In a time of economic uncertainty, you may question whether to focus on investing in stocks or real estate. Market conditions have increased stock volatility, and you may want an additional hedge against inflation and recessionary conditions.
Here we compare stocks and real estate to help you decide which is better for your long-term goals and how best to allocate your investment dollars.
Volatility:
Stocks tend to be more volatile than real estate. Both investments trend upward, but stock values change daily, whereas real estate tends to have more steady values. Dips in value can provide opportunities to buy at a lower price, and you may lose money if you sell in a down market.
A key advantage of real estate is that land and buildings have intrinsic value, where stock prices could fall to zero if the company goes out of business or files for bankruptcy.
Cash Flow:
Both stocks and real estate can provide cash flow. Dividend-paying stocks allow you receive gains while maintaining ownership. Properties with tenants can create cash flow through rent. Based on the proforma, syndications tend to pay monthly or quarterly distributions to investors.
Passive Investment Opportunity:
Stocks and mutual funds are passive. You purchase the investment, and the fund manager makes the decisions. Placing a trade initiates the buy or sell without any further action required. Financial advisors can help you create a portfolio based on your goals and risk tolerance.
Real estate can be passive. You can purchase a property and then hire a property manager. Commercial real estate syndications are even more passive because the sponsor does all the work, including locating and financing the property.
Potential for Gains:
Both stocks and real estate have varying levels of risk and rewards. Mutual fund investments categorize funds based on risk and diversification factors. For example, funds specializing in large company blue chip stocks will have less risk and potential lower gains than more risky funds specializing in small-cap companies in emerging markets.
Real estate also has risk and reward correlations. New construction projects tend to be riskier than established housing, and A-level properties have less risk than C-level properties. Regional market growth, the quality of the property, and market conditions also affect the risk of an individual property.
Liquidity:
Stocks are liquid and can be converted to cash quickly and easily. It is not difficult to find a buyer, transaction costs are low, and you can receive funds in less than a week. While you can sell them anytime, liquidating in a down market could result in losses.
Real estate is illiquid. When you are ready to sell, you must find a buyer, pay closing costs, and typically wait 60 to 90 days after signing the contract to close.
Taxation:
Stocks and mutual fund investments create taxable events when you sell a position or receive dividends. The IRS taxes stock shares held over a year at the lower capital gains rate. Dividends and stocks held under a year are taxed as ordinary income.
Real estate deductions can reduce taxes. Property owners often qualify to deduct property taxes, mortgage interest, repairs and maintenance, property management expenses, and depreciation.
Final Thoughts
Both stock and real estate investments provide opportunities to profit and offer cash flow options. Building a diversified portfolio is generally not a matter of choosing one or the other but determining what percentage to invest in various categories.
If you’re interested in expanding your real estate holdings through syndications with McKee Capital Group, watch our introductory video.
