The Truth About Stock Markets & Real Estate
By JD Esajian on September 23, 2015
There are many more similarities between real estate and stock market investing than most know, or will admit to. However, there are substantial differences that no one can afford to ignore anymore. These may be even more important over the next few years. So what do you need to know?
The Similarities
There are actually a lot of similarities between these two investment strategies. Most stock market financial advisers will readily admit to the big benefits of investing in real estate. The same is rarely true of real estate salespeople. Most real estate people don’t get why people invest in stocks and suffer the consequences when they could be in the real estate market. So how are they similar?
Compound Gains: Both real estate and stocks can provide the benefit of compound gains. Month after month and year after year, your gains can help snowball your income and net worth. This applies whether you are invested in mutual funds, rental properties, or are flipping houses. It is one of the most powerful forces in our financial universe.
Passive Investing: The reason stocks have become so popular and common among both the average and super wealthy is the ease of investing. It is just plug and play. Many don’t realize it, but real estate investing can be completely passive too. There are ways to passively, yet directly, invest in real estate. This applies to rental homes, commercial real estate, and even flipping houses.
Debt and Equity: Individuals can invest in both debt and equity in businesses, and in the real estate market.
Income and Capital Gains: Shares can grow in value, and throw off dividends. Real estate can appreciate in value and produce monthly cash flow.
Tax Benefits: Real estate may certainly offer a broader array of tax benefits, but by using vehicles like IRAs, both stocks and real estate can deliver tax deferred or tax free returns.
Professional Advisers are Important: Unless you are a professional day trader, you probably wouldn’t dream of diving into the stock market with your nest egg. Real estate may seem a lot simpler, and most are more comfortable with it, but it still pays to get advice before really going all out.
Diversification: Diversification is important in both real estate and stocks. It is just a smart strategy for maximizing the upside, and minimizing the downside.
Cyclical: Both markets are cyclical. They have their ups and downs.
The Differences
While there are many shared similarities between these types of investments, there are some major differences too.
Control: Control is a big difference. You have no control over the performance of your investments at all. Even if you invest in stocks directly, or into startups, unless you have a majority shareholder status, and maybe even have a hands on role in the company, you have no idea where your finances are going. In real estate, there are many ways to control your outcome and results. That ranges from hand selecting your investments, to tenants, to remodeling, and property management, and you can effectively add value at any time.
Safety from Downside: While stocks and real estate can share a lot of the same upside potential, stocks have virtually no downside protection. That’s scary. Fluctuations, especially gradual ones, are one thing. Insane volatility by the hour where you can lose your portfolio in a day is something completely different. In real estate, the land isn’t going anywhere.
Proven History: Few realize the difference in the histories of the stock market and property market when it comes to proven track records. Did you know that the largest stock market in the world is barely 200 years old? The oldest real stock exchange in London is barely 300 years old. At one point, stocks were blocked from being sold for a long period. Now compare that to real estate.
Summary
The truth is that there a lot more similarities between investing in stocks and real estate than most acknowledge. Once those that have been in stocks recognize this, and the additional benefits of real estate, they ought to be comfortable making the transition. There is nothing wrong with putting some of your real estate gains over in sticks. But when it comes to safety and consistency, it is hard to beat real estate.