Investing in the Stock Market vs. Investing in Real Estate
Few assets yield investors greater returns on their money than stocks and real estate. Although both investments can lead to great profitability, investing in one or the other may not fit your investment strategy. When determining where to invest your money, you should understand the characteristics of both investment types. Knowing how the two assets measure up against each other helps you make an informed decision that can lead to profitability.
The return you expect to receive on an investment is an important factor in determining if the investment is a good choice or whether your money is best placed somewhere else. Historically, stock returns have outpaced real estate gains. According to a study dated August 2012 by Thornburg Investment Management, the S&P 500 experienced a 30-year nominal return of 10.98 percent. The nominal return on single-family real estate was 3.94 percent. The ending date used to calculate the returns was Dec. 31, 2011. A nominal return is a rate of return on an investment without taking inflation into consideration.
The cost associated with investing in stock is significantly lower than real estate. When you purchase a stock, the most you can lose is the amount of your initial investment and broker fees. For example, if you buy a share at $100 and a year later the price declines all the way to zero, the most you can lose is $100 and the trading fees you paid. The costs involved in real estate are not as straightforward. Some of the common costs associated with real estate investing include the cost of the property, title insurance, credit report, mortgage processing and local transfer tax fees. You may also pay a commission fee if you use a real estate agent. Also, it is difficult to predict how much you might need to spend on repairs and renovations and if it is rental property, how long some units might sit vacant.
If you sell a stock that you’ve held for at least one year and receive capital gains, you must pay up to a 15 percent tax on the income. You can deduct your capital losses, which offset the total amount of your capital gains. Real estate investors are responsible for paying property tax on their investment properties. The IRS allows you to deduct qualified expenses related to rental properties. According to the IRS, some of the qualified expenses include interest, points, advertisements insurance, depreciation, management fees, repairs and utilities. Investors must pay taxes on rental income and capital gains when the property is sold.
Stock prices are typically more volatile than real estate prices. For example, the price of a stock can drop 20 percent in a day. It is far less likely that real estate prices will drop as quickly. This is not to say that real estate does not experience price volatility. In a struggling economy, a real estate investment can decline in value. More homeowners may look to sell at that time, mortgages may become increasingly difficult to obtain, and buyers may not have the income necessary to purchase real estate.
Stocks enjoy the advantage over real estate in terms of liquidity. An asset is considered liquid when an investor can quickly sell it for cash. You can buy or sell a stock that trades at a high volume in a matter of minutes. In most cases, you cannot sell real estate as fast. Depending on the market, it can take months or even years to sell real estate at the price you want.