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27 Jul 2021 • 4 min read
When deciding what to invest in, there isn’t one simple answer.
Why? This is because choosing the right investment for you depends on your circumstances, financial situation, goals, and ultimately your risk appetite - how much you are willing to lose.
Stocks and real estate are two common assets that investors typically buy when on their journey to build their wealth. So if you’re weighing up your options between the two, continue reading for things to consider before deciding what’s right for you.
Before we delve in, remember that no matter the asset class, investing comes with the risks of losing your money as returns are (unfortunately) never guaranteed.
Investing in real estate provides numerous ways to make money, such as through renting to generate (somewhat) passive income, house flipping, Real Estate Investment Trusts (REITs) or through appreciation in the long term.
With these financial opportunities, it’s no surprise that investors find real estate an attractive investment, but let’s get into the pros and cons of real estate investing.
It can provide steady cash flow. If you choose to rent your property to tenants, you’ll be able to earn a stable monthly income stream.
Gives you more security and control. Traditionally, real estate has always been seen as a “safe” investment as ownership offers you more control. When you invest in stocks, you’re investing in a company with the hopes that those running the company will do so successfully to make you profit. When you own a property, you’re essentially running your own “company” as you’re in control of how it performs by what you choose to do with it.
Diversification. By investing in real estate, combined with your other investments, it allows you to diversify your investment portfolio to spread your risk across different asset classes.
Appreciation. Over a long-term period of time, your property may increase in value which enables you to sell it at a higher price than you had originally bought it for and beat the rate of inflation.
Requires a large amount of cash up front, though this is probably no secret. When buying a property, it isn’t only the deposit you need, though saving for that alone can take some time. You also need to account for the other costs such as Stamp Duty, survey costs, legal fees, and not to mention...
Continued costs. Even after you buy the property, there are many costs which you will need to be responsible for such as repairs, renovations, monthly bills as well as covering your mortgage for vacant months if you’re renting out the property.
Real estate is an illiquid investment. Unlike stocks, you can’t just buy and sell whenever you want. As your money is tied up in a tangible asset, you can’t liquidate cash quickly and easily when you need it. Though this applies to traditional real estate investments such as buying a property, investing in REITs offers more liquidity because REITs allow you to buy and sell easily, just like any stock.
Real estate is a long-term investment. Investors looking for quick cash may not turn to buy property as a short-term investment as the process of buying and selling property can often take a while. Whilst real estate also has the potential to appreciate, it may take a long period of time to truly see and reap the benefits of the booming property market.
When you invest in stocks, you buy a small piece of a company because you believe that its value will go up over time. In most instances, investors make money from stocks through its appreciation (when the value of the stock increases) or dividend payments.
Easy to diversify. With many sectors to choose to invest in, it’s easy to diversify your portfolio and not put all your eggs in one basket. This means that if one sector isn’t performing so well, you have your other sectors to cover you.
Accessible. With investing in the stock market, it doesn’t require a lot of capital to start off with. In fact, its accessibility appeals to many investors as you can invest as little or as much as you’re comfortable with to begin.
Stocks are liquid assets as you can buy and sell them easily, and pretty much at your fingertips (thanks, technology). This means that you can withdraw your money with ease from your brokerage account when you need it, however, it could potentially be less than what you had originally invested because returns are never guaranteed.
Passive income and minimal work required. Unless you are actively trading, investing in stocks requires little to no effort and could generate passive income through dividend payments.
The stock market is more volatile compared to real estate and almost impossible to predict. This makes investing in stocks risky as the performance of a company and the stock market as a whole is completely out of your control.
Potential for emotion-driven decisions. The FOMO is real - especially when it comes to investing. When investing in stocks, it’s easy to make decisions based on emotions. For example, if the market crashes and stock prices go down, many tend to panic sell. However, when a stock is performing well, people tend to buy in amidst the hype around a company.
The bottom line
With the pros and cons of investing in stocks and real estate broken down, you may already know what’s best for your personal circumstances at this present moment.
With stocks being much more accessible to the everyday investor, it may be an attractive option for most at first. However, it’s not to say that you can only invest in one or the other over time as, ultimately, the best investment portfolios are the ones that are diversified.
The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.
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