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Investing in Stocks vs. Real Estate: Which is Right for You?

Real estate and stocks are the most widely held assets among investors. According to the Federal Reserve Bank of St. Louis, 66% of American homes are owner-occupied, and 81% of employees with access to a 401(k) retirement plan participate, per Vanguard data. Both assets can help you grow your wealth, but which is a better investment for you? Let’s explore the pros and cons of each to help you make an informed decision.

Investing in Stocks

Stocks may provide the easiest path to get started. You don’t need much money to start, and you can buy and sell stocks, bonds, mutual funds, and exchange-traded funds (ETFs) fairly easily through a brokerage account. Here are some benefits and downsides to consider:

Pros of Investing in Stocks

• Higher Potential Returns: Historically, stocks have proven to be more profitable than real estate. For example, the S&P 500 has increased 8% in price from March 1992 to June 2023.
• Liquidity: Stocks are highly liquid, allowing you to buy and sell quickly through your brokerage account.
• Diversification: It’s easier to build a diverse portfolio of stocks with less capital compared to real estate.
• Tax-Advantaged Accounts: Investing in stocks through a 401(k) or IRA can offer tax-deferred or tax-free growth.
• Dividends: Some companies pay dividends, providing passive income.

Cons of Investing in Stocks

• Volatility: Stock values can fluctuate wildly, especially in the short term.
• Taxes: Gains are typically taxed when you sell your assets.
• No Utility: Stocks don’t provide a direct use or benefit other than as an investment vehicle.
• Lack of Control: You have no control over a stock’s value, which depends on market trends and company performance.

Investing in Real Estate

Real estate investing can help you create passive income while building equity in your properties. Here are some benefits and risks to consider:

Pros of Investing in Real Estate

• Less Volatile: Real estate generally doesn’t experience the wide short-term fluctuations seen in the stock market.
• Passive Income: You can receive monthly rent payments from tenants while growing equity in your property.
• Financing on Debt: You can finance the entire cost of an investment home with a down payment, making it safer than margin investing in stocks.
• Tax Benefits: Real estate offers numerous tax breaks, including deductions for maintenance, depreciation, mortgage interest, and property taxes.
• Hedge Against Inflation: Home prices and rents tend to rise with inflation.

Cons of Investing in Real Estate

• Illiquidity: Selling a home is significantly more time-intensive than selling stocks.
• Potential Losses: Negative cash flow can occur due to high mortgage payments, costly repairs, and property taxes.
• More Work: Maintaining properties requires effort, whether you do it yourself or hire a property manager.
• Tenant Issues: Bad tenants can cost you money in unpaid rent and property damage repairs.

Real Estate vs. Stocks: Key Considerations

Risk

Both stocks and real estate come with a degree of risk. Stocks can lose value in a market collapse, while real estate can lose value in a slumping economy. Consider your risk tolerance before investing.

Capital Requirements

Stock investments generally require less upfront capital than real estate. You can purchase a share of stock for as little as $1 to $5, while real estate typically requires a substantial initial investment.

Returns

Stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared to a 5.4% return in the housing market. However, real estate investors could see additional rental income and tax benefits.

Diversification

Diversifying your portfolio with stocks is relatively simple. Building a diversified real estate portfolio is more time-consuming and cost-prohibitive. Real estate may be better viewed as an asset to diversify a portfolio that includes stocks, bonds, and other assets.

The Bottom Line

You can grow your wealth through both real estate and stock market investments or even a combination of both. Choosing which route to take may come down to your risk tolerance, comfort level with each asset, and how you want to spend your time. Real estate investing may make sense if you want to own tangible assets and are willing to manage property. But if you prefer a more hands-off approach with more liquidity, stock market investing may be a better option.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is here to help you make the best investment decisions for your future.

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