When it comes to investing decisions, the stock market and real estate are two of the most common places to put your cash. Which one offers better returns?
Real estate investment holds many advantages over investing in the stock market. Here are six ways that real estate offers an advantage to investors.
1. Real estate is a tangible asset that you control
The entirety of the real estate market may not be under your control, but your investment property is. There’s real power in being the head honcho of your investment. You get to make decisions about what to upgrade. You get to decide how much to charge for rent. You choose who to rent to. Those and all the other decisions that go into building your real estate investment wealth are in your hands. With stocks, you lack control. Instead, you and your money are at the mercy of the company and its executives and board.
2. Rental properties offer cash flow
Real estate investors who buy properties to rent out have the advantage of steady cash flow. The key is to find properties that you can rent for more than your expenses. Start with the 2% rule—which says you should be able to rent the property for around 2% of the price you pay for it—when evaluating a property for cash flow. Investments like dividend stocks can provide cash flow, but they are not in your hands. Instead, your investment is at the mercy of the people running the companies. Also, generally you earn on only your investment amount and not on any borrowed funds.
3. Funding real estate investment with debt is safer than funding stocks with debt
With real estate, you make money on your entire investment, including your debt. For instance, if you buy a $200,000 property with $40,000 down payment, you’re financing $160,000 of the price. Assuming the property price rises with inflation, you earn about 3 percent a year. In one year, your house is now worth $206,000—so you made a $6,000 on your $40,000 investment for a 15% rate of return. Even when you factor out the 3% inflation, you’ve still made 12% minus any costs of owning the property. On the stock market, financing with debt is called margin trading and is considered high risk.
4. Real estate investment acts a hedge against inflation
Since home values and rental incomes tend to rise with inflation, investing in real estate is a solid way to at least keep up with inflation, if not surpass it. Again, this is where investing with debt is to your advantage. You’ll be paying less of the current dollar value for the home as time goes by (and inflation goes up). Rents rise with inflation, also protecting your real estate investment. Stocks offer some hedge against inflation, but they also tend to fluctuate based on a variety of factors, everything from politics to tax revisions to the economic cycle.
5. Real estate investment offers tax advantages
Tax advantages of investment property vary by situation, but real estate investors generally can access many easy-to-understand tax advantages, including deductions, passive income and pass-through deductions, and depreciation. With stocks, tax advantages vary by type of investment, and mistakes are easy to make. Some estimates find that investors lose between 1 to 2% rate of return per year due to a poor stock investment strategy around taxes.
6. Real estate has a history of holding value, especially over time
Real estate has been part of the investment portfolios of wealthy people throughout history. That’s because real estate tends to hold and grow value for the reasons listed above. While values rise more dramatically in some geographical places than others, they offer a safe and reliable place to invest your money. Use tools like the Zillow’s home value index and the Federal Housing Finance Agency House Price Index for more granular data.
The one thing property investment almost always takes is time. Whether by being a landlord or by flipping houses, real estate is a high reward investment that works with tangible assets that are easy to understand and control.