Investing in stock market – is it better than investing in real estate?
How does investing in stock market compare versus investing in real estate? This is a very common question among investors and a lot of comparisons have been drawn between the two investment avenues. Before deciding which option to choose between these two, it is important for the investors to understand the basics of how these markets work as well as advantage and disadvantages of both. Both these investment avenues have their unique aspects which make them lucrative.
People should be deciding between the two based on their investment strategy, limitations and risk appetite. Let us take a deeper look into both these markets and see relative pros and cons of each of them.
Investing in Real Estate – Real estate has given a return f around 8% historically if you exclude the recent sub prime crisis. Real estate includes any property which is tangible. A lot of people feel it is better to own something which they can feel and see like property instead of virtual stock. The real estate has 2 categories – residential and commercial.
Advantages of investing in real estate include depreciation which means that you can write off some amount of money invested as wear and tear. This helps in reducing the value of property thereby reducing the tax liability. You can also make use of 1031 exchange. In this system, you can sell the property which having to pay any capital gain tax. This is possible only when you invest the money in similar property type.
Major disadvantage of investing in real estate is the lack of liquidity. Real estate can take time to appreciate and there is a lot of upfront investment involved. It is pretty difficult to diversify your investments in real estate. One option is to invest in something called REIT (real estate investment trusts) which behaves like a mutual fund and you can act as a shareholder.
Investing in stock – Stock investing has given an annual return of about 13% historically. When you invest in stock, you own a part of that company. There are a lot of advantages of investing in stock market over the real estate. Investing is stock market has become very easy and simple now thanks to various online trading options available in market. The upfront payment required is also pretty less and you just need an online trading account to be opened with a brokerage house to get started. Stocks are a very liquid investment and therefore it is very quick and easy to buy and sell stocks. The can also be rolled over to retirement funds in a tax free way which saves you a lot of money. If chosen carefully, it is not rare to get much better returns (above 20%) by investing in stocks.
As with everything, there are disadvantages of investing in stock market as well. Firstly, it can behave in an unpredictable manner. Stock can be very volatile therefore it is not for faint hearted people. A lot f times, people make buy or sell decisions based on emotional feeling rather than analytical data which can prove to be a fatal investment and is completely irrational.
Final words – Generally speaking, investing in stock market has been giving better returns than investing in real estate in the long run but real estate is considered to be a more stable investment having better tax advantages. Therefore, investors should choose one over another based on his financial condition and risk appetite while taking into consideration the advantages/disadvantages related to each of these.
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