One long-running debate in the world of investing is whether real estate or stocks are a better investment. Both types of assets certainly have their virtues, but many investors may discover that real estate investing edges out stocks in several different areas. Here’s why.
Real estate investing creates a steady, passive income stream.
One of the most attractive things about owning real estate is the fact that it creates a passive income stream. Of course, to earn income from your properties, you must rent them out, but after they are rented, there isn’t much to do but collect your income and perform regular maintenance on them.
Real estate is better than stocks in particular because it provides a steady source of income, while stocks can be quite unpredictable. You also don’t collect income on stocks unless you sell them or they pay dividends, while you can buy and hold real estate.
However, once you have rented out your properties, they provide steady cash flow you can count on. You will always know easily how much cash you should have coming in on your properties every month, assuming you have quality tenants who pay their rent on time. Rental prices tend to move up in step with inflation, so it’s easy to predict how much cash flow you will receive in the future, either from properties you already own or from renting out a property you don’t even own yet.
Real estate investing offers more control.
Stock investors are at the mercy of the market, often tossed about with little rhyme or reason. They have no control over their profits. If the stock market is up, they earn a profit, but if it’s down, they lose money through no fault of their own. The goal of stock investing is to buy low and sell high, but it’s nearly impossible to do that consistently, even with a lot of experience. There will always be variables that can’t be guessed at before they affect prices.
On the other hand, real estate is very easy to understand and control. Property owners set the rates at which they will rent their properties out, so they are in complete control over how much they bring in. It is necessary to research rental rates for similar properties and use that to inform the rates you set. However, you can always add more properties to increase the rental income you’re earning.
Additionally, if you’re not getting any interest in one of your properties at the price you have set, you can always negotiate a new price to get the property rented out. For example, let’s say you run a Toronto residential property management company, and there’s one property in the city that isn’t garnering interest. You can cut the price to see if more renters become interested.
Real estate offers more tax advantages.
One of the greatest benefits of real estate investing is that it brings depreciation expenses on your taxes. Let’s go back to the example of Toronto residential property management. Landowners will see their tax liabilities decline thanks to deductions for depreciation. Rules regarding depreciation for property vary from country to country. In Canada, the building part of the property can be depreciated as part of your capital cost allowance, although the land part cannot be.
On the other hand, stock investing is subject to capital gains taxes, so investors must take extra steps to reduce their tax liability. If you don’t know how to do it, you could end up paying quite a bit in taxes on your stock investments.
Returns tend to be higher on real estate.
While real estate and stocks are two totally different ways to invest, it is important to understand the returns you can expect on each of them. Over the last several decades, stocks have seen an average compounded return of about 8% every year, according to Investopedia. Those years included some years when stocks declined overall as well.
Based on value, real estate investing has beaten stocks two to one over the last 20 years with a 10.71% average annual return on the former and a 5.43% average annual return on the latter. This makes real estate a very attractive investment option for many investors.
Real estate also offers two-fold increases in value. On average, real estate appreciates by 3% to 4% per year. Property owners also benefit from a return of 8% to 12% on their property due to the income it generates. Properties are also tangible investments that continue to hold some value even when the market is down, while stocks are just paper and can decline dramatically in down years.
There’s less volatility.
Investors who are concerned about volatility might also want to consider real estate instead of stocks. Stock prices can change suddenly by quite a bit, while property values tend to be more stable. Stock prices go up and down, often with little warning and sometimes with very little news.
Stocks are subject to the industry they are in, and other factors like interest rates and inflation impact prices. Investors who worry a lot about their investments may find that they prefer knowing where their investments stand instead of being fearful that prices will drop suddenly.
Property owners can enjoy a certain sense of security because real estate always carries some value, while stocks could always fall to $0 or close to it, although that’s rare.
One disadvantage is the initial investment.
There is one disadvantage to real estate investing, which is that you must have quite a bit of money saved up to get started, while stock investing can start with smaller amounts of cash. Of course, if you’re researching the possibility of investing in real estate, you probably already have a pile of cash you’re looking to invest. It may just be a matter of figuring out where to put your money, whether that’s in buying properties to rent out or in the stock market.
Liquidity may also be a concern for some investors because real estate cannot be easily liquidated like stocks can. However, if your properties are generating a steady income, liquidity may also not be much of a concern because you will have a steady stream of cash rolling in.
About the Author
Sabine Ghali, Managing Director at Buttonwood Property Management, a property management company in Toronto. She is an entrepreneur at heart who endeavors to help investors create real estate wealth over time in the Greater Toronto Area. Sabine is published in a number of media outlets, including Entrepreneur, Forbes, Toronto Star, Toronto Sun, and Gulf News, among many others.