Getting started as an investor is not just about saving up enough money to buy assets. A big part of the process is deciding where you will put your money. There are many investment products in the market, and each has its unique set of pros and cons.
The best investment option for you will depend on factors such as your long-term or short-term goals, how comfortable you are with taking risks, your age (fresh out of college or nearing retirement), your level of financial savvy, and how much time you have.
Other things to look at are the prospective investment’s ability to generate income and the rate of return. Naturally, you will want an investment that offers a combination of income and high returns. No other assets classes do this better than stocks and real estate.
Real estate and stocks are two of the longest existing and most trusted investment options in the market. Almost every successful investor will tell you they invest in both stocks and real estate. Indeed, many other investment products are partially based on real estate and stocks.
But for someone just starting on their investment journey or trying to build a foundation as an investor, it is a good idea to begin with a focus. Between buying stocks and investing in real estate, which one is right for you? Read on to find the answers.
The pros and cons of investing in stocks
- The barrier to entry is low when investing in stocks. You don’t have to go looking for stocks to buy, and you don’t need a lot of money to get started.
- Stocks are very liquid, and you can easily convert them to cash since they are traded daily at the exchange, and you can quickly find buyers.
- If you invest in dividend-paying stocks, you can expect to earn income from the investment.
- Buying stocks does not involve complicated accounting because your expense is usually limited to broker fees. Regardless of how uncomfortable you are with numbers, you can invest in stocks.
- You can get annual growth of up to 3% a year.
- Investing in stocks will not require a lot of your time, and you don’t have to manage the asset directly
- Stocks are highly volatile; the prices of company shares can plummet in a matter of hours on the back of bad news about a company, the economy, or natural disasters.
- Because stocks are so easy to sell, they are vulnerable to emotional decisions. Unless you understand the market, you will be apt to sell at the first hint of bad news, making you lose more money.
- You may have to pay a lot of money in taxes when you sell.
The pros and cons of investing in real estate
- The best thing about buying real estate is the income the property generates. This is often more than enough to maintain the building, pay the mortgage/insurance and workers. In the end, you will usually have some money left over.
- Real estate is a tangible asset, you can see what you are buying, and no economic upheaval will make it disappear suddenly.
- There are a lot of tax advantages when you are investing in real estate. You can deduct taxes for many of the day-to-day costs of running a property. These deductions sum up to a lot of money and make a big difference to your profits.
- Real estate is a hedge against inflation; buying property will preserve the value of your money.
- You need a lot of money to start as a property investor.
- Real estate is not entirely passive. You have to be involved in the daily management of the building, and the effort to oversee a property can be a lot of work. However, you can hire a property manager to do this on your behalf, but you have to pay them a fee. Check out a few property managers’ websites to see what they’re all about to find the right one for you.
- Real estate is not liquid; if you have an emergency and need money quickly, you may not be able to find a buyer for the property.
Real estate versus stocks. Which is right for you?
For centuries, real estate has always been a fixture in the investment portfolios of the rich. You will be hard-pressed to find a billionaire who is not heavily invested in real estate (even by buying the stocks of a real estate company). Why is this? The reasons are simple:
Real estate is probably the only investment where it is perfectly safe and completely acceptable to buy the asset with borrowed money. Leverage allows you to invest in real estate beyond your means.
No other investment offers as many different ways of investing as real estate. You can choose to invest in REITs, use a buy-and-hold, or a short-term real estate investing strategy.
Even if demand wanes in the short-term, real estate will always be in demand.
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