As the pandemic continues to drag on and the stock market continues to climb, many investors are spending more time thinking about their financial health. One of the most important decisions an investor can make is whether to invest in stocks or property.
This article compares the difference between stocks and property investing to showcase which can offer the biggest potential for long-term returns.
Overview of Real Estate vs. Stocks
Before we dive into the pros and cons of stocks versus property investing, it’s useful to take a macro view of some of the critical differences between real estate and stocks as different asset classes:
Type of asset
Real estate is a tangible asset, including the land itself and any improvements, such as a building. Stocks, however, provide you with a share of a company’s earnings in the form of dividends.
What you own
Real estate property can be owned individually or by a group of investors with a direct stake in the property. Shares of common stock represent ownership of a corporation and a claim on profits and sometimes voting rights.
Ease of selling
Property is an illiquid asset and can take months or years to sell, depending on the property type. On the other hand, stocks are highly liquid and can be bought and sold online or with a smartphone app at any time of the day or night.
Real estate requires ongoing maintenance and management to maximize cash flow and property value. Stock market investors don’t pay extra maintenance fees, although a company’s operating expenses impact the potential profits.
Level of risk
Property is generally less risky than stocks: even in a normal market downturn, real estate assets still have value and the potential to generate future cash flow. Stock values can be highly volatile and sometimes disappear entirely. For example, in the dot-com bubble of 2000-2002, individual investors lost $5 trillion in the stock market as companies evaporated into thin air.
Real estate includes residential property such as single-family homes or small multifamily buildings, while commercial property refers to facilities such as offices, shopping centers, industrial property, and apartment buildings. Although these two broad asset classes are unique, they also share similar pros and cons.
- Act as a hedge against stock market volatility because real estate and even real estate investment trusts (REITs) have a low correlation to stocks and bonds.
- A rental property’s cash flow can provide monthly income plus long-term appreciation in property value, perfect for the passive real estate investor.
- Tax advantages of real estate include deductions of operating and business expenses, and depreciation, to reduce taxable net income.
- Real estate is easy to leverage by making a small down payment and financing the rest of the purchase price at today’s historically low interest rates.
- Investing in property is transparent and simpler to understand while providing more direct control of the property’s financial performance.
- Property investing requires a lot of work, such as researching sales and rent trends, vacancies and absorption, and future demand, which is why most investors hire a commercial real estate broker.
- Real estate is very illiquid and can be difficult to pull money out of at short notice, making properties a better choice for investors buying and holding over the long term.
- Buildings or land can be expensive to acquire, with down payments typically 25% or more and total buyer and seller transactions costs of around 10% of the property value.
Online brokerages and smartphone apps make it very easy to buy and sell stocks and bonds, including fractional shares, puts/options, and calls. However, the ease of trading shares isn’t always a good thing. Here are some of the pros and cons to be aware of before investing in the stock market.
- Stocks are very liquid, with day traders buying and selling shares every hour the market is open.
- It’s easier to diversify your portfolio, with stock available for virtually any asset type, along with broader-based mutual funds, exchange-traded funds (ETFs), and index funds.
- Stocks are very inexpensive to purchase, with discount brokerages offering free transactions and the ability to buy fractional shares.
- Vast amounts of research are available for stocks, allowing investors to understand how stocks have performed through different market cycles.
- Many stocks also pay dividends, which can then be reinvested to boost returns over the long-term. However, some huge companies like Google (Alphabet) and Facebook generate billions of dollars in net income while paying no dividends to their shareholders.
- Stocks can be much more volatile than real estate, with the S&P 500 generating negative returns some years of more than -38%.
- The liquidity of stocks can also be a drawback, with many investors becoming emotionally involved with their trades without keeping an eye on the longer term.
- Selling stocks can also trigger considerable capital gains tax, whereas real estate investors can conduct a 1031 tax-deferred exchange to defer tax payments and have more capital to reinvest.
Do Stocks or Properties Have Better Returns?
With the market at an all-time high, it can be tempting to think that stocks are the best buy. However, an in-depth look at the numbers shows that property generates better returns over the long-term.
Because all real estate is different, it isn’t easy to make an apples-to-apples comparison between specific commercial property investments and the stock market. That’s why the National Association of Real Estate Investment Trusts (Nareit) analyzed publicly-traded REITs’ performance compared to publicly-traded stocks.
Nareit found that property has outperformed the broader stock market, even during the Great Financial Crisis.
Property returns are more reliable.
The standard deviation for 10-year real estate returns is 9% compared to 16% for stocks. This means that property generates more consistent, less volatile returns over a holding period of ten years compared to owning stocks.
Property generates larger annualized returns.
Property returns are also higher than stocks over a longer-term investment period. Over a 20-year investment horizon, real estate generated average annualized rolling returns more than 50% higher than stocks over the same period.
Property outperforms stocks over more extended periods.
Over the past 30 years, property has outperformed stocks more than 56% of the time. When property returns are measured over 19 years or more, property outperforms stocks each and every month.
Diversify and Grow Your Portfolio
Of course, past performance is no guarantee of future returns. Both stocks and property have their advantages and disadvantages. That’s why many investors today are beginning to hedge their bets by moving some money out of the stock market and investing in commercial real estate.