Stocks and shares dominate the capitalist world and market ups and downs are part and parcel of our everyday lives. As are the stories of millions made in a morning or entire fortunes wiped out overnight. But stocks don’t have the exclusivity on investment portfolios – real estate also forms the backbone of most. And of course, many people own a least one property, their own home. But which makes the better investment? To decide, we need to look at the pros and cons of real estate investing versus buying stocks.
The advantages of investing in property
As well as providing a roof over your head, real estate investing also has the following advantages:
Property prices go steadily upward – if you look at historic trends in house prices, they always move upwards. Despite the cycles with their bubbles and crashes, the underlying trend is always up. To take advantage of this, however, property investment is best thought of as medium to long term. As Warren Buffett, one of the world’s most successful investors ever, said, “our favourite holding period is forever”.
Buying real estate is unemotional – unless you’re buying your home, purchasing property involves no strong emotions. Stocks and shares, however, often involve a rollercoaster of enthusiasm and despair as the scenes of frantic buying or selling in stock exchanges illustrate. And this panic is often contagious. You rarely see this in real estate markets.
Property investment is easy – you don’t need to be an expert in finance to buy real estate. If you’re buying stocks, on the other hand, you do need more than basic notions on how shares work.
Real estate is tangible – as the name says, it’s real. You can see it, touch it and use it yourself. Stocks, on the other hand, seem rather ephemeral, they’re usually digital and so not tangible at all. At most, you’ll get a paper certificate. Compare that to the solidity of bricks and mortar.
Property is lasting – barring a natural disaster, real estate stands the test of time and it’s unusual for property to be wiped out overnight as can happen with stocks.
Real estate is your domain – you control the property and decide what you do with it. Stocks tend to be in the hands of others, often management companies or boards of shareholders. Bottom line? You have vested interest in the property (your investment) because no one cares about it more than you.
Real estate has leverage – successful real estate investment often involves financing through mortgage loans. This allows investors to leverage the purchase and increase returns. Few investors borrow to buy stocks.
Property has diverse income streams – you can make money from real estate in different ways. Capital appreciation is the most obvious, but a property can also generate a passive income through rental returns from buy-to-let, for example. You can also buy a plot of land and develop it, extend a small property or upgrade an old one to add value.
Real estate is stable – property markets do move up and down, but never to the same extent as stocks and shares. Even the slightest political event can send shockwaves through exchanges. Major economic crises or geopolitical disputes force them into freefall.
The advantages of investing in stocks
No comparison of the two investment vehicles would be fair without looking at the benefits that come from buying stocks and shares. User friendly apps like eToro brought the world of stock investing closer to the masses. Getting started with buying publicly traded company stocks has never been easier. The pros include:
Stocks give you instant liquidity – if you need cash, you can sell stocks easily and quickly. Property, however, can take a while to sell especially in slow markets.
Stocks are cheaper – shares start at just a few euros whereas you need at least several thousand to buy a property.
Stocks come with zero maintenance – there’s no upkeep involved with stocks and no worries about damage from adverse weather conditions or careless tenants.
Stocks offer high returns – if you know how to play the market, you really can get rich quick with stocks and shares. Profit gains through property tend to be slower.
The downsides of investing in property and how to offset them
The list of advantages for real estate runs considerably longer than the one for stocks and shares. But that isn’t to say that property investment comes with zero disadvantages.
Even the old adage, “it’s as safe as houses” isn’t always true – many homeowners lost considerable sums of money in the last economic crisis. However, their number pales in comparison to the shareholders who have seen millions wiped off their portfolios since the pandemic started in March this year.
Wrong location – arguably the biggest risk when in property investment is buying in the wrong place. Not for nothing are the three most important things to bear in mind: location, location and location.
Offset by – carrying out careful and rigorous market research helps you avoid making this mistake. Choose an agent specialised in the area and take their advice on the best-situated properties.
Poor liquidity – property can be a challenge to sell quickly so it isn’t a liquid asset convertible easily to cash.
Offset by – making property earn you money in the form of regularly monthly income. Buy-to-let investment is one of the best examples of gaining liquidity through a property investment.
Costly maintenance – all houses need upkeep, which can be costly especially for big-ticket items such as roof repairs or broken pipes.
Offset by – tapping into as many tax deductions as possible. There is, unfortunately, no avoiding maintenance, but in most countries you can offset the costs against your tax bill.
On balance, the advantages of real estate investing far outweigh the drawbacks. And equally importantly, all the disadvantages can be easily avoided or mitigated.
The downsides of investing in stocks and how to offset them
The same cannot be said unanimously for stocks. You could research stock market trends and company performance for weeks, but the volatile nature of the market can make all your facts and figures obsolete. After all, no investor in airline shares could have imagined an almost empty sky between March and July this year resulting in plummeting values for airline shares. Or the domino effect this would have on other stocks – for example, manufacturers of aircraft engines such as Rolls Royce.
And while it’s true that most countries levy lower income tax rates on dividends from shares, there is no guarantee you will receive a profit. The FTSE 100 has lost 23.5% this year since the start of the pandemic leaving many shareholders with losses rather than dividends.
Bottom line? Offsetting the drawbacks of investing in stocks can be a challenge and is often out of your hands.
Which is better real estate or stocks?
As we’ve seen, when it comes to advantages, property investment clearly has a considerable edge over stocks. Not for nothing do the most successful portfolios always contain real estate and many millionaire fortunes have their foundations in property.
And then of course, real estate beats stocks hands down in one particular aspect and that’s the value of a home. In these strange times, we have all discovered that our home is a true refuge. Somewhere to take shelter and feel safe from the pandemic raging outside. Which stocks would you describe as a haven?
Visit our website at ThePropertyAgent.es and find investment property for sale on the Costa del Sol.