Real estate and stocks both have a proven track record of being great financial vehicles for consumers to invest in.
For years financial experts have quarreled over which investment option has the best rate of return. Still, the fact remains that you also want to select an investment based on your personal financial goals and risk tolerance.
A common myth or misconception is that you must be young to invest in real estate. But the truth is that you can be of any age and still reap ample returns from real estate investing.
There is no doubt that having a mix of both stocks and real estate can lead to a better balanced and diversified portfolio. However, there are several reasons why you might want to lean into real estate as opposed to the stock market.
Let’s look at some of the advantages that real estate holds over stocks and how you could benefit by allocating more money into real estate instead of equities.
Generate Passive Income
One of the best benefits of investing in real estate is the potential to generate passive streams of income. For example, you can buy a piece of real estate, turn around, and rent it out. It's important to note that you want to make sure that before you buy and rent a property, that it can generate positive cash flow. This means having money left over after collecting the rent to cover any applicable mortgage payment and operating costs.
While some might argue that stocks can also generate income through dividends, it's important to distinguish the differences between the two types of income. When you rent a property, most people require a lease to be signed by both the tenant and the landlord. This lease is a legally binding agreement where your tenant agrees to pay you monthly rental payments in exchange for using and enjoying the property under specific parameters.
If your tenant decides not to pay you for any reason, you then have legal recourse to go after them personally for the obligation through legal proceedings. On the other hand, dividends are excess earnings or profits that a company only typically distributes to shareholders when it has met all its financial obligations. In fact, there is no legal requirement that says a company has to pay out dividends. Some companies actually choose to reinvest those earnings back into the company.
Because companies are not required to pay out dividends, buying and renting real estate is much more desirable if you're looking to set up long-term stable passive streams of income. The increased cash flow can also help you pay down your mortgage and build up your equity over time. While the operating costs involved with managing multiple properties can be a concern to some, new technologies make managing numerous properties and developments seamless.
Terrakan makes property development much more affordable by offering clients an integrated solution to help manage multiple projects within one platform. Members can benefit from basic property reports, listing services, and value servicing tools.
Hedge Against Inflation
If you are a savvy investor, then inflation should always be a growing concern. As the cost of living continues to increase, the money you earn today will have less purchasing power for future goods and services. The same concept applies to the price of rent. As the economy continues to grow, the cost of rent tends to increase.
If you are holding real estate as a means of generating income from rental payments, this means you can incrementally increase rents to keep pace with the market. In a way, you pass some of the costs of inflation onto your tenets.
Furthermore, you get the added benefits of capital appreciation. Real estate tends to appreciate over time which can also help guard you against inflationary pressures. By contrast, only certain types of stocks perform better during periods of higher inflation. Typically, growth stocks perform worse than value stocks. That’s often because companies must increase prices due to inflation, making it harder for growing companies to compete.
By investing in growth stocks, you aren’t getting any added value. In fact, you might end up investing more money for less upside.
Better Leverage
Expanding your investment portfolio using debt can be much easier and safer with real estate than investing in the stock market. Typically, getting a mortgage on a piece of real estate is pretty cut and dry. You can invest in new properties with a down payment of 20% or sometimes less. If you have the cash flow and reserves, you can expand your portfolio at an accelerated rate.
In contrast, you can use debt to invest in stocks, but it's slightly different. Known as margin trading or buying on margin, it can be precarious and hard to navigate if you are new to trading. Furthermore, not all stocks qualify to be purchased on margin, whereas you can obtain a new mortgage on almost any piece of real estate, be it commercial or residential.
The other thing to consider is the tax advantages you get for financing real estate investments. The IRS allows you to write off various expenses, including loan interest, property taxes, insurance premiums, depreciation, maintenance, repairs, and other operating costs.