Purchasing a home, renovating it, and reselling it quickly at a higher price is a growing business venture. And one that's competing with the stock market.
Some argue that real estate is a better investment than stocks because it's less volatile and more tangible. The fact is that both have their benefits and drawbacks.
So, before you decide which is a better investment, get to know more about the pros and cons – summarized for you below. You're welcome!
Investing in Real Estate
Real estate investing is a good strategy that has generated long-term wealth for many people over the last couple of decades. Many investors would tell you that this is a better way to invest because it feels more accurate when buying tangible goods.
And it's not a mystery that real estate can be very lucrative nowadays, obviously depending on different factors such as location, debt leverage and demand.
Investors will mainly be interested in two types of real estate – residential and commercial. Investors who buy residential real estate investing in places for people to live in.
Investors who purchase commercial real estate are investing in properties with the aim of leasing spaces to businesses. For example, to provide a workspace or storage space.
For making a rightful investment decision in property, it's essential to make the most of invested capital. As a result, real estate investors usually get a mortgage to invest in more properties and ultimately profit from their properties.
It is the bright side of investing in real estate, but if your capital isn't used to its maximum advantage, investors might be left with huge debts that exceed their properties' total worth.
Exploring the Stock Market
Buying a stock is a way to invest in a public company. A stock represents a share in the company's ownership, and as an investor you'll receive a portion of its earnings and assets.
You'll make a good profit as long as the company's performing well. However, during times of financial or economic crisis, you may experience some losses as the earnings of the company decrease.
With this in mind, choosing a long-term strategy and building a well-diversified portfolio should help keep your earnings steady.
We know that the stock market can be intimidating, especially with confusing economic indexes, and few people understand financial terms. But don't worry, we're here to help you become an intelligent investor and show you everything you should know about stocks.
Should I buy Real Estate or Stocks?
Now that you know the difference between real estate and stock investing, let's dive into some cold hard facts and compare the overall performance of these popular investment strategies.
Rate of return
It is difficult to predict whether you'll earn more investing in real estate or stocks. The return on every investment depends on the investor's skills to read the signals of the market and other external factors.
Liquidity
It simply means how easily the assets can be converted into cash or how easily you can sell something. For example, you can trade stocks in just a few clicks, while it's a time-consuming process with real estate.
To sell your property, you'll need to list it, fill out the paperwork, handle negotiations and so on.
Fees and expenses
Regarding costs, stocks are a much smaller investment than property. And trading is becoming even more cost-effective, with new ways to invest.
If we look at the expenses for real estate (sales agent commission fees, home inspections and insurance policies, to name just a few), you can start to understand how profit margins get smaller and smaller.
Diversification
Unless you have a lot of money or financial support, owning properties in Mumbai, Delhi, Bangalore, Pune, and other desirable cities, is just a pipe dream.
Some argue that you can diversify your property portfolio through real estate investment trusts (REITs), but most of these trusts specialize in one real-estate sector. So, for example, you'll see office REITs or healthcare REITs.
On the other hand, a portfolio of stocks is a lot easier to diversify, and you can even buy Exchange-Traded Funds (stock bundles that are already diversified).
Ease to protect
If the stock market gets ugly, you can quickly sell your investments (although we recommend you make long-term investments). But when the real estate market hits rock bottom, you'll struggle to get reasonable offers.
Even if you do get lucky and receive an offer that helps you break even, you'll still be stuck with the complicated and long-winded process of selling your property.
Initial costs
When you purchase a property, you'll need to make a down payment and have cash available for any initial repairs. Then, if you don't move into the property while you're refurbishing, you'll still have to pay taxes, maintenance, utilities, insurance, and more – costs that gradually eat away at your funds.
In comparison, stocks can be as cheap as you choose. For example, you can buy fractional shares (a fraction of a whole share) to start investing with as little as INR 500, make one-off investments and purchase more shares later.
Final Thoughts
We can't tell you if one strategy is better than the other. It boils down to your interests and where you feel comfortable investing your money.
Find investing in stocks intimidating? Don't worry; you're not alone. All you need to do is build up your confidence to start investing!
