Real estate and stocks are two of the most popular investment options. Both can be profitable, but each has its own risks and rewards. So which is the better investment? Well, it depends on a variety of factors, including how much you have to invest, your risk tolerance and your overall investment goals.
To help you make an informed decision on which investment opportunity is right for you, we’ll take a closer look at the nitty-gritty of investing in real estate and stocks.
Investing in Real Estate
When you invest in real estate, you’re buying property. You may be purchasing a primary residence to live in year-round, buying and flipping homes for a profit or purchasing an investment property to rent. There are also commercial real estate options to consider, such as office buildings you can lease out or larger apartment complexes you can manage.
While real estate investing has some risks, it can be a very lucrative endeavor.
One key to success in real estate investing is to do your homework. You must research the market and understand the ins and outs before you dive in.
It also helps to diversify your real estate portfolio by investing in different types of real estate, such as long-term rentals, flipping properties, real estate investment trusts (REITs) and more. This way, you can offset any potential losses with gains from other real estate investments.
You can choose from a few options to fund your real estate investments. You can use your savings, take out a loan, pull equity from another property or use real estate crowdfunding. Either way, you’ll need a solid plan in place before you start investing.
Since real estate is a physical asset, it can be a more hands-on investment than stocks. For example, if you’re flipping properties, you’ll need to be involved in the process of rehabbing and selling the home. And if you’re a landlord, you’ll need to deal with tenants, repairs and other day-to-day responsibilities of being a property owner.
From March 1992 to March 2022, the average real estate return in the U.S. was 5.3%. And in March 2022, U.S. house prices grew 17.5% year-over-year – an increase from 17.4% for the previous quarter.[1]
Investing in real estate can be a great way to build your wealth over time. But it’s important to remember that real estate is a long-term investment.
Investing in Stocks
Like real estate, you can make a lot of money by investing in stocks. But how do stocks work?
Think of a publicly traded company as a pie. When you buy shares of that company, you’re purchasing a tiny slice of that pie. As the company grows and becomes more successful, the value of your slice will increase. And if the company pays dividends, you’ll receive a portion of those profits.
Of course, stocks can also go down in value. Even the most successful companies can have down years. So it’s essential to diversify your portfolio by investing in different types of stocks across different industries or risk levels.
You can also limit your risk by investing in index funds. Funds spread your investment out over a large group of stocks or mutual funds managed by professionals.
Historically, the average return on investment of the S&P 500 was roughly 10% per year.[2] If you invested $1,000 in the S&P 500 today, you could expect to have $6,000 in 20 years.
Of course, past performance is no guarantee of future results. But while stocks may be a more volatile investment than real estate, they can also offer the potential for higher returns. With the help of a financial advisor, you can minimize your risk and maximize your chances for success.
Pros and Cons of Investing in Real Estate
While real estate has the potential to offer a high return on investment, it’s also a more hands-on investment than stocks. And it may take years to see a return on your real estate investment. Let’s look at the pros and cons of investing in real estate:
PROS of Investing in Real Estate👍
✅Generates cash flow
Compared to stocks, real estate can offer a more stable and predictable cash flow. For example, you’ll generate monthly rental income if you’ve invested in a rental property. And, if you’re flipping properties, you’ll receive a lump sum of cash when the property is sold.
✅Passive income
Once you’ve bought a property, you can hire a property manager to handle day-to-day tasks, such as repairs, marketing and rent. This hands-off approach can offer a great source of passive income.
✅Tax advantages
Investing in real estate can offer some tax advantages, such as deducting your mortgage interest payments and property taxes from your taxable income.
✅Protects against inflation
Since real estate values tend to go up over time, investing in real estate can help protect your investment against inflation.
✅Increases leverage
With real estate, you can leverage your investment by taking out a mortgage, which allows you to own property worth more than your initial investment without paying the full price upfront.
✅Value appreciates over time
Real estate values tend to appreciate over time. If you buy a property and hold onto it for a few years, you will likely see an increase in the value of your investment.
✅Helps build generational wealth
If you’re looking to build wealth that you can pass down to your children, real estate is a great option.
✅Potential vacation or retirement home
Chances are you’re not going to want to retire in your starter home. But if you invest in a vacation rental or retirement property, you could have a place to retire that also generates income.
CONS of Investing in Real Estate👎
⛔Requires more work than stocks
Real estate investing requires more work than simply buying and selling stocks. You’ll need to find a property, get a mortgage, make repairs or find tenants. The amount of cash you pay upfront may feel daunting, and you’ll experience fewer “small wins” with real estate investing.
⛔Requires large upfront investment
To buy a property with a mortgage, you’ll need to come up with a large sum for the down payment and closing costs and ensure you have the income to cover the monthly mortgage payments. As a result, real estate investing is not for everyone, especially borrowers with unpredictable incomes.
⛔High transaction costs
Between the real estate agent’s commission, closing costs and repairs you may need to make, investing in real estate can be a costly endeavor. You’ll need to be sure you have the money to cover all upfront costs before you purchase a property.
⛔Value appreciation isn’t guaranteed
While real estate values have appreciated over time, there’s no guarantee that your property will appreciate in value.
Pros and Cons of Investing in Stocks
Whether you’re investing in stocks for the long term or looking to make a quick profit, there are risks and rewards associated with this investment option.
PROS of Investing in Stocks👍
✅Highly liquid
Because stocks are traded on exchanges, they can be easily bought and sold. The result? You can cash out your investment quickly if you need to.
✅Easier to diversify portfolio
With stocks, it’s easy to diversify your portfolio by investing in various companies across different sectors.
✅Requires less work than real estate
Stocks are a relatively passive investment. Once you’ve bought shares in a company, you can sit back and let the dividends roll in.
✅Low transaction fees
Compared to other investments (such as real estate), there are relatively low transaction fees when you buy and sell stocks.
✅Easy to add to tax-advantaged retirement accounts
You can easily add stocks to tax-advantaged retirement accounts, such as a 401(k) or IRA, to grow your money tax-free.
✅Historically has a higher rate of return
Over the long term, stocks have outperformed other investment options, such as bonds and real estate.
CONS of Investing in Stocks👎
⛔Higher volatility than real estate
The stock market is notoriously volatile – prices can go up and down quickly, often without warning.
⛔Capital gains taxes
If you sell your stocks for a profit, you’ll need to pay capital gains taxes on your earnings.
⛔Emotional decision-making
It can be hard to stay calm when the stock market is erratic. But if you make decisions based on your emotions, you could end up losing money.
Real Estate vs. Stocks: Which Is Right for You?
So which is the better investment? Real estate or stocks?
The answer depends on your investment goals, risk tolerance and financial situation.
Think of it as an apple to oranges comparison. You can’t say which is better, but you can decide which one is right for your unique circ*mstances.
Here are a few things to consider:
If you’re looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time.
If you’re looking for a more passive investment, stocks may be the way to go. Once you’ve bought shares in a company, you can sit back and let your investment play out.
For investors who are risk averse, real estate may be the more appealing investment. Although there’s a possibility that your property could lose value, it’s typically less volatile than stocks.
On the other hand, if you’re comfortable with risk and looking for a higher potential return, stocks may be the right investment. Given the historical rate of return, stocks have the potential to generate more wealth than real estate.
It’s also worth noting that real estate can be a more expensive investment than stocks. Between the real estate agent’s fees, closing costs and repairs, there are a lot of upfront costs associated with purchasing a property.
However, you don’t have to choose between real estate and stocks – you can always invest in both!
The bottom line is that there’s no right or wrong answer when you’re deciding whether it’s better to invest in stocks or buy a house. It all comes down to research and choosing the investment option that aligns with your financial goals.
And if you decide you want to invest in both, that’s OK, too! Be sure to consult with a financial advisor. They can help you develop a personalized investment strategy and provide guidance along the way.
Invest Wisely
No matter what you decide, remember that there are no guarantees when you’re investing. But as long as you’re comfortable with the risks and are making informed decisions, you’re on the right track!
Whether you’re looking for a long-term investment or something more passive, real estate and stocks both have the potential to generate wealth. Just remember to do your research and invest wisely!
CEIC Data. “United States House Prices Growth.” Retrieved August 2022, from https://www.ceicdata.com/en/indicator/united-states/house-prices-growth
US Securities and Exchange Commission. “Saving and Investing.” Retrieved August 2022, from https://www.sec.gov/investor/pubs/sec-guide-to-savings-and-investing.pdf
FAQs
If you're looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time. If you're looking for a more passive investment, stocks may be the way to go.
What makes more millionaires stocks or real estate? ›
“90% of all millionaires become so through owning real estate.” This famous quote from Andrew Carnegie, one of the wealthiest entrepreneurs of all time, is just as relevant today as it was more than a century ago.
What is more risky stocks or real estate? ›
It depends on the particular stock and real estate investment (there are numerous ways to invest in real estate and they're not all equally risky), but real estate is typically less volatile than the stock market.
Why do stocks beat real estate? ›
Historically, the stock market experiences higher growth than the real estate market, making it a better way to grow your money. Stocks are more volatile than housing, making real estate a safer investment. Stocks have no tangible value, whereas real estate does.
Is real estate the best form of investment? ›
Real estate has proven itself a worthy investment that provides cash flow and appreciation over time. Whether you're an aggressive or conservative investor, it's a great way to diversify your portfolio and can pay off in the short-term and long-term.
Why 90% of millionaires invest in real estate? ›
Federal tax benefits
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
Is it better to have money in stocks or real estate? ›
Volatility. Although stock market returns generally outperform real estate investments by a significant amount over the long run, investors have to pay a price in the form of volatility. Whereas housing prices may decline by double digits in a terrible year, the stock market can decline by 10% in a matter of days.
Is real estate a good investment in 2023? ›
In my opinion, real estate is one intelligent option to consider in 2023, as it often has excellent returns, tax advantages and provides diversification even in the face of a challenging economic climate. Real estate also has the potential to compound your investment.
Is real estate the safest form of investment? ›
The lowest risk and highest return that real estate offers make it one of the most preferred investment options globally. Many investors strive to invest in real estate in order to hedge against inflation and at times to expand their property portfolio as a diversifier.
Do more people invest in stocks or real estate? ›
But that's not what those looking to increase their wealth actually did this year. In 2022, the No. 1 action Americans took to build wealth, stated by 27% of respondents, was investing in the stock market. Just 12% invested in real estate.
Property investment is likely the best way to invest 50k. It would help if you spoke to a financial advisor before deciding to invest money. A savings account is the safest way to invest 50k. You need to know your risk tolerance before deciding where to invest 50k.
Why do most real estate investors fail? ›
Unrealistic Expectation of Profit
Although real estate investment may be very lucrative, success doesn't happen overnight. Investors who rush into things or don't generate a lot of money right away rapidly get frustrated and overwhelmed. Building your portfolio and network takes time.
What is one major disadvantage to investing in real estate? ›
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities.
What type of real estate has the highest return? ›
Commercial real estate is known to yield higher returns than residential real estate. If you can afford to manage a commercial space, it can prove lucrative over time, depending on your area. The value of commercial real estate is determined in part by how much revenue it generates.
What type of real estate makes the most money? ›
Real Estate Broker
A real estate broker is permitted under law to negotiate and organize real estate dealings. A career as a real estate broker is one of the highest paying and lucrative professions in the real estate industry. On average, experienced brokers take home a six-figure pay.
What is the most profitable property to invest in? ›
What Types of Commercial Properties Are the Most Profitable? High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces.
Where do billionaires invest their money? ›
The average portfolio sees 21% put directly into commercial property, while a further 13% is invested through debt funding or real estate investment trusts (REITs).
What do rich people invest in? ›
Investing Only in Intangible Assets
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
Where do most millionaires keep their money? ›
Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills. They keep rolling them over to reinvest them and liquidate them when they need the cash.
Does real estate appreciate faster than inflation? ›
Looking at the data, inflation-adjusted returns, even factoring in inflation, have almost always been positive in history - meaning that price appreciation for real estate is greater than the inflation rate!
Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.
Is the end of 2023 a good time to buy a house? ›
They expect home prices to improve in Q3 & Q4 this year, over in 2023 they expect the medium home will delince 5.6% compared to 2022, to $776,600 in 2023 ($822,300 in 2022). They had predicted a median 2023 price of $758,600 forecast last October.
Why buying real estate in 2023 is smart? ›
2023 is a balanced year for housing supply and demand. This is ideal for retail purchasers and rental property investors. No longer a “seller's” market. Rising interest rates raise the monthly mortgage payment, which reduces homebuyers and lowers property values.
Is stocks or real estate the best long term investment? ›
Here are a few things to consider: If you're looking for a long-term investment, real estate may be the better option. There are no guarantees, but real estate tends to appreciate in value over time. If you're looking for a more passive investment, stocks may be the way to go.
What are the four investments which is considered the safest? ›
For example, certificates of deposit (CDs), money market accounts, municipal bonds and Treasury Inflation-Protected Securities (TIPS) are among the safest types of investments.
What is the most safe type of investment? ›
What are the safest types of investments? U.S. Treasury securities, money market mutual funds and high-yield savings accounts are considered by most experts to be the safest types of investments available.
Do the rich invest in real estate? ›
Altogether, high-net-worth investors put more in real estate than equities: 32% of their wealth on average is invested in residential property, 26% in equities and 21% in commercial properties, Knight Frank's report said.
Do I need to be rich to invest in real estate? ›
There are several ways to get started investing in real estate without having to be wealthy to begin with. This article has shown you how to invest in real estate with little money through renting out a room, crowdfunding, investing in REITs and buying a multi-unit primary residence.
How much of wealth should be in real estate? ›
Investing expert Barbara Friedberg says a real estate allocation of 5% to 10% is a good rule of thumb since real estate is an alternative asset class. At the same time, private equity and real estate investor and serial entrepreneur Ian Ippolito recommends putting as much as 13 to 26% or more into real estate.
What's a good way to invest $100000? ›
Best Investments for Your $100,000
- Index Funds, Mutual Funds and ETFs.
- Individual Company Stocks.
- Real Estate.
- Savings Accounts, MMAs and CDs.
- Pay Down Your Debt.
- Create an Emergency Fund.
- Account for the Capital Gains Tax.
- Employ Diversification in Your Portfolio.
What is the best way to invest $5,000?
- Try real estate investing for rental income.
- Invest in individual stocks.
- Invest in mutual funds or ETFs.
- Consider low-risk bonds.
- Leverage robo-advisors for hands-off investing.
- Open a CD for steady returns.
- Put a little into cryptocurrency for high potential returns.
By investing just Rs. 5000 every month in an SIP, you can create high returns to meet your long-term goals. A systematic investment plan allows you to invest a monthly sum in a single type of fund, be it equity, debt, gold, etc. You can choose to diversify by investing in different types to balance out the risk.
What is the biggest threat to real estate? ›
Share
- Inflation and interest rates. These forces are having a surmountable impact on the housing market and consumers' pocketbooks. ...
- Geopolitical risks. ...
- Hybrid work models. ...
- Supply chain disruption. ...
- Energy. ...
- Labor shortages. ...
- Housing imbalance. ...
- Regulatory uncertainty.
High Cost: The biggest disadvantage with real estate investment is the high capital requirement. To get started, you need to provide for down payments, EMIs, insurance, property taxes, stamp duty and so on.
Can real estate investors become millionaires? ›
Becoming a millionaire from real estate investing isn't as far-fetched as it may seem, but it's not an easy goal to reach. You shouldn't expect it to happen overnight, but it is achievable. If you have the right knowledge, develop a plan, and be persistent enough, you can become a millionaire real estate investor.
What can go wrong when investing in real estate? ›
7 Mistakes Real Estate Investors Should Avoid When Buying An Investment Property
- 1.1. Not Doing Thorough Research.
- 1.2. Doing Everything On Your Own.
- 1.3. Not Considering Operating Expenses.
- 1.4. Overpaying.
- 1.5. Not Having An Investment Strategy.
- 1.6. Not Considering Residents' Needs.
- 1.7. Putting All Your Eggs In One Basket.
Real Estate Transaction Costs are High
The transaction costs associated with buying and selling properties can be quite steep. These costs, which include commissions, title insurance, loan origination fees, and a variety of closing costs, can easily wipe out the appreciation in market value of a property.
Why is real estate one of the safest investments? ›
Real estate markets are relatively stable
While the real estate market is also subject to some volatility, it is significantly less than in the case of stocks. This means that there is less risk associated with investing in real estate, which makes this type of investment safer.
What is the average return real estate vs stocks? ›
Is real estate or stocks more profitable? Investments in real estate have historically earned 3% to 4% per year on average; contrasted to investments in stock market indexes earning approximately 10% annually over the long-term.
What is the best return on investment in real estate? ›
A “good” ROI is highly subjective because it largely depends on how risk-tolerant a particular investor is. But as a rule of thumb, most real estate investors aim for ROIs above 10%.
Good Rate of Return in Terms of ROI
On the other hand, real estate investors with riskier investment properties would not settle for anything less than 40%. On average, real estate experts agree that anything above 15% is a good rate of return on investment in real estate.
Do most millionaires invest in real estate? ›
Some of the most successful entrepreneurs in the world have built their wealth through real estate. In fact, it's estimated that 90% of all millionaires invest in some form of real estate. There are several reasons for this, but in today's article, we'll share seven reasons why millionaires invest in real estate.
How to make $1000000 a year in real estate? ›
How To Make A Million Dollars In Real Estate
- Learn About Real Estate Investing.
- Establish Your Goals.
- Start Now, But Start Small.
- Write Offers For Affordable Deals.
- Generate Cash Flow.
- Start Growing Your Portfolio.
- Invest In Larger Properties.
- Continue Growing To 1 Million Dollars.
Let's dive in and see how you, too, can become a lucrative real estate investor.
- Leverage Appreciating Value. Most real estate appreciates over time. ...
- Buy And Hold Real Estate For Rent. ...
- Flip A House. ...
- Purchase Turnkey Properties. ...
- Invest In Real Estate. ...
- Make The Most Of Inflation. ...
- Refinance Your Mortgage.
Equities are generally considered the riskiest class of assets.
Is owning property the best investment? ›
In the long run, owning a home is a good investment. When you rent, your money goes to your landlord, whereas when you put your money toward a home, you can see a return on your investment over time.
Do millionaires invest in stocks or real estate? ›
The Bottom Line
Millionaires have many different investment philosophies. These can include investing in real estate, stock, commodities and hedge funds, among other types of financial investments. Generally, many seek to mitigate risk and therefore prefer diversified investment portfolios.
What percentage of millionaires are made through real estate? ›
Only 3% of American millionaires received an inheritance of $1 million or above. Real estate makes up about 40% of a typical millionaire's net worth.
What investment makes the most millionaires? ›
No matter how much their annual salary may be, most millionaires put their money where it will grow, usually in stocks, bonds, and other types of stable investments. Millionaires put their money into places where it will grow such as mutual funds, stocks and retirement accounts.
Is real estate the best way to become a Millionaire? ›
Between the passive income potential, long-term appreciation, and tax benefits, real estate continues to be the investment of choice for the wealthy.
- Even better, real estate can make millionaires out of everyday investors. ...
- You don't need to choose just one investment type.
Investing Only in Intangible Assets
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
Where do the ultra rich keep their money? ›
High net worth investors typically keep millions of dollars or even tens of millions in cash in their bank accounts to cover bills and unexpected expenses. Their balances are often way above the $250,000 FDIC insured limit.
What do 90% of millionaires make? ›
It is a well-known fact that 90% of the world's millionaires have made their fortunes through their timeous investments when buying, selling and renting out properties.
Is it true that 90% of millionaires make over $100000 a year? ›
Choose the right career
And one crucial detail to note: Millionaire status doesn't equal a sky-high salary. “Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.”
Why do rich people invest in real estate? ›
Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property. The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.
What bank do millionaires keep their money? ›
Millionaires tend to turn to private banks for a variety of reasons. Since they offer a wide range of financial products, services, and expertise under one roof, the element of convenience can be very enticing. There are also several perks and more favorable options and rates, making the bank very attractive.
What type of investment makes the most money? ›
The most successful investors invest in stocks because you can make better returns than with any other investment type. Warren Buffett became a successful investor by buying shares of stocks, and you can too.
What are the 3 things millionaires do not do? ›
He also identified three money habits that successful self-made millionaires avoid at all costs.
- They don't have a wallet full of exclusive credit cards. ...
- They avoid giving large gifts to their children, or supporting them financially as adults. ...
- They don't spend hours managing their investments.
To become a real estate millionaire, you may have to own at least ten properties. If this is your goal, you need to accumulate rental properties with a total value of at least a million.
What is the fastest way to build wealth in real estate? ›
- 7 Fastest Ways to Make Money in Real Estate. ...
- Renovation Flipping. ...
- Airbnb and Vacation Rentals. ...
- Long-Term Rentals. ...
- Contract Flipping. ...
- Lease to Buy. ...
- Commercial Property Rentals. ...
- Buying Land.
Can real estate make you rich? It can, but it's not a sure bet. The real estate market has boom and bust cycles, and real estate investors can lose money as well as make money.
