Welcome, new investor! Deciding to invest can be a scary leap into the unknown. You know that there are many people investing and seeing success from it, but where to get started? Are the wins in real estate investing or investing in stocks? While it mostly depends on your preference, there are some advantages to each. In this article, we’ll weigh the pros and cons and break it down for you so that by the end of it, you’ll have a better understanding of what’s right for you.
Overview of Stocks and Real Estate
Every day on the radio or news you may hear something about the Dow Industrial Average and how many points it either rose or dropped for the day. If you’re like many Americans, you don’t know what that means, but you have heard about investing and realize it has to do something with that. Let me break it down for you.
When a company wants to grow but needs money to do so, they will often they will go public. Going public means they divide up their company into shares, which the public can then buy and own a piece (or share) of their company. Those shares are then traded or sold for money or various other stocks on the market. As the economy and success of the business grow, so does the price of each share. So, say you bought shares in Microsoft totaling $1,000 in 1987. Because Microsoft is so hugely successful, your shares would be worth $546,996. Adjusting for inflation, you would have made $247,999.20 on your investment. That’s a lot of money!
When you purchase a stock, you have no real tangible item. You may have a say in how the company is run (depending on how many shares you hold), but there is no actual item you can point to and say “That’s my investment.”
In the real estate market, things are a bit different. When you purchase real estate to invest, you typically have an idea of how you will make your money off of it. You can renovate it and sell it, you can hold onto it to trade for a higher price point in the future, or you can rent it out. You are also able to leverage the money put into these investments to purchase more real estate investments. In the end, if the purpose of your investment doesn’t work out, you can always sell the property and get a return on some, if not all, of your money.
Pros and Cons of Real Estate
There are many pros of investing in the real estate market, and many have made a lot of money doing so! One of these pros is that you have a tangible item that you purchase and can control –in part– what happens to it. You can choose to keep it, sell it, or make money on it by renting it out, but you ultimately have control over what happens. There is also the possibility of being able to get a higher return on investment through investing in real estate because you are not only able to rent out the property and make money that way but in the end, you can sell the property and get a return from there as well.
You get fantastic tax write-offs for real estate, as well! You can write the properties off, the renovations off, even your gas to get to the property is a write-off. Furthermore, if you decide to purchase a multifamily home for investment purposes and live in one side while simultaneously charging rent on the other units, your mortgage could be paid for by the income from the property. Additionally, if the housing market starts taking a turn for the worst, it’s slow enough that you are usually able to predict it and sell out before it becomes too severe.
If you like investing money but not much time, then real estate investing may not be for you. It takes time to find the right deals, go to closing, fix up the property, and either sell it or continue to acquire tenants. On top of that, if you are renting it out but can’t seem to find a tenant, you end up paying more money to maintain that investment. Another big reason some are hesitant to invest in real estate is that it is not a liquid investment, meaning you can’t cash out fast if you need money.
Pros and Cons of Stocks
Investing in stocks is so popular because of how easy it is to start. You don’t need to qualify for a loan or have a chunk of money saved to begin investing– you can invest pennies! Because it’s all online, you are always able to check on your investment and make decisions based on the data that is there. Another excellent reason for investing in stocks is the ease of the passive income. You will never get woken up by your stock investment to address flooding septic the way your real estate investment might. And you don’t even need more people to help you on your stocks– it can be a one-person-job. You can also write some types of stocks off on taxes as well!
The risk is a significant reason why people choose real estate investing over stocks. When you invest in a company, you are more or less rolling a die. You don’t control the decisions the company makes or what they do with your money. They could decide to go in a particular direction that makes your stocks drop in value. In a fast-paced market like the stock market, it is hard to determine when the time to bail is. Understanding stocks can also be a bit more complicated than real estate investing, and tricky to maneuver without help.
Finally, there’s always the con of selling at market value. Since the late 1970’s when the president took the dollar off the gold standard, inflation/deflation has occurred. Basically, this means that the amount of money you invest in the stock market is probably worth more the day you invest it than the same amount in 10 years.
For example, say you buy shares in a company for $10,000 and your investment doesn’t increase or decrease for ten years. You will have lost money because the dollar was worth more when you initially invested it. In real estate, properties usually rise in value the longer they sit despite inflation.
The Key: Keeping Expenses to a Minimum
Know the amount of money your investment will cost you upfront
One of our founders got into real estate investing by purchasing a rental property for his first home. As he grew his portfolio, he spent days scouring over the listings and made hundreds of offers to find the one property that would work correctly for his investment purposes. From there, he and his partner did the work to the units themselves so that, going forward, they would be able to know the amount of money they needed to spend on repairs upfront.
Many of the best stocks to make money from cost a significant amount of money. Know the price you are willing to pay for your investment and gear up to take the risk. ETFs are a usually more affordable and less risky option in the stock market.
An ETF is an Exchange-Traded Fund that owns a set of assets like gold and silver and sells shares of those assets. You never own anything tangible, but your shares rise and fall based on the value of the underlying assets. Low-cost ETF shares are less risky and usually more affordable than other stocks making them more appealing.
Track the Data
Keeping track of your investments is a considerable way to ensure you are making wise investment decisions. Track your costs, the ups, and downs, as well as future investments you may consider. Tracking your ROI is a sure way to find out what works, what doesn’t, and how to change it.
With both investment vehicles, patience is the key. You can’t be willing to cash out at each dip in the market or you’ll never see a significant ROI. Do your research, track your data, and make your decisions based on the data rather than your emotions. Having a “gut feeling” about a property doesn’t mean there won’t be major structural or market issues. Following the numbers pay off.
Investing in real estate can be a pricey endeavor to start out on. That’s why we created Clever. Clever helps you find a local, flat fee full-service agent that not only has expertise in your market; they don’t cost an arm and a leg to provide it. Call us at 1-833-2-CLEVER or complete our online form to get connected a top-rated local agent that will list your home with a discounted commission rate.