Over the past month, I have become obsessed with investing in the stock market. How to do it more aggressively, how to start buying individual stocks, etc. I have probably asked myself everything that a beginner investor can ask. One of the most important questions that has been stuck in my head is this one:
Is it better to invest in real estate or invest in the stock market?
I am sure many of you already have an answer. For those of you who have experienced success in one or the other, you probably have an idea in mind – which is great. But for me, I am torn between the two. I have had a long desire to invest in real estate, but my commitment has been challenged as I have learned of the many benefits of investing in the stock market. There are many positives and negatives to each investment strategy, so I thought I would compare the two.
Investing In Real Estate
Buying rental properties as an investment strategy is certainly not new. There are many people who have used real estate investing to build up their wealth and even supplement their retirement income. Yet, less people invest in real estate than utilize the stock market. This could be for one of the following reasons:
- Don’t want to work with tenants – Being a landlord can mean a lot of administrative work and working with tenants when things go wrong. A lot of people are too busy to be caught up with these small things. Investing in the stock market is much simpler in many ways.
- Risk of a bad tenant – There have been a lot of horrible tenant stories that have probably created an unreasonable amount of fear for people considering real estate investing. With that said, there is always the risk that a tenant could do damage to your property and this keeps people from taking the leap.
- High real estate market – Another reason why some people avoid it is because it just doesn’t make sense in their market. When prices are too high and rent too low to justify it, sometimes it just doesn’t make sense to invest in real estate.
While these are all legitimate reasons to avoid investing in real estate, it isn’t without its benefits. One of the most important benefits of real estate investing is the potential to grow your money faster with leverage. Real Estate leverage means that you are using your small amount of money to grow faster. In real estate investing, you can buy properties with a smaller amount of money than investing in the stock market. This means that if you buy a $100,000 home with a 20% down payment and the home value increases 5% in one year, you just made a 25% return on your investment without even considering the positive cash flow from rent. It wasn’t just the down payment (your investment) that saw a 5%, but the entire $100,000.
Stock Market Investing
With that said, the stock market is often the preferred choice. There are several advantages to the stock market that keep many investors satisfied:
- Investing money can be simple – While some investors buy individual stocks that require more attention, stock market investors have the ability to buy index or mutual funds that require little attention. To make it even easier, most people have the money automatically deducted from their paychecks.
- Invest regularly – In real estate investing, there is often that period of waiting to save up a down payment before being able to invest your money. Investing money in the stock market, however, is something that can be done regularly without a large lump sum saved up. This means less time of your money just sitting around doing nothing.
The comparison between the two forms of investing is quite complex and that is without considering the tax benefits of both forms. Each has it’s own unique tax benefits that I don’t have the time or space to go into.
While I am still figuring out my unique approach to investing, I plan to use a hybrid form. I do not want to pass up the benefit of the stock market to be able to invest regularly. Yet, I also don’t want to miss out on the importance of leveraging my money with real estate. For this reason, I have started with the stock market in an effort to slowly incorporate rental properties in the next 5 years. By using a combination of investment strategies, I will also diversify my investments and thereby provide much needed security.
How are you investing your money? Do you plan to incorporate real estate investing?
This post was written by Corey, a staff writer from 20’s Finances, where he recently started an investing series to help the inexperienced investors.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.