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Most investors can benefit from a diversified portfolio, but investors often prefer either equities or real estate. Both types of investments can provide capital appreciation, income, or both, but have very different overall characteristics.
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If you’ve given up on choosing just one option, either stocks or real estate, you need to understand the risks and rewards that each type of investment brings. Here, we look at the pros and cons of stocks and real estate to help you decide which one suits your investment objectives and risk tolerance.
Return value
Comparing the long-term returns of real estate and the stock market is difficult. This is because each asset class has different potential risks and returns. However, the easiest comparison using most data points is buying a house versus owning the S&P 500 stock index. In this regard, there is no real competition. Over the long term, the S&P 500 has delivered investors an average annual return of about 10%, compared to just 3% or 4% for real estate.
volatility
Stock market returns are generally significantly better than real estate investments over the long term, but investors have to pay a price in the form of volatility. In a bad year, home prices might drop by double digits, but the stock market could drop 10% in a matter of days. During bear markets, which occur about every 3.6 years on average, the stock market loses 36% on average. In some cases, stocks can fall by 50% or more during a bear market. This kind of volatility doesn’t occur in real estate, except perhaps the most speculative part of the market.
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Liquidity
One of the great advantages of the stock market over real estate is its liquidity. You can literally sell any stock any time the market is open. In many cases, you can sell after hours or even before the market opens. For most stocks, you can enjoy a very active and liquid market and see a fair market price at the moment.
On the other hand, if you sell your home, you may have to wait months or years to unload your property, and you don’t know what the ‘true’ or ‘fair’ value of your property is. There are cases. Whatever an investor is willing to pay you.
Investment scale
Investing in real estate usually requires more capital than buying stocks. Land and developed real estate may be worth tens of thousands, hundreds of thousands, or even millions of dollars, but some brokerage firms allow you to buy fractional shares of stock for a fraction of the price. I can do it. Some investment pools and listed real estate investment trusts may have low initial investment costs, but outright ownership of real estate typically requires a much larger investment than buying stock.
leveraged return
Real estate can offer leveraged earnings benefits. While it is true that an investor can borrow against the value of the account to purchase additional shares (this is known as margin trading), typically up to 50% of the value of the portfolio is his can only be borrowed. However, the traditional down payment for a home is only 20% of the purchase price, and many homebuyers make as little as 10% or less. This leverages the returns and offers the potential for homeowners to earn a large percentage return on their initial investment. For example, if he invests $20,000 in a $100,000 house, and the house’s valuation rises by 20% to $120,000, he doubles the $20,000 invested.
taxation
Real estate and shares are fixed assets and are taxed in the same way. Profits earned within a year are considered ordinary income, while profits earned after more than a year are long-term capital gains and are taxed at a lower rate.
However, real estate offers a wide range of tax exemptions not available to equity investors. For example, if you own your own home, you can deduct mortgage interest, mortgage interest, discount points, home improvements needed, mortgage insurance, and property taxes (single filer up to $5,000 for joint filers and up to $10,000 for joint filers).
Benefits of a Diverse Portfolio
Both stocks and real estate are valid investment assets with different characteristics. This allows them to complement each other as part of a diversified portfolio. Residential real estate not only provides a place to live, but also offers various tax benefits and long-term capital appreciation potential. In addition to capital appreciation, rental properties can provide passive income in the form of monthly rent payments that typically increase each year. Stocks are generally held for their growth potential, but many stocks also pay regularly increasing dividends, thereby providing income opportunities as well. The best course of action is to own both asset classes in a diversified investment portfolio devised in collaboration with your financial advisor.
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