Should you invest in real estate or stocks? The investment you choose will depend on your finances, financial goals, time and risk tolerance. Read on to find out which is the most appropriate investment for you.
Investing in Real Estate
Investment in real estate works in different ways. You can buy a house, remodel it and sell it at a profit. This is commonly referred to as fix and flip. It is time intensive, requires hard work, and when you stop working your income stops. You can buy a turnkey property and rent it. If you are busy and have capital you can invest in apartment or multifamily syndications. In this method, a syndicator pools together money from investors to buy or build apartments. You as the investor get passive income from the investment in the form of cash flow and backend profits when the property is sold.
Real estate investment requires a big cash injection and may take time to generate profits. However, it comes with good returns in the end. In addition, real estate has the potential to appreciate with time and may provide substantial tax benefits.
Advantages of Real Estate Investment
Investing your money in real estate comes with many benefits. Here are the main benefits/reasons why you should consider it:
- High returns or passive income – Investing in a rental property or apartments can generate passive income. It is a good investment for investors desiring long-term returns.
- Lower risk thanks to inflation protection – Real estate investment protects investors from the impact of inflation. Inflation can cause an increase in the cost of living, which results in rent increases. If you have a rental property or invest in an apartment syndication, that means more income for you.
- Appreciation – Rental properties tend to increase in value over time. Many factors will affect the value of your property, but with time your rental property could be worth significantly more than its initial cost. You can sell it in the future for massive profits.
- Tax benefits – The U.S. government encourages people to invest in real estate by providing exceptional tax benefits when they do so. First, there is depreciation tax benefit, which allows real estate investors to write off 3.6% of the value of the building each year as an expense, even though there is no out-of-pocket cost for this expense. Multifamily investments have an additional benefit called bonus depreciation. With bonus depreciation, you can deduct the entire value of the investment from your taxable income in the first year! This may sound too good to be true but it’s not.
- Leverage – Leverage allows a real estate investor to purchase a property that costs more than the amount of money they have available or to spread out their cash across multiple properties. It is common for a real estate investor to put down 20-30% on the purchase of a property and obtain a loan for the remaining portion.
Drawbacks of Real Estate Investment
Several drawbacks can prevent you from investing in real estate. They include:
- Require significant cash investment – Buying or developing a real estate property requires more money than stocks. It also involves high transaction costs.
- Lack of liquidity – It is challenging to sell real estate quickly. It takes time to list the property, look for buyers and close the deals.
- Tenant challenges – Being a landlord comes with a set of problems. You have to look for good tenants. It is not easy to deal with some tenants. You can avoid all the hassles by considering multifamily syndication, where you will not deal with tenants directly, and you will be getting the advantages of real estate investing.
Investing in stocks can give you returns in two ways: selling the shares at a profit or receiving dividends as a stockholder. Like real estate investment, investing in stocks requires research and patience to make significant profits.
Benefits of Stock Investing
You might want to invest in the stock market for the following reasons:
- Lucrative historical returns – Many investors have earned huge profits in the past thanks to stock investing. If you buy and hold stocks you can expect an average annual return of around 7% over a long time.
- Ease of diversification – It is easy to invest in a variety of stock assets, which may minimize your investment’s overall risk. You can also consider index funds, which make diversification even easier.
- Accessibility – It is easy to find stocks to invest in. All you need is a robot advisor account or self-directed brokerage to start investing. With many micro-investing apps available today, you can begin stock investing with a couple of dollars.
Drawbacks of Investing in Stock
Here are reasons that will make you avoid investing in stocks:
- Volatility – Stock values can fluctuate regularly, and as a result, you may be forced to sell your shares at a loss. It is a risky investment that is likely to be affected by many factors.
- A risk of making decisions based on emotions – You are likely to make investment decisions based on emotions that will likely ruin your investment.
Historically, commercial real estate investing has had higher returns than stock investing with less volatility. For passive investors, apartment syndication has attractive long-term returns and monthly cash flow.
How To Get Started
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