Is real estate investing better than stock market investing?

Dear daughter,

Some beginners always shave this question: Is real estate investing better than stock market investing? Instead of focusing on what really matters, they want quick answers.

As with many things in life, there is no quick and short answer to that question.

Here, I will describe how each one works and by the end, you will be able to answer the question yourself.

How do you make money investing in real estate?

Real estate investors have different opportunities of making money.

Rental properties seem to be the most common way people make money in real estate.

How does it work?

You buy a property, you rent it out, you use part of the rental money to pay everything you have to pay, and the rest goes to your pocket.

It looks simple. But what is “everything you have to pay”?

Just let me mention some of the costs of renting:

• Mortgage payments. If you use leverage, which all real estate investors do, this one is your first and bigger expense. You can read more about what is a mortgage if you don’t remember.
• Tax and rates.
• Management fee. These are fees you pay to a company, or to someone, to manage the property. Their job is to make sure that there is a tenant on your property, to collect the monthly payments, fix the problems in the property, etc.
• Insurance.
• Vacancy costs.
• Accounting fees.

As you can see, there is a “bit” more to rental properties.

A second way to make money in real estate is called property flipping.

This is when you buy a property, usually in distress, renovate it, and then sell it for a profit.

The last one is about the property developers. You buy land, develop properties and sell/rent them for a profit.

Each of them carries risks and requires a lot of work, like all types of investments.

How do you make money investing in the stock market?

In the stock market you can make money in two main ways:

1. Buying at a lower price and selling at a higher price
2. Getting paid dividends on the stock you own

You can find the explanation of these two ways here.

So, which one is better?

Now that you understand how you can make money in each type of investment, let me go through some pros and cons.

Pros and cons of real estate and stock market investing

I will give here what I believe are the most important pros and cons. There are more, but these are enough to make my point.

Real estate pros:

• You can get great tax deductions
• The property value usually goes up with time. This is another source of making money. If you sell the property in 10 years, it will probably cost more than what you paid.
• In the case that you don’t get tenants, you still have the property! And the property has a value. This one is the one I like the most.

Real estate cons:

• If you don’t get a tenant, you don’t make money and you must pay all the costs from your pocket. You literally are losing money.
• Some tenants don’t pay the rent on time or just stop paying. The costs of eviction and lawyers can be high.
• You have a mortgage to pay! And usually, a mortgage must be secured with some other property you have. So, if you don’t pay the mortgage, you can lose your rental property plus whatever other asset (s) you have that have the same value as the mortgage.
• You might need a lot of money to start. Some investors say you can invest in real estate starting with $0. Theoretically, that is true. In practice, however, it seems to have a low probability of happening, at least when you are starting.
• The price is determined by anyone. If you enter now in the market with 10 properties and you give a low rental price, people won’t go to the ones with a higher rental price. The same can happen to you if someone else has lower prices than you do.

Stock market pros:

• You can start with little money. This one is the main reason why started here.
• You can sit and wait to be paid. No need to pay any extra expense apart from the fees when you buy the stock and small monthly for the brokerage account.
• When you get dividends, taxes are deducted before you get the money. So, there is no need to plan for tax payments.
• You can benefit by buying one stock, or by buying an index that tracks the whole market.
• You can also buy real estate stocks in the stock market. In this way, you benefit from real estate without buying the real estate.

Stock market cons:

• If the company you bought goes bankrupt, you probably lose all your money.
• If you need to sell when the market is low, you will lose money. The stock market fluctuates, sometimes is crazy, like at the moment I’m writing this.

Conclusion

Dear daughter, don’t try to make your own conclusion by counting the pros and the cons of each type of investment. That’s not how it works.

My recommendation to you is to assess it pragmatically.

What do you like most? How will you feel more comfortable? In what area you are more knowledgeable?

Which one of the two is a better place to be according to where you live?

Some people like real estate. However, this doesn’t mean real estate is better than the stock market.

Other investors, like more the stock market. It doesn’t mean the stock market is a better option.

By now, I hope you can answer if real estate investing is better than stock market investing.

Don’t forget to tell me what you think. I want to know if you got the message.

Love you, Dad.