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When it comes to investing, is it best to invest in stocks, real estate, or both? If you are looking to grow your wealth over the short or long term, it can be hard to know which is the best option. In this article, we will take a look at the pros and cons of investing in stocks, and in real estate.
Stocks Pros
There are a number of pros, number one being the fact that the stock market is highly liquid, as are the stocks themselves. Investment capital remains flexible and can be withdrawn and reinvested with little difficulty. Traders can execute investments at a moment’s notice and unlike real estate, you can get an accurate idea of the value of your investment at any time.
Investors can also enjoy a wider diversity in their investments. Your average individual doesn’t have the budget to own a diverse property portfolio spanning different places and comprising different kinds of property.
Stocks however allow investors to get involved with companies in every industry including tech, manufacturing, finance, media, and more. It’s also worth noting that there are fewer transaction fees with stock investments. UK stock brokers require that you open an account to buy and sell stocks, but often fees can be as little as zero. Less money on fees means more capital for you to invest.
Stocks Cons
One of the main drawbacks of the stock market is its volatility. Prices can move up and down very quickly and very severely in stark contrast to property values. Unless you are taking a long view of your stock portfolio, these price fluctuations can be risky.
You also need to check whether your profit or the sale of your stocks is subject to any taxes. Depending on where you live or are from, there can be instances where capital gains tax is payable. You may also have to pay taxes on stock dividends from your portfolio depending on your personal tax circumstances, but it may be best for you to consult a tax consultant.
Lastly, investment in stocks can trigger emotional decision making which is detrimental to strategy. Because buying and selling stocks is easier and faster than property, it means it’s more prone to snap decisions. On occasion, investors sell up when a buy-and-hold strategy would have reaped better rewards.
Real Estate Pros
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Buying a home can be a somewhat long and complicated process but the basic concept is simple: buy a property, maintain it, have tenants or do work on it, and then resell at a higher value. There is not much to learn about buying and selling property and buyers often have a team of professionals to assist in the process.
Property can also be purchased with a mortgage which allows investors to buy a property of a higher value than the cash they have. With as little as a 20% down payment, a property can be flipped, the mortgage repaid, and profit made.
There are also some tax advantages to owning a property. Homeowners can get tax deductions on mortgage interest, and there are tax breaks available including exclusions on capital gains tax.
Real Estate Cons
Buying, flipping, selling, and owning property is a lot more work than just investing in stocks. It also required ongoing costs such as maintenance, tax, professional service fees, insurance, and more. Overall, significant investment is needed beyond the initial purchase. When selling a property, you can expect to pay high closing costs which can be as much as 10% of the total value. This is a huge amount of money when compared with stocks.
Investment in property usually limits you in terms of diversification of your portfolio. Unless you are a multi-millionaire, you will be restricted to a couple of properties in certain locations. Stocks offer you the chance to invest in multiple industries all over the world
Last but not least, real estate doesn’t offer you a guaranteed return on your investment. While property prices do rise over time, you are always at risk of a market swing and selling the property at a loss.
As you can see, both markets have pros and cons but neither guarantee success. Stocks do come out on top though, purely based on the ability to hold an incredibly diverse portfolio. This means you have more chances for success and aren’t constrained to one property in one area.
