2021 Investors Guide: Is Real Estate Better than Stocks?

You have many different opportunities when it comes to investing in 2021. It’s easy to get caught up in figuring out the best place to put your money so it will grow for years to come. With the recent gains on Wall Street and in the housing market over the last couple of years, stocks and real estate have been popular investment choices for many investors. So that begs the question: Is real estate or stocks the better investment?

Before that question can be fully answered, it’s important to understand that both real estate and stocks are great investments for their own individual reasons. And the allure of either investment depends on several different factors that can be found in this investor’s guide.

We’ll also look at some details of both investments in-depth shortly. As with any investment vehicle, there’s always a degree of risk involved, and you should never invest more money than you’re willing to lose. But you know how the saying goes – the bigger the risk, the bigger the reward! Here are some factors to consider when deciding between the estate or stocks as an investment:

1. Risks

2. Time Investment

3. Investment Strategy

4. Cost of Entry

Risks

As mentioned earlier, there are risks involved with almost every investment, and real estate and stocks are no different. It’s important to understand the risks involved in investments because they will determine which opportunities you’re comfortable pursuing based on your personal risk tolerance. When talking about the risks of these two investments, we’ll look at 2 different factors: diversification and market stability.

Diversification

The ability to spread out the risk of your investment across multiple assets so you’re less exposed to losses. Real estate investors diversify their investments through purchasing multiple properties, so they aren’t reliant on only one asset for income. Stock investors diversify their investment by buying multiple stocks or mutual funds.

Market Stability

If history has taught us anything, it’s that there is no such thing as a stable investment. Almost any market is influenced by external forces and can have large swings in either direction. Short-term investing is risky in both real estate and stocks because you never know what will impact those markets negatively. However, if you stick it out, both investments have proved that long-term strategies provide profitable returns.

When it comes to real estate, diversification can be difficult because investing in multiple properties requires a lot of capital and may not be feasible for newer investors. However, over the years, the housing market has proved to be a more stable investment, avoiding constant volatility and providing solid gains from appreciation on a yearly average.

It isn’t the same case for stocks. Diversification is much easier to achieve through investing in multiple stocks or opting for mutual funds made up of a portfolio of stocks. The stock market tends to be less stable than the housing market, often experiencing large swings of gains or losses based on several different influences.

Time Investment

When it comes to comparing real estate and stocks as the better investment, the amount of time you’ll spend managing that investment is an important consideration. Depending on the level of involvement you want to have in your investment, you’ll either opt for an active or passive strategy. The truth is there are active and passive strategies for both real estate and stocks.

Active investment strategies usually imply that you’re heavily involved in the management of your assets which requires a substantial amount of time. An active investment strategy for real estate would be buying and managing rental properties yourself.

It will allow you to cut down on costs associated with maintenance and management, but those responsibilities would fall on you. For stocks, an active investment strategy would be researching and buying/selling stocks on your own.

You’ll save on portfolio management fees and potentially some trading fees, but the success of your portfolio would solely depend on you.

Passive investment strategies indicate that you take a “back seat” role in managing your assets and hire someone else to do it for you. In real estate, this often means hiring a property management company to oversee your properties.

They handle all property maintenance and tenant relations, so you don’t have to. With stock investments, it commonly means hiring a portfolio management group that handles the investment strategy for you. You tell them your risk levels and financial goals and they handle the rest.

Investment Strategy

With investment strategy, real estate and stocks are similar when it comes to benefits. However, taking a short-term or long-term approach towards these investments looks very different.

Short Term

these are investments that typically can be converted back to cash in less than 5 years. However, it’s very common for them to be cashed out within the first 3 – 12 months. Short term investment strategy for real estate could be house flipping.

You buy a property that needs work, you put money into fixing it up and sell it for a profit. This process usually takes a couple of months to a year depending on the size of the project. For stocks, this strategy could be buying or shorting a stock that you believe will experience a price change within a few months.

Long Term

Unlike short-term, long-term investment strategies usually last more than 5 years and can often last much longer. For real estate, this could mean investing in a rental property and renting it out to tenants while making some profit on rent and benefiting from the appreciation of the property over time.

For stocks, the “buy and hold” strategy is commonly used for long-term investments. You buy stock in companies you believe will continue to grow well into the future.

When comparing short and long-term strategies, one isn’t typically “better” than the other. It comes down to the amount of risk you’re willing to take. Short-term investments tend to be riskier than long-term investments.

The benefit of the short term is that you get money (plus gains) back quicker. The benefit of the long term is that there’s a higher chance of your investment being profitable and your gains being larger with more time to appreciate.

Cost of Entry

One other factor to consider deciding between real estate and stock investments is the cost of entry. Historically, stocks have been a lower cost of entry compared to real estate because real estate traditionally requires large amounts of capital to purchase – while stocks don’t.

That’s not so much the case these days as investors have found creative ways to invest in real estate requiring a lower cost of entry.

Crowd investing has become increasingly popular in real estate over the past few years. With the cost of acquiring real estate being out of reach for many individuals, investors have turned to pooling their money together as a strategy for co-owning real estate.

Popular websites and apps like Fundrise and Crowdstreet are platforms where you can start investing in real estate for as little as a few hundred dollars. These platforms have made investing in real estate attainable for essentially any investor – making the cost of entry into the real estate market competitive with the stock market.

Final Thoughts

Real estate and stocks are both popular and smart investments right now. So, which one is the better investment? Well, that depends on you and your current situation. If you take your financial situation, risk tolerance, time commitment, and investment strategy into consideration; the answer should become clearer. The good news is that either investment can fit into almost any situation.

If earning passive income through rental properties feels like the right investment for you, consider hiring a property management company to oversee the property for you. They’ll handle the daily operations and help you figure out how to get the best return on your investment.