Nowadays investing in the stock market is a very popular topic. There are a lot of questions that a beginner investor may ask – how to do it more aggressively, how to start buying individual stocks, and so forth. However, probably the most important question of all is whether it is better to invest in real estate or in the stock market in the current economic climate.
There are many advantages and disadvantages of each investment strategy, so we decided to compare the two.
Investing in Real Estate
The investment strategy of buying rental properties is certainly not new. Many people profit from real estate investments and add to their retirement income. However, still fewer choose to invest in real estate than in the stock market. This may be so because of one of the following reasons:
- They don’t want to work with tenants. If you are a landlord you may be faced with lot of administrative work and working with tenants when things go wrong. A lot of people don’t have the time to be caught up with these small things. In this respect, investing in the stock market seems much easier.
- Also, there is always the risk of a bad tenant. The number of horrible tenant stories may have probably caused an unreasonable amount of fear for people considering real estate investing. Moreover, there is always the possibility that a tenant could damage your property. That is why many people don’t take that leap.
- Another factor that people consider is the return on investment. It just doesn’t make sense in their local market, unlike in Dubai, and that is why many avoid it. It just doesn’t seem reasonable to invest in real estate when the rents are too low to produca reasonable income.
As you can see there are legitimate reasons to avoid investing in real estate, but it isn’t without its benefits. One of the most important advantages of real estate investing is the potential to increase your investment faster with leverage. We speak of Real Estate leverage when you are using your small amount of money to grow faster. In real estate investing, you can buy properties for less money than you need to invest in the stock market. For instance, if you purchase a $100,000 home with a 20% down payment and the home value rises 5% in one year, you will have a 25% return on your investment without even taking into account the positive cash flow from rent. The entire $100,000 saw a 5%, not just your investment.
Stock Market Investing
Many people choose to invest in the stock market and here are several of the reasons why:
First, investing money can be simple. Although some investors decide to buy individual stocks that require more attention, stock market investors have also the opportunity to buy index or mutual funds that require little attention. Most people even have the money automatically deducted from their paychecks.
While in real estate investing, you should always save up a down payment before being able to invest, investing money in the stock market can be done regularly without a large sum saved up. In this way your money is active all the time.
As you can see the comparison between the two forms of investing is quite complex. Not to mention the fact that each form has its own unique tax benefits. That is why you may start with the stock market and then you may gradually incorporate rental properties. By using a combination of the two investment strategies, you can also diversify your investments and thus provide much needed security.