People buy assets for various reasons. Many people see investments as a vehicle toward retirement. Other people buy assets to save up for a vacation or another big purchase. Investors have many origin stories, but most gravitate to real estate and stocks. Investors have poured their money into these investments for centuries. The appreciation potential is massive, and today’s savings rates aren’t enticing people to stash their cash.
Accredited investors have more options than ordinary investors. These investors can buy advanced assets around stocks and real estate. Accredited investors can invest in complex resources, such as hedge funds, venture capital, and real estate funds. Every investor has a limited amount of funds. Knowing the advantages and disadvantages of real estate vs. stocks can help you make better decisions that align with your financial objectives.
Investing in Real Estate vs. Stocks as an Accredited Investor
Accredited investors can buy rental properties and pick stocks, but people with more money often look for passive investing. They want someone else to manage their money and do all of the work. You can buy shares of companies and real estate investment trusts, but this approach gives you less control. More capital opens the doors to professional management and more control over your investments. You don’t have to be at the mercy of a company and hope they perform well. Accredited investors can buy assets that put them in close contact with the decision-makers. In these arrangements, accredited investors can have a say about the future direction of the investment.
Real Estate vs. Stocks: Which One is a Better Investment?
The real estate market and stocks each offer compelling opportunities for investors. You can invest in a wide range of assets and use criteria to shortlist investments that align with your goals. Each asset has a different set of risks and potential rewards.
Investing in Real Estate: Overview
Real estate will always hold value. People need places to live, work, and store their belongings. Real estate provides these critical necessities. In addition, as an asset, real estate acts as an inflation hedge. The asset has had some ups and downs like any investment, but it has historically performed well.
You can use many indicators to assess a property’s value, but nothing matters more than location. The location of a property can make or break your investment. Real estate professionals often target areas with population growth and low unemployment, amount other factors.
Most investors shy away from real estate because of the time investment. Managing real estate can feel like a full-time job. However, accredited investors can escape this fate and still buy real estate.
Investing in Stocks: Overview
The stock market lists thousands of companies you can buy and hold. Some investors trade and use derivatives, but the buy and hold method has less risk and stress. Long-term investors do not observe stock price charts every hour. Instead, they focus on a company’s 5-10 year outlook before investing.
Investors use metrics such as the P/E ratio, EPS, revenue growth, and other factors to assess value. Like with real estate, a stock’s value is in the eye of the beholder. Two investors can look at the same stock and make convincing analyses that offer different courses of action.
Real Estate vs. Stocks: Which Investment Is Right for You?
It’s no secret that real estate and stocks have produced millionaires. People invest their money early and let it compound for years. However, each person has a different path to success and deciding if you prefer real estate or stocks is important. Understand the differences between these popular assets before investing another dollar.
Cash Flow and Income
Stocks and real estate each produce cash flow and income. Dividend stocks usually pay their shareholders quarterly, while some make monthly payments. The best dividend-paying companies hike their dividends yearly, effectively rewarding long-term shareholders. Not all stocks offer dividends, but you can also generate income by selling assets with capital gains. Some stocks that do not provide dividends right now may offer them in the future.
Once you have a property and tenant, you can generate monthly rental income from real estate. You can select from apartment buildings, commercial properties, and other real estate asset classes. Some accredited investors team up with real estate sponsors to become passive investors. As a result, you won’t have to worry about collecting rent or asking tenants to make higher rent payments the following year. Raising rents is an integral part of realizing cash flow, but not every investor has the fortitude to raise prices on their own.
Access and Capital
Stocks require less capital than real estate, and it’s easier to get started. You can select from thousands of companies and build your portfolio quickly. You can own a stock within seconds of making an order. Real estate requires more capital, and you will have to find a property in a desirable location. Accredited investors have more options since they can target out-of-state real estate properties and have someone else manage them. Real estate investors embarking on their journey usually start with a local property to gain experience before looking at other real estate markets.
Management Costs
Management costs can quickly add up for stocks and real estate. Picking your assets will help you avoid most of these costs, but this approach requires substantial time. Accredited investors can pay brokerage fees or property manager expenses depending on if they prefer stocks or real estate.
Time and Effort
Real estate requires more time and effort than stocks if you do both of them alone. While you can pick stocks and walk away from your portfolio, real estate requires constant attention.
Diversification
Real estate investments require more capital and have recurring costs. This structure makes real estate less desirable than stocks for portfolio diversification. Accredited investors have more flexibility with real estate and can invest in several real estate funds to diversify their holdings. The extra steps to real estate diversification through sponsors can lead to stable assets and reliable cash flow. Stocks have fewer barriers to entry for diversification, and you can simplify the process with a mutual fund.
Stability
Stocks have many advantages, but stability isn’t one of them. Stock investments swing on company, political, and economic news. New information can create mayhem in the stock market. Real estate is a more stable asset. Tenants will continue making monthly rent payments, and real estate prices won’t fall as dramatically as growth stocks. Many of the top-performing stocks in 2021 have declined more than 50% from their all-time highs. You can get lucky and exit at the right time, but that’s a risky strategy for retirement money.
Liquidity
Stocks offer more liquidity than real estate. You can exit a stock position in a few seconds, but it can take months or even years to sell a property. Real estate investors have more hurdles to clear before reaching an agreement with a buyer.
Risks
Stocks and real estate have significant risks. Stocks can quickly lose their value on unexpected information and market reactions. Dramatic price swings can rattle investors and cause them to sell at losses. Real estate investments don’t have the same risk, but high costs and vacancies can squeeze short-term profit margins. So it makes sense for assets with strong returns to involve some risk. Investors must incur some risk to get sizable rewards and achieve financial independence sooner.
