Real Estate vs Stocks: 8 Reasons to choose the best investment
12 February, 2020
When inflation is factored in, real estate investing has always significantly outperformed other investment markets worldwide, including the U.S. stock market and mutual funds, as well as other fixed income investments like bonds and Treasury bills. Since investing in real estate provides a hedge against inflation, property owners are much more likely to actually see upwards of 10 percent returns from real estate than from stocks, bonds and mutual funds, which are lucky to provide more than 5 percent ROI after inflation is factored in.
"Throughout modern history, real estate has actually boasted extremely high returns with low risk", writes Bigger Pockets, who reported in-depth last year on findings in a massive study called "The Rate of Return on Everything" that looked at 16 advanced economies over 145 years, comparing ROI on equities, real estate, bonds and treasury bills, and concluded that real estate investing offers the best returns.
Best of all, today it is possible to invest in real estate without ever worrying about managing the property or dealing with maintenance issues! Read on to see eight reasons to invest in real estate instead of stock and begin your journey to financial freedom today.
Use the table of contents below to navigate through the blog:
- Difference Between Real Estate vs Stocks
- Real Estate Investments Provide Cash Flow
- Real Estate Provides Better Returns and Lower Risk
- Stocks don’t provide tax advantages - Real Estate…Yes!
- More About the Inflation Hedge & Why It’s Important
- Real Estate is Less Complicated than Stock Market Investing
- Better Security for Your Family
- Cons of Investing in Stocks
1. Difference Between Real Estate vs Stocks
There are a variety of different arguments regarding which is a better investment - real estate or stocks - because both have unique advantages and disadvantages. Regardless, if you want to make money, you have to start with a good understanding of both - here’s a brief overview.
Real Estate Investment
Perhaps most importantly, real estate offers a level of security the U.S. stock market and other international investment markets simply can’t touch. Investors can also expect to collect much higher returns from real estate investments, to the tune of up to 15 percent annual ongoing ROI from income producing real estate investments like the KASA Investment Fund. This hands-off, totally secure investment option serves as a type of compromise between investing in the stock market and investing in real estate that you would have to personally manage and maintain. Other types of smart residential and commercial rental properties, raw land and REITs can also outperform the stock market with less risk.
Stock Investment
By comparison, if money is tied up in conventional investments like stocks, bonds and mutual funds, investors must always remember that the stock market is not secure and can be very volatile! The stock market has also never performed well enough over time to build wealth at a high enough rate to ensure a secure retirement. When times are good, you can earn a profit but during times of economic challenges you are just as likely to see funds disappear.
"Real estate investments are lower risk, yield better returns and generally offer greater diversification [than the stock market]", writes Investopedia. "Real estate is also appealing because it is a tangible asset that can be controlled, with the added benefit of diversification".
2. Real Estate Investments Provide Cash Flow
Cash flow is the byproduct of owning investment property that provides ongoing income and is generally defined as whatever is left after paying all monthly expenses on a real estate investment. Cash flow is important, because it can help you retire early, allow you to collect higher ROI than you could get from stocks, bonds or mutual funds, and can work with property appreciation to ensure investors are making money.
3. Real Estate Provides Better Returns and Lower Risk
Properly managed real estate investments in a great location can easily provide much better returns with lower risk than stock market investing. Stock market values constantly go up and down, while the tangible, income-producing nature of real estate ensures that you will weather those ups and downs, with rents and property values rising to keep pace with inflation.
"Real estate has outperformed the stock market approximately two to one since 2000, earning 10.71% annually versus 5.43% for stocks", reveals Investopedia. "Investors benefit from the [3% to 4% annual] appreciation of property, but also receive 8% to 12% per year in return on their investment from the income generated from renting out the property".
4. Stocks don’t provide tax advantages - Real Estate…Yes!
One of the most important tax benefits for real estate investors can come in the form of deductions, which include any costs associated with mortgage interest, property tax, operating expenses, depreciation and repairs on a rental property. In addition, whenever you buy investment property (or shares of a real estate fund like the KASA Investment Fund) using money in your IRA or 401k account, you can also enjoy tax-free or tax deferred income for retirement.
5. More About the Inflation Hedge & Why It’s Important
Generally speaking, an inflation hedge involves adding any asset to your financial portfolio that is expected to maintain or increase its value over time. This includes real estate, because property values and rents typically increase over time, keeping pace with or exceeding the rate of inflation. These increases are an essential part of any well-balanced financial portfolio, because they allow investors to generate secure, ongoing income over time at a rate that keeps pace with the global economy, unlike stock market investments.
6. Real Estate is Less Complicated than Stock Market Investing
There’s little doubt that investing can be complicated, but real estate is much simpler and easier to understand than stocks, bonds and mutual funds. For one thing, unlike stocks, real estate is a tangible asset you can actually touch and see! In addition, many traditional investments are governed by complicated rule sets and also come with hefty annual fees that can be hard to predict, while future rule changes are virtually impossible to anticipate. By contrast, real estate investing offers a clear path to financial security and proven ongoing income you can rely on, with rules that are straightforward and easy to grasp.
7. Better Security for Your Family
Whether you decide to buy and directly manage an income producing rental property, or opt to become a Shareholder in a real estate investment fund, adding real estate to your financial portfolio offers a greater deal of security for your family than stocks, bonds and mutual funds, because it offers a more predictable year-round cash flow, higher ROI and greater long-term growth, as well as the chance to collect tax-free or tax-deferred income for retirement that you can rely on.
8. Cons of Investing in Stocks
Although many financial advisors will be quick to tell you that stocks have a greater potential for higher returns compared to other types of investments, it’s important to remember the key word here is "potential". The reality is that stock prices can suddenly fall dramatically just as quickly as they can rise, and there is no guaranteed minimum return. In fact, you could easily wake up one day to find all of your assets gone, with no recourse. Here are the top three cons of investing in stocks that you don’t have to deal when if you invest in real estate:
- Short-term volatility
- You can lose your entire investment
- Not a good option for retirement income
In summary, when done correctly, real estate investing can provide ongoing, secure annual returns through rental income, tax advantages and capital appreciation, while also offering a hedge against inflation. By comparison, equities like the stock market can suddenly rise dramatically by 20 percent or more, only to lose all gains and more overnight without warning, leaving investors holding the bag, and - in many cases - wondering what to do about securing ongoing retirement income. But according to Investopedia, "Real estate investment is the purchase of a future income stream from property, offering several advantages over other types of investments, including potentially higher returns, stability, inflation hedging and diversification"; which also means real estate is a great way to secure ongoing retirement income you can rely on.
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