One question that many investors ask themselves before entering the investing market is “Which is a better investment option? Buying a rental property or stocks?”. Both options have their pros; however, we at Mashvisor advice investors to follow the first one. Here are 7 reasons why buying a rental property beats investing in the stock market:
1. Buying a Rental Property vs. Stocks – Control Over the Investment
The first reason so many people want to buy investment properties is that the moment the purchase is made, they have full control over the property. Property investors are free to decide how to finance the rental property, how much to spend on maintaining the rental property, how much to charge for monthly rent, who the tenants will be, and when to sell the rental property. Furthermore, before buying a rental property, a real estate investor can search and find many types of investment properties to invest in, and different real estate investing strategies to follow. Not to mention, property investors can physically check the rental property to ensure it’s suitable for them and decide whether or not to make the purchase.
On the other hand, stocks are not a physical asset that you can see and manage. This means that investing in stocks eliminates the benefit of having full control. Since your share is trivial compared to the overall value of the company, stock investors have practically no power over anything that the company may or may not do. The only choice you have the ability to make is which company you want to invest your money in. Other than that, you basically give in to whatever this company has for you. In addition, the stock market offers fewer options than the real estate market – you can’t choose which stock to invest in since they’re all technically the same!
Thus, for an investor who prefers to be in control of his/her investments, buying a rental property is the better option.
2. Buying a Rental Property vs. Stocks – Cash Flow/ROI
Cash is king. Whether you decide to invest in the stock market or opt for buying a rental property, your investment has to be paying you cash that you can either save or reinvest. In general, rental properties provide a real estate investor with a guaranteed and steady source of cash in the form of monthly rent. In addition, a real estate investor can find tips to boost the rental income from his/her investment property, thus generating a positive cash flow and a better return on investment (ROI). The key, of course, is buying the right rental properties.
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Stock shares, however, can make good returns, but it’s all on paper. Stock investors will not see any real money until they sell their shares! Not only that, but also the unstable income from stocks makes managing your finances harder. The stable monthly income from buying a rental property, on the other hand, makes it a lot easier to operate your finances and plan ahead of time because property investors know what they’re making and when they’re receiving it.
3. Buying a Rental Property vs. Stocks – Hedge against Inflation
Investing in real estate can be a potential hedge against inflation as historically cash flow and rental rates have kept pace with inflation. What this means is that market prices for rental properties rise automatically as the cost of living also increases. This is beneficial for a real estate investor for three main reasons:
- Property investors can raise the amount of rent they charge as inflation increases.
- The value of the rental property will go up enough to cover inflation.
- Mortgage payments are not affected by inflation, thus they actually decrease as inflation increases.
Therefore, when buying a rental property, inflation will be on your side. This is not the case for stock investors. Although prices do rise over time, traditional equity investments are not linked to inflation as directly as real estate investments.
4. Buying a Rental Property vs. Stocks – Risks
In general, buying a rental property has fewer risks than stocks, especially when investing in real estate for the long term – the longer you hold investment properties, the fewer risks of loss you have as equity and home prices build and rise over time. In addition, the more rental properties a real estate investor buys, the fewer associated risks he/she faces, unlike the stock market where risks typically stay the same.
While stocks have the advantage of being way more liquid, they are also very unstable. As a result, average stock investors not only can’t predict their returns, but they also tend to buy and sell at the wrong times. While the economy affects the real estate market, it’s to a much lesser extent than it affects the stocks market.
5. Buying a Rental Property vs. Stocks – Leverage to Build Wealth
Leverage is a tool that real estate investors can use to build their portfolio of investment properties. When you get a mortgage for buying a rental property, you’ll have leverage that you can use to invest in more rental properties with less money down!
Most loans require 20% of the property purchase price as down payment, while the bank finances the other 80%. Let’s say you put 20% down for the purchase of a $100,000 investment property. You only have to pay $20,000 now, and you have the next 15-20 (or even more) years to pay the remaining $80,000 plus interest.
When financing buying a rental property in this way, property investors have the opportunity to buy several rental properties with little money down and increase their rental income (which pays all their costs such as mortgage, taxes, maintenance, management, etc.). This is another benefit of real estate investing which stock investors don’t have.
6. Buying a Rental Property vs. Stocks – Ability to Buy Low and Sell High
In the stock market, money is made by buying low and selling high. However, for most stock investors, this is almost impossible to do consistently as they don’t know everything about the company they’re investing in, its sector, management, competitors, etc.
As for real estate investing, there are a number of strategies where property investors can buy low and sell high almost regularly, such as the fix-and-flip strategy. When following this investment strategy, property investors are basically buying a rental property that is on the market for a cheap price because it needs renovation or for being a foreclosure, rehabbing rental properties, and then selling them for a higher price that covers the purchase price, the costs of renovations, and a profit margin. It’s possible for a real estate investor to repeat this process over the course of his/her real estate investing career as there will always be cheap investment properties for sale.
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7. Buying a Rental Property vs. Stocks – Tax Benefits
The last aspect to consider when deciding whether to invest in real estate or the stock market is taxes. Buying a rental property will require you to pay property taxes. However, there are certain tax benefits provided only to property investors. For example, your cash flow is tax-free, and your property taxes, mortgage interest, operation expenses, and insurance are all tax deductible. Exactly how much a real estate investor can deduct depends on the rental income.
As for stock investors, their tax consequences include paying a capital gains tax on any profits they make from selling stocks. Not only that but even without a sale, investors are required to pay a tax on any dividends they receive.
Buying a Rental Property vs. Stocks – Conclusion
You can definitely see the advantages of real estate investing that you don’t enjoy when investing in the stock market. This is why we, at Mashvisor, advise investors to go with buying a rental property to invest in instead of investing in stocks.
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