Investing in real estate and investing in stocks are two very different ways to build wealth. You can use both, however, to meet your long-term financial goals while also exploring different ways to generate immediate income as well.
Find out the key differences between real estate and stock investments, plus how to assess the pros and cons of each option.
Investing In Real Estate Vs. Stocks: How Does It Work?
While choosing to invest in real estate or stocks sounds like two distinct options, there are actually many subsets within each category.
Real Estate Investing Explained
Real estate comes with both passive and active forms of investing, plus various types of ownership structures based on your preferred level of investment and risk. Here are six types of real estate investments to consider.
Residential Real Estate
Investing in residential real estate can potentially allow you to earn ongoing income while also enjoying long-term property value growth. You can fix and flip a property for short-term gains or hold onto the property and rent it out to tenants. Since 2000, the median U.S. home price has more than doubled, according to the Federal Reserve Bank of St. Louis, though annual appreciation varies by market.
Commercial Real Estate
Instead of investing in residential homes, commercial real estate involves buying business-related property, such as office, retail, industrial and multifamily buildings. Similar to residential properties, you can bring in rental income while also enjoying appreciation in your property value over the years. Plus, commercial rental agreements are usually multiyear agreements, so you have less turnover in tenants and better stability in cash flow.
Raw Land Deals
Raw land is undeveloped land that is frequently cheaper than properties with existing buildings, whether residential or commercial. You can hold onto the land and solely enjoy property value growth until you decide to sell. Or if you want to generate immediate income, you can build out the land or lease it for agriculture, energy development, parking, storage, or cell towers.
Real Estate Investment Trusts (REITs)
A real estate investment trust is a more liquid way to invest in real estate compared to owning a property outright. Plus, you don’t have to worry about managing or maintaining any properties. To qualify as REITs under U.S. tax law, companies must distribute at least 90% of their taxable income to shareholders. There are many publicly traded REITs available, and you can narrow down your portfolio selections based on categories like mortgages, commercial buildings or healthcare.
Real Estate Crowdfunding
Real estate crowdfunding involves joining other investors to purchase real estate investments. Some platforms may require you to be an accredited investor, while others are less stringent on their financial requirements. Like REITs, you can choose from both residential and commercial real estate investments. Many platforms have a hold period, meaning you must keep your money invested for a set period of time – often several years. During the hold period, you cannot sell your investment shares to access cash; for this reason, real estate crowdfunding is regarded as an illiquid investment option. In addition, real estate crowdfunding carries risks tied to the platform used for this investment structure; for example, a technical failure or legal issues could cause problems accessing investment funds.
Personal Real Estate
Many people invest in real estate simply by purchasing their own home. As you build equity, you can tap into that growth either by selling for a profit or getting a home equity loan, home equity line of credit or cash-out refinance. Another option to maximize your investment is to purchase a multifamily unit, like a duplex. You can live in one unit and then rent out the others to put toward your mortgage payments.
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Stock Investing Explained
A whopping 62% of Americans own stock, making it a popular choice for retirement and mid- to long-term savings goals. You’ll see a number of types of stocks when researching options for your portfolio.
Common Stocks
A common stock is a type of asset you buy on a stock exchange. You can buy individual companies or invest in pooled investments like an exchange-traded fund (ETF) that hold baskets of stocks. Common stockholders usually have voting rights in the company, which are proportional to the amount of stock owned. You may also receive dividends, depending on the company and its performance.
Preferred Stocks
Purchasing preferred stock gives you priority whenever the company pays out dividends or distributions. Oftentimes this is a fixed amount so that you receive consistent income. There are no voting rights with preferred stock, however. Preferred stocks are typically issued with a fixed par value and dividend. Their market price may rise or fall based on interest rates and demand.
Growth Stocks
As the name implies, growth stocks are meant to rise in value at a higher rate than the overall market. That means there is usually a higher level of risk involved, since there can be a lot of volatility, particularly in the short term. Because these stocks are focused on long-term growth, investors typically don’t receive dividends.
Income Stocks
Income stocks are designed to provide you with steady dividends, which ideally increase over time alongside the value of the stock itself. You can find income stocks across a wide range of industries to help diversify your portfolio. Utilities, energy and real estate are common industries with income stocks.
Value Stocks
Value stocks are those that are trading below their intrinsic value. They can be a good option for an investor who wants to earn bigger gains over time. You’ll need to do some analysis, however, in order to identify these stocks.
Blue-Chip Stocks
For predictable growth, blue-chip stocks represent established companies with a long track record of historical growth. Oftentimes, they pay dividends to help you create an income-generating portfolio.
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Comparing Real Estate Vs. Stocks
How do real estate and stocks compare to each other from an investment perspective? Take a look at them side by side to see what it takes to get started – and get out of – each one. We focused here on a traditional investment-property purchase for real estate, and common stocks for stock investments.
| Feature | Real Estate | Stocks |
|---|---|---|
| Upfront Costs | Down payment Closing costs Potential renovations | Many brokerage accounts have no minimum investment Fractional shares let you access stocks at any price point |
| Research | More familiar investment, especially in geographies you know Less complicated analysis for cash flow | May require learning multiple industries to make well-informed investment decisions Analysis can be complicated |
| Liquidity | Easy to take out a loan based on home equity Can take months or longer to sell | Depending on the broker, securities financing is sometimes reserved for high-balance accounts Can be traded daily |
| Returns | Usually stable over the long term Slower appreciation than stocks | Historically strong gains over the long term Short-term volatility can impact stock performance Increase returns on dividend stocks by reinvesting the payouts |
| Ongoing Costs | Maintenance Vacancies Advertising Management company fees, if applicable | Annual management fees Transaction fees |
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Pros And Cons Of Investing In Real Estate
If investing in real estate seems like an attractive way to build wealth over time, consider both the pros and cons before jumping in.
Pros:
- Investment property loans are secured by the property, but lenders often still require personal guarantees from borrowers.
- Real estate values tend to increase in times of inflation, protecting your investment even during economic turbulence.
- You can deduct both rental property expenses and depreciation from your taxable income each year.
- A 1031 exchange may allow you to sell a commercial property and purchase a new one while deferring capital gains tax. This lets you climb the property ladder without taxes diminishing your equity.
Cons:
- While earning rent each month is sometimes touted as “passive” income, it takes quite a bit of work to manage a property, even if you outsource it to a property manager.
- Real estate takes more upfront capital than stocks. It can be hard to diversify your portfolio unless you’re working with a large pool of money.
- Both upfront and ongoing costs can eat into your profits and overall growth, unlike stocks, which come with comparatively low transaction fees.
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Pros And Cons Of Investing In Stocks
It’s easy to invest in stocks, but weighing the pros and cons can help you make smart decisions for a diversified portfolio that grows over time.
Pros:
- It’s easy and affordable to buy and sell stocks, keeping your funds liquid in case you want to cash out.
- Some stocks may outpace inflation so that your savings don’t devalue over time.
- You can diversify your portfolio with your preferred asset allocation, no matter how small or large your investment amount may be.
- When you purchase stocks in a taxable account for at least a year, you can enjoy the long-term capital gains tax rate instead of income tax on your investment growth.
Cons:
- Even though stocks are liquid, short-term volatility can cause the value to fluctuate significantly.
- There are so many investment options to choose from, making it important to create a plan based on your personal situation. Hiring a financial advisor can help you make decisions, but it will add to your overall cost and you may need a minimum investment in order to qualify.
- Hidden costs – such as transaction and management fees for mutual funds, managed portfolios, and advisory services — can eat into your overall gains. (Fortunately, some brokers now offer zero-commission trading.)
FAQ
The Bottom Line: Choosing Between Real Estate And Stock Investments
There’s no right or wrong answer when it comes to investing in real estate vs. stocks. Choosing stocks is an easier entry point for newer investors, both in terms of time and finances, but real estate can be an attractive long-term investment. Plus, there are several alternative ways to invest, such as REITs and crowdfunding platforms, which can help you diversify until you’re ready to purchase your own investment property.
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Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
