Real Estate Investing vs. Stocks: What’s The Difference?

The good news when deciding whether to invest in real estate or stocks is that it doesn’t have to be either or. Each asset class may offer returns and can help diversify a portfolio, and they each come with their own risks. What’s more, there are plenty of publicly traded stocks that give investors exposure to real estate.

Real estate itself is a tangible asset that may provide a hedge against inflation, although buying and selling may require a lot of capital, time, and effort. Stocks have a lower minimum investment and are liquid, but they can have rapid price swings. Deciding what to invest in, or whether to invest in both, depends on one’s goals, time horizon, and appetite for risk.

Investing in real estate

There are several ways to invest in real estate, depending on how involved an investor wants to be in owning and managing an actual property. Investors can buy and flip homes for a profit, or buy a rental home and either manage the property themselves or hire a management company. Owning a home as a primary residence is also a form of real estate investment, because it may appreciate in value and sell for a profit. 

Investors can also choose passive real estate investments. They can buy real estate stocks in funds that invest in residential and commercial properties, or shares in a real estate investment trust, or REIT, which is a company that owns or finances income-producing property.  

Investing in stocks

There are also many ways to invest in stocks. Shares of publicly held companies represent an ownership stake in the company, and trade on stock exchanges. An investor can open an online brokerage account and place a stock order directly through an app, or they can use a traditional broker. 

To gain immediate exposure to many stocks and other types of securities, investors can buy shares in a fund. For instance, mutual funds pool money from investors and buy a variety of securities. Exchange-traded funds, or ETFs, are also funds that include bundles of securities, and are designed to track an index, sector, or commodity.

Real estate investing vs. stocks: key differences

Real estate and stocks are two very different asset classes with varying potential returns, risks, and the time and effort it takes to invest in them.  

Returns: real estate vs. stocks

Stock market and real estate returns are never guaranteed, but both asset classes may generate profits. Over the long term, both real estate and stocks tend to appreciate in value. For instance, the average 10-year return on commercial and residential investment properties is 9.3% per year as of early 2021. The S&P 500 Index’s average annualized returns between 2011 and 2020 was 13.9%, but the average annualized return from 2012 to 2021 was lower, at 9.95%.

Risks: real estate vs. stocks

Every type of investment carries some form of risk, and real estate and stocks are no different. Real estate values generally rise over time. But because values fluctuate and vary widely by location, investors risk losing money if they’re forced to sell when the market is at a low point. And because real estate is much less liquid than stocks, it can take months to find a buyer and complete a sale.

Stocks are more liquid than real estate but generally experience more rapid price fluctuations in the short-term. Holding on to stocks in the long term may help investors ride out volatility, though an investor may lose money if they need to sell quickly and the stock value has declined. 

Time and effort: real estate vs. stocks

Some forms of real estate investments are hands-on, which may suit some investors. For instance, it takes a lot of time and effort to own rental properties. Investors who own directly may need to consider liability issues, deal with renters’ maintenance requests, hire landscapers to care for the yard, as well as pay the mortgage, insurance, and property tax bills regularly. Even hiring a company to handle these tasks still requires occasional meetings and oversight. Buying an undervalued property and flipping it for a profit, which is another form of real estate investing, also demands a lot of time and effort. 

On the other hand, buying shares of stock doesn’t require much work on the investor’s part, other than researching each company or fund to determine whether it’s worthwhile.

Potential benefits and risks of investing in real estate

If you’re wondering “Should I invest in real estate?” here are some potential benefits to consider:

• Passive income.

  Some forms of real estate investing, such as buying shares in REITs or real estate funds, generate passive income. This approach also frees up the investor’s time–they don’t have to manage or operate the actual property–while helping to diversify their portfolio. 

• Potential gains.

  While appreciation isn’t guaranteed, real estate tends to gain value over the long term. 

• Tax benefits.

  If an investor buys an investment property, they can deduct some of the related expenses, such as property management fees, mortgage interest, and property taxes. Additionally, investors won’t have to pay Social Security taxes on rental income. 

On the flip side, there are some risks involved with real estate investing.

• Low liquidity in some cases.

  Investors may be able to offload REIT shares quickly, but they’ll need more time to sell a property—especially a fixer-upper. 

• High entry and exit costs.

  Buying a rental property or flipping a home are two approaches that require a lot of cash up front. Investors will need to figure out if they have the capital to buy the property, and also if their potential gains outweigh the down payment, closing costs, and monthly bills on an investment property. 

• Taxes.

  Real estate investors will likely pay property taxes on an investment property, whether they’re renting it out or flipping it for a profit. And when recognizing profits from the sale of REITs and real estate funds, investors might have to pay a net investment income tax. 

• Finding and dealing with tenants.

  Whether they own residential or commercial properties, investors will need to handle requests from tenants and maintain the property. They’ll also need to find good tenants who reliably pay rent, because vacancies result in lost rental income and higher expenses. 

Potential benefits and risks of investing in stocks

Are stocks a good investment? To find out, familiarize yourself with the potential pros and cons of having a stock portfolio.

The potential benefits can include:

• Easy to buy and sell:

  Brokerage accounts let people easily buy and sell investments at any time and withdraw cash from a sale immediately. This is much easier than buying and selling an asset like real estate. It’s also possible to invest as much or as little as you can or choose to, making it an accessible form of investing.

• Low entry costs.

  Stocks come with little or no transaction fees, commission charges, and minimum purchase requirements. Many brokers also waive fees for mutual funds, index funds, and ETFs. And if the stock you want to buy is too expensive, you might be able to buy fractional shares through your brokerage for less than the price of a full share.

• High liquidity.

  Investors can buy or trade their shares anytime the stock market is open, allowing them to quickly turn shares into cash.

And potential risks of stock investing include:

• Volatility.

  The price of a stock can go up or down every day and even by the hour or minute. If an investor needs to sell, they may lose money if the stock is below the purchase price.

• Time spent researching.

  Although it only takes minutes to buy or sell shares, investors who choose to buy shares of an individual company may want to put some time into researching its prospects before investing. 

• Taxes.

  Selling stocks for a profit will likely result in capital gains tax. On the flip side, there are some tax breaks for selling stocks at a loss.

The bottom line

There are many ways to invest in real estate and stocks, and each asset class may offer risk and returns. Real estate is typically less liquid, comes with high upfront costs, and is more hands-on, but there are ways to invest and earn money passively. Stocks are highly liquid and easy to buy, but they can go through more rapid price swings than real estate. Investing in both types of assets may help diversify a portfolio and hedge against risk.