One of the greatest ways to grow your wealth is through investing. However, once you decide to invest, there are several more important decisions you have to make. One of those is going to be which kind of investment vehicle to take.
For many people, the choice comes down to investing in real estate vs stocks. There are pros and cons to each of these investment strategies and they can each be extremely lucrative when done correctly.
Luckily for you, we’re here to help. So if you’re interested in learning more, then make sure that you keep on reading and we’ll give you all of the information that you need in order to make the right decision.
The Difference Between Real Estate and Stocks
When you purchase a share of stock, you’re purchasing a portion of a company. If a company has 1,000 shares and you own ten shares, then you own one percent of that company.
As the value of a company’s shares rises, the value of your stock is also going to go up. The board of directors of that company will decide how much of the profit will be reinvested in expansion each year. They’ll also decide how much money will be paid out as cash dividends.
This board of directors is elected by stockholders to watch over the management.
It can be easy for a stock to become under- or over-valued. Before you invest, you should study the company as a whole. That includes how much of their profit gets paid out as dividends.
If a company is paying more than sixty percent of its profits as dividends, then it may be a dividend trap. That’s when a struggling company uses an unsustainable dividend in order to attract new investors.
When you invest in real estate, you’re buying physical property. With some real estate, you’ll have to pay money every month that you own it. This can include a vacant property that you have to pay taxes on while you wait to sell it to a developer.
Some real estate will be able to earn you income. This can include commercial property, rental houses, and apartment buildings. Here, you pay expenses, your tenants pay rent, and you get to keep whatever’s left as profit.
There are pros and cons to each kind of investment.
Pros and Cons of Investing in Real Estate
One of the biggest pros of investing in real estate is that it’s something that’s tangible. You can see and feel your investment. You can also do actual work in order to improve the value of your investment.
With stocks, you’re at the mercy of market forces and can usually do very little to boost the value of a stock.
Also, beginning investors tend to be more comfortable with something like real estate. That’s because they can more easily understand property and have at least some idea of down payments, mortgages, and owning a home. The stock market, on the other hand, can seem like a foreign language to people who didn’t study it in school.
Rent from real estate can also provide an investor with consistent cash flow every month.
One of the cons of investing in real estate is all of the time and effort. With stocks, you can just make an online account with a brokerage and start buying shares of companies. There’s usually a lot more work in order to find the right piece of real estate.
You also have to deal with problems that come up with the property. Unless you pay a management company, you’ll likely have to deal with pipe issues, gas leaks, and other unexpected problems on your own. These costs can add up and can suck up a lot of your time and energy.
This is why it’s so important to have a real estate business plan.
Pros and Cons of Investing in Stocks
History shows us that buying stocks can be an effective way to grow your wealth. Even if you buy a low-cost S&P 500 index fund, you should generate a ten percent annual return on average.
You can also generate passive income by investing in companies that pay out dividends. With stocks, you also get more liquidity than with real estate. If you need cash quickly, then you can just sell your stocks and cash out with ease.
It’s also a lot easier to borrow against your stocks than to borrow against real estate. If you have margin borrowing, then it can be as easy as writing a check against your account.
One of the biggest cons of investing is how emotional it can be. If the stock market crashes, you may be inclined to sell, even though history shows that crashes are the worst times to sell.
Also, individual stocks can be extremely volatile. On the same day, you can be up and down significantly. If you don’t have the right temperant, then you could end up making bad decision after bad decision as you end up buying high and selling low.
The Importance of Knowing the Pros and Cons of Investing in Real Estate vs. Stocks
Investing can be a great way to grow your wealth. However, if you do it improperly, you could end up in a position worse off than when you started. That’s why it’s so important to know the pros and cons of investing in real estate vs. stocks.
That information will help you figure out which investment vehicle is right for you.
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