Over the years, there’s been an argument as to which is a better investment: a real estate property investment or stock investment.There really isn’t a straightforward answer; both the real estate market and the stock market have their advantages that make them unique, and disadvantages that make them challenging. Of course, at the end of the day, it all comes down to each investor’s preference, risk tolerance, and personal goals.
In spite of this, we at Mashvisor believe that the advantages of a real estate property investment overweight those of a stock investment. In this article, we provide investors with major reasons why investing in the real estate market is a better investment decision than investing in the stock market. So, without further ado, let’s dive right in!
Property Investment Gives Real Estate Investors Full Control
The minute a property investor decides to buy a rental property, he/she has full control over the investment! The property investor is free to decide which type of investment property to buy (single-family home, multi-family home, condo, apartment, townhouse, etc.) and which investment property financing method to go for (cash, mortgage loan, private money, hard money, etc.). In addition, the property investor gets to determine how much to charge for rent, who to rent the investment property out to, and when to sell the property investment. Not to mention, a real estate property investment is a physical asset, meaning that real estate investors can physically check the rental property and evaluate it to determine whether or not it’ll be a profitable investment. Furthermore, a real estate investor can make any changes to his/her property investment property to make it more desirable and profitable.
A stock investment, on the other hand, eliminates the benefit of having full control. First off, the stock market offers fewer options than the real estate market since all stocks are technically the same. Secondly, stocks are liquid assets, meaning that stock investors can’t physically see and manage them. Moreover, the only choice stock investors have the ability to make is the company in which to invest money. And, since shares of stock investors (as individuals) are trivial compared to the overall value of the company, they practically have no power over anything the company may or may not do. Thus, a real estate property investment is the better option for investors who prefer to be in control of their investments.
Property Investment Generates Cash Flow
Every investor is driven by the same motivation – to make money! Whatever investment you opt for, it has to give you a return on investment (ROI) which you, as an investor, can either save or reinvest. A real estate property investment provides real estate investors with a steady stream of cash flow in the form of monthly rent collected from tenants. Cash flow is an attractive aspect of the real estate market, and it’s usually a sign of successful property investment. Cash flow pays for the investment property’s expenses such as mortgage payments, property taxes, operation costs, etc. and yields a higher return on investment! In addition, there are many ways to make money in real estate. The key, of course, is buying positive cash flow investment properties.
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Stock investment, too, can make a good return on investment, but it’s all on paper. Stock investors don’t see any real money until they sell their shares! Real estate investors, on the other hand, know exactly how much their property investment is making and when they’ll receive profits.
Property Investment Has Fewer Risks
In general, property investment in the real estate market has fewer risks than stock investment, especially when investing in real estate for the long term. The longer real estate investors hold investment properties, the fewer risks of loss they have because home prices and equity build with time. In addition, a real estate property investment will always have value since real estate properties are physical assets, unlike a stock investment which could drop down in value any minute. Furthermore, the more investment properties a real estate investor buys and owns, the fewer associated risks he/she faces.
The stock market is generally riskier than the real estate market. Even though a stock investment is more liquid, it’s also very unstable. Thus, stock investors face the risks of unpredictable return on investment and buying/selling shares at the wrong time! While the economy affects the real estate market and property investment, it does so to a much lesser degree than it affects the stock market.
Property Investment Has Many Tax Benefits/Deductions
Another reason why a real estate property investment appeals to many investors is the tax benefits and deductions offered only to real estate investors. For example, the cash flow generated from an investment property is tax-free. In addition, real estate investors are able to deduct almost all expenses related to owning an investment property such as property taxes, mortgage interests, insurance, and operation expenses. Exactly how much the property investor can deduct depends on his/her rental income. Not only that, but when a property investor decides to sell the property investment and reinvest the profits, he/she will not pay capital gains tax.
Stock investors, on the other hand, don’t enjoy these tax benefits from a stock investment. Their tax consequences include paying a capital gains tax on any profits they make from selling stocks. Even without a sale, stock investors are required to pay a tax on dividends they receive from the stock market.
Property Investment Provides Leverage to Build Wealth
Leverage is a tool that a property investor can use to build a portfolio of investment properties. Getting a mortgage for buying a real estate property investment gives real estate investors leverage to invest in more investment properties with less money down! Let’s give an example for a further explanation: Most mortgage loans require the property investor to put down 20% of the property’s purchase price as down payment, while the bank (or mortgage broker) finances the other 80%. Let’s say you put 20% down for the purchase of a $100,000 property investment. In this case, you only have to pay $20,000 now and have the next 15-20 (or even more) years to pay the remaining $80,000 plus interest.
Buying an investment property using this financing method gives real estate investors the opportunity to buy several investment properties with little money down. This leads to increasing their rental income, which ultimately pays all their costs such as mortgage, taxes, maintenance, management, etc. This is another benefit of real estate property investment which investors don’t enjoy in the stock market.
Property Investment Is a Hedge against Inflation
This is the final benefit of a real estate property investment which investors don’t enjoy with a stock investment. Historically, cash flow and investment property prices have kept pace with inflation. What this means is that as the cost of living increases, so does the market price of investment properties.
This benefits real estate investors on three levels. First, as inflation increases, real estate investors can raise the amount they charge for rent. Secondly, the value of investment properties goes up enough to cover for inflation. And lastly, mortgage payments are not affected by inflation, meaning that they actually decrease in absolute value as inflation increases. Therefore, with a real estate property investment, inflation will be on the property investor’s side. This is not the case with stock investment. Although stock prices rise over time, they are not as directly linked to inflation as real estate.
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Final Thoughts on Real Estate Property Investment
Investing in the stock market does have its advantages; however, the advantages of owning a property investment definitely overweight them! This is why we at Mashvisor recommend investors to start a real estate investing career. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
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