When considering potential investments it is important to take into account your style, preferences, and personality. This is especially important when deciding whether to invest your capital in real estate or stocks.
The specifics of each individual investment should also be taken into account. Only a select few stocks would’ve outperformed California beachfront property purchased in the 1970′s, while it would have been impossible to beat the gains made by investing in shares of Wal-Mart, Microsoft, and Dell, especially if you reinvested your dividends.
While there is no cookie-cutter answer to “should I invest in real estate or stocks?” a good place to begin is by analyzing each type of investment.
What Each Investment Entails
By investing capital in real estate, you are purchasing physical property or land. Certain types of real estate will cost you money every month you own it – such as a vacant parcel of land earmarked for sale to a developer, but requires monthly payments, maintenance, and tax payments.
Still other types of real estate generates cash, such as strip malls, rental houses, and apartment complexes. In these types of real estate investments, tenants pay rent every month while you are responsible for expenses, pocketing the difference as profit.
When purchasing stocks, you are buying a piece of a corporation. Your stake in the company entitles you to a cut of the profits, if there are any, for each share that you own. While Wall Street makes the buying and selling of stocks seem more complicated than it really is, if you purchase 10,000 shares of a company with 1,000,000 share outstanding, you own 1% of the corporation.
A corporation’s Board of Directors decide how much of the company’s profits get reinvested in expanding the business. The Board of Directors are elected by shareholders, and is also responsible for deciding what portion of profits gets paid out to shareholders as dividends.
Should I Invest In Real Estate Or Stocks? Pros And Cons Of Each Investment
There are many advantages to investing in real estate. People are more psychologically open to investing in real estate based on the fact that it is a tangible asset that can be seen and physically inspected. It is also an investment that most people have grown up exposed to, and were taught the importance of.
It is also more challenging to be defrauded in real estate due to the inspection process that takes place before the sale of property. Real estate also offers a safer leverage (debt) structure than the margin lending used to purchase stocks. Historically, real estate has also been an excellent hedge against inflation, as well as protection against a declining dollar.
Real Estate, compared to stocks, takes a lot of hands-on work. Screening tenants, insurance concerns, and maintenance all factor into an investment in property, and require prompt attention. There is also the possibility that real estate could end up costing you money every month due to a high vacancy rate, utilities, maintenance, taxes and property management fees.
History has proven that in spite of the ups and downs of the markets, purchasing stocks, retaining ownership of them for long periods of time, and reinvesting your dividends has been the best path to wealth. Buy purchasing a piece of a company by buying the company’s stock, you reap the benefits of the company’s results without having to actually report to work every day.
A high quality stock will not only increase profits every year, they also raise their cash dividends. It is also much simpler to diversify by investing in stocks, as some online brokerages and mutual funds allow you to invest as little as $100 a month. An investment in real estate would require a substantially higher initial investment.
Go With The Investment That Best Suits Your Needs
Even in light of the fact that stocks can generate more wealth in the long run, most investors are too fickle, undisciplined, and emotional to benefit. Psychological factors are the number one reason investors lose money in the stock market.
Stocks are also extremely volatile in the short-term and can make investors nervous. If you know why you invested in a company in the first place, short-term fluctuations in stock prices should go largely ignored, and dips should be regarded as buying opportunities.
Always take into account your own investment objectives when answering the question “should I invest in real estate or stocks?”. Your risk tolerance, available capitol, and experience should be taken into consideration when deciding which investment is right for you.