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Through the years, there has been much debate as to which is a better investment; real estate ownership or the stock market. Both options can be very profitable but they come with a different set of advantages and disadvantages, making them appealing to different types of investors. Knowing which one is right for you is a matter of realistically assessing the risks involved in both cases, as well as the implications.
Real Estate – The Pros and Cons
There are two main types of real estate investments: commercial and residential. Some investors purchase rental properties and hold them for a number of years, renting them out for passive income. Others adopt the “home flipping” strategy – looking to purchase properties under market value, and refurbishing them to sell at a profit.
Advantages of Real Estate Investments
- Real estate is a tangible good – you can physically touch and feel a home, and to some investors this feels more assuring.
- Real estate market trends are more predictable than stock market trends.
- The equity created through a real estate investment provides capital which can be used to finance other investment opportunities. Investors can borrow against their equity.
- While a real estate investment provides cash flow, it can also be used as a primary residence during periods in which the property is not generating passive income.
- Purchasing a home gives you leverage; you can build your net worth by using the profits made off a real estate investment to further expand your portfolio.
- The real estate market is a more stable and reliable investment. In Montreal, you can expect your property to appreciate at a rate of 4-7% annually. Compared to the stock market there is very little risk of your investment losing value, providing you hold onto it for more than 4 years. .
- As a real estate investor, you are more in control of your investment’s value. You can make improvements to your property, screen your tenants, and refinance your mortgage when rates are low. On the other hand, when you invest in a private company, you are putting your faith entirely in the hands of an external party.
- Real estate investments are tax advantageous. You can deduct the interest on your mortgage as well as other expenses such as condo fees, taxes and management fees towards your income.
- Real estate is easier to analyze and quantify. If you know your monthly expenses, and compare that to your rental price, occupancy rate and the market’s yearly appreciation, you’ll be able to easily calculate the returns on your investment. The combination of cash flow and equity helps real estate investors build wealth, without much risk.
Disadvantages of Real Estate Investments
- Real estate investments are illiquid, which means that when you buy a property, you cannot sell it right away and still realize a profit. In many cases you will have to hold onto the property for several years before seeing a return on your investment.
- Closing costs can amount to a few thousand dollars, between the taxes, commissions, notary fees and insurance costs.
- It is often harder to diversify your portfolio when investing in real estate; many investors will purchase several properties in the same neighbourhood, for the sake of convenience. Without thorough market research, this can mean more vulnerability to market instability.
Stocks – The Pros and Cons
When investing in the stock market, you receive shares in a company. If the company flourishes, you will see profits on your investment. During economic downfalls, you may see your investment lose value as the earnings of the company drop.
Advantages of the Stock Market
- Similarly to real estate, the stock market also allows you to gain leverage, using your profits to increase your total amount of shares.
- Stocks are very liquid- they are quick to sell and quick to buy.
- They are also flexible; they can be reallocated into a tax free retirement account until the capital is withdrawn.
- Due to the volatility of the stock market, it is possible to see significant spikes in annual profit.
- Stock have lower transaction costs; online transaction costs range at around $10 a trade regardless of the size of your investment.
Disadvantages of the Stock Market
- While the volatility of the stock market can reap higher profits, it is also riskier. If the company you have invested in goes bankrupt, your investment will be dissolved.You risk losing your entire investment if the company plummets.
- Stocks are intangible investments; you will not reap the material and social benefits (such as a sense of community, security, and pride of ownership) from a stock investment as you would when buying a property.
- Stockholders are paid last if the company goes broke.
- For amateur stock investors, competing against professional traders who have more time and knowledge to invest can be challenging.
- Investing in the stock market is an emotional rollercoaster, with stock prices rising and falling every few seconds.
Knowing which is right for you
The decision of whether to invest in real estate or stocks depends on your personal temperament as well as your preferences and skills as an investor.
Investing in real estate is right for you if you take pride in ownership, and would rather see tangible assets representing your wealth. It is well suited to an investor who prefers to remain in control of his or her investment, and does not do well in volatile, unpredictable environments. As a real estate investor, you will need to enjoy interacting with people, and must be able to remain committed to the investment for at least 5 years.
Investing in the stock market is right for you if you have a limited amount of capital to invest, and you don’t want to be tied down to a geographical location. An ideal stock market investor is happy to give up control, and can handle risk and volatility well. At a more professional level, you’ll need to do research on the stock market, to understand and predict trends in global economics.