Real Estate Investing vs. the Stock Market
With the real estate market on the up-tick, everybody is talking about real estate investment versus stocks. Which is a wiser place to invest your money? It really comes down to personal preference and your comfort with the ebb and flow of the the stock market. Your best course of action will be to research both investment strategies to see which fits your situation and risk tolerance the best.
Stocks are essentially an investors vehicle to owning a piece of a publicly traded company. If Company XYZ has 1 million outstanding shares of stock and you purchase 10,000 shares, you will be the owner of 1% of the Company. An investor buys in at a certain price (market price), hoping the company will perform well enough to increase the value of that market price.
Real estate investing is the act of purchasing, managing and selling real estate for a profit. The value of the asset will be affected by the overall market, improvements you make to the property, and how you manage it if you decide to rent it. Many articles discuss the advantages and disadvantages of investing in either the stock market or real estate, but fail to delve into the returns of each strategy.
Stock Market Analytical Review
The S&P 500 has shown to prove healthy returns for investors. Over the past 46 years, the stock market has had an average annual return of 10.31% and over the past 20 years, it has shown an annual average return of 8.6%. The stock market, however, is extremely volatile. One day you have astronomical returns and the next, catastrophic losses. In David Jileks, of MarketWatch, article, he makes a case to stay in the market for the next ten years.
If the bull market keeps running for another ten years, it would be unprecedented, exceeding the longest bull market on record by almost four years. If the markets climb is interrupted by a bear market, could the twenty and thirty year averages still be reached over the next ten years? In other words, over the next ten years, stock investors may see the current bull market end, experience a bear market typically defined as a 20% loss or more and still achieve ten year annualized returns of over 14.67%.Jilek highlights the volatile nature of the stock market above, and rather than suggesting to run from it, he suggests to stick it out. In fact, the general consensus is that the stock market is a good long term bet. Stocks certainly have their upside. They are more liquid, have lower transaction fees, are generally less work, and are easy to keep diversified. Every investor is different and will need to find where they are the most comfortable. Making investment decisions out of panic or fear is never good.
Playing the stock market game comes naturally to some, but for the others, real estate investing is a much more tangible strategy that allows you to be directly involved in the success or failure of your investment.
Real Estate Analytical Review
Returns in the real estate investing market have been healthy over time as well. Twenty year returns for commercial real estate outperform the S&P 500 index, although marginally, at 9.5%. Investors have seen even better returns on residential and diversified real estate investments, which average a 10.6% return. Of course, attractive returns lie ahead for intelligent investments, but significant cash flow, rising rents, and maybe most importantly, leverage are all major advantages for taking the real estate route.
Leverage, in real estate, is the investors option to easily obtain funding for investments, where as with other non-leverage type investments, an investor would put up 100% of the money for the investment. Leveraged investments allow you to pay a modest amount for the full investment. This separates real estate from most other investments, but as any investor knows, leverage carries the risk of a future inability to pay back the leveraged amount.
It should also be noted that investments in real estate carry certain tax benefits that stock market investing does not. Certain expenses may be deductible, and properties can, at times, be traded into other real estate to avoid capital gains taxes.
When investing in real estate directly, the investor has direct control over the asset that has been invested in. When investing in stocks, rarely does the investor have any control in the running of the individual business. With stocks, the investor is a silent partner, relying on the management of the company to increase the value of the investment. With real estate, while the returns may be slightly better over time, more direct involvement of the investor is required.
Which Investment is Right for You?
As mentioned earlier, it cannot be said with conviction which strategy is best for you. If you are already in one of these businesses, a certain strategy may seem more approachable or accessible, and for some, it just makes more sense. Of course, do your homework on the investment you are considering. Research the decision to choose the path that is right for you. While one strategy may work for one investor, it may not work for another. We are all different with separate skillsets, so invest, but invest in what you are most interested in.
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