Even though you might be well placed as an investor if you diversify your portfolio, you might find yourself favoring real estate or equities (real estate Vs equities). It is normal and only shows that you are human, just like every other investor. However, your choice does not mean that the other investment type does not have income and capital appreciation. It does… but these investment types are different especially when you start looking at their characteristics. If you have no option but to choose either real estate or equities for your investment, then you should make sure that you have understood the rewards and risks associated with each one of them. So, which of the two is better?
01. Liquidity
Liquidity is one of the main benefits you will enjoy if you invest in equities. For instance, if you wake up in the middle of the night and sell part of your equity, no one will stand in your way as long as the market is open. In addition, if you want to generate returns on your equity portfolio, you can get an options account that allows you to buy call or put options depending on what you think about the value of your equities. You will even be able to see real-life pricing of the market with equities, making the entire investment very transparent. Now, let us assume that you are selling a house. How much time do you think it might take you to get a buyer who gives you what you want? This might take you weeks or even months. You might never even get the true value of your house since you might have to take what a buyer is willing to give.
02. Volatility
If you have invested in both real estate and equities for some time, you might already have realized that real estate cannot outperform equities in the long term. However, you have to go through volatility with equities. For instance, you might have the prices of your real estate property reducing by a lot of money in a year – that might sound normal. However, the prices of your equities can reduce by a significant percentage within a couple of days. The stock market has a bear market that you also have to deal with. This is a time when prices in the stock market reduce by about 35%. You will go through a bear market after every three and a half years on average, and some stocks might reduce by up to 50%. You will not have this kind of volatility if you decide to invest in the real estate industry.
03. Returns
Do you think you can successfully compare the long-term returns between equities and real estate? Well, this is not easy. First of all, each of these types of investments comes with different rewards and potential risks. However, let us assume that you want to compare the returns before making up your mind on the best type of investment between the two. So, you have two options – to invest in the S&P 500 stock index or buy a house. So, which one would you go for? Well, the truth is that equities can easily outperform real estate in such an example. In the long run, you will have your investment in stocks returning around 10% every year. However, the investment in real estate will return a meager 3% to 4% every year. So, always ensure you are putting your money in the right places.
04. Leveraged Returns
When it comes to leveraged returns, you are better placed if you invest in real estate. However, this does not mean you cannot borrow against your equities. Margin trading allows you to borrow up to 50% of your portfolio’s value. However, this will be much better for you if you have invested in real estate. For example, you will be required to have about 20% or even less as a down payment for a home. This provides you with leveraged returns and makes it possible for you to earn more money from your initial investment. For instance, let us assume you have put a $10,000 down payment on a house worth $50,000. If the value of your home rises by about 20% to $60,000, you will have doubled the initial investment of $10,000. This is one of the reasons you should consider investing in the real estate industry over equities.
05. Investment Size
How much money do you think you will need to invest in either real estate or equities? Well, you will need to make sure you have a lot of money to buy a house, for instance. Let us look at a piece of land in a city. How much money do you think you will need to acquire it? On the other hand, do you need that amount of money if you want to buy, let us say, one stock or even a share of stock? Most definitely not. You can spend just a couple of dollars on equity and sell when prices are high to make a profit. This does not mean that you cannot find affordable real estate properties. If you look at publicly traded properties and other investment pools, you might be lucky to get a property that requires a very low investment cost initially. That notwithstanding, the fact is that you will need a lot of money to invest in real estate.
So, Which is Better?
As you can see above, real estate Vs equities. Each one of them has its pros and cons. You need to make sure that you have done your research before settling on any one of them. You might even be bold enough to invest in both. Before you leave, make sure to check detailed guide on real estate: