time. In other words, you can borrow money from the bank against the equity you have in a property and use the proceeds to purchase more cash-flow-producing real estate.

When you collect rent each month from tenants, a portion of that rent goes towards paying the mortgage on the property. Typically, the principal balance goes down and the amount of equity you have in the property increases. Over time, you will build a significant amount of equity that the tenants have paid for.

This benefit is often overlooked by many investors. Investors usually do not take into consideration the profit they will earn when they cash out on equity built up while they own the property.

Real estate tax advantages

The tax benefits that real estate provides are not found in other investments. These tax benefits do not increase the properties cash flow or the overall value, but they do allow for significant retention of the profits at tax time.

Some of the main tax advantages of real estate investing include:

• Depreciation
• Interest deductions
• Expense write-offs
• Tax-deferred exchanges

Depreciation allows you to deduct the cost of the improved property over long and specific period of time. Commercial real estate is depreciated over the course 39 years, and rental properties are depreciated over 27.5 years. In other words, you will get additional annual tax deductions over this period of time. The tax law requires you to take the depreciation.

For example, if you were to depreciate a $1,000,000 commercial real estate investment, you would have a write-off of $25,641 each year for 39 years.

Interest deductions allow you to write off the interest you pay on the mortgage on your investment property. This can be a significant deduction, especially when the first several years of payments consist mainly of interest. Interest deductions are likely be higher than the depreciation during the first few years of your ownership.

Expense write-offs include all of the costs associated with the real estate investment. Not only are maintenance, repairs and property taxes deducted, but home office expenses, telephone, and travel expenses can also be written off.

Tax deferred exchanges allow you to sell your investment property and defer your capital gains tax as long as you use the funds to purchase another property. You can continue to buy larger and better properties without having paying capital gains tax after each sale.

Stock liquidity

A major advantage that stocks have over real estate is liquidity. Real estate can take a long time to sell, and the transaction costs are much higher. Stocks, on the other hand, can be sold quickly and inexpensively. If you needed to cash out your investment quickly, you can have your stocks sold and have the cash in a few days.

You can also sell just a portion of your stocks, while you typically cannot sell a portion of a property.

If you goal is to invest your money for the long run, liquidity shouldn’t much of an issue for you to consider.

Effort in real estate vs stocks

The amount of effort that goes into investing in real estate vs stocks can vary greatly depending on which strategy you choose. If you are managing your own properties, you will likely have to exert more time and effort into their investment than an investor who simply invests in stocks or funds. If you are purchasing a large property, a professional manager handling the day to day operations would make this far easier and passive for you.

Investing with a professional real estate investor in the form of a partnership will offer the real estate benefits while placing the management burden upon the manager. Investing this way provides true passive income. This is a hand-off type of approach to real estate investing, but in a way that still grants you all of the typical benefits ownership grants.

The Right Investment For You

Real estate investing has immense benefits that stocks do not come close to providing, but the time, energy, and money that goes into getting started can be a lot for many investors. Finding the right property, negotiating terms, obtaining financing, and managing the property is a lot of work for some. This is one of the main reasons people may choose to invest in the stock market instead, even though real estate has obvious benefits. Don’t let the process of obtaining and managing real estate scare you away from it. If done correctly, it will make you wealthy.

I discuss this in depth in my book. After reading it, you will have a ton of knowledge, knowledge that I gain over that past 17 years as being a hands on owner and developer. I give you tons of secrets that so called “real estate pros” don’t tell you. I let you in on all of the mistakes to avoid and what to look out for during the buying process to avoid massive headaches. I am sure that the book will be able to help you make an educated and confident decision on your future real estate investments.

All of the tips and processes in the book I use daily and are universal for all markets and conditions. You won’t be disappointed.

The author is not a registered broker, dealer, investment advisor, investment manager or registered funding portal. Investing in securities involves risk, and investors should be able to bear the loss of their entire investment. Nothing contained in this informational presentation should be construed as financial, legal, investment or tax advice. Before making an investment decision with respect to any offering, potential investors are advised to carefully read the related subscription and offering memorandum documents and to consult with their tax, legal and financial advisors.