Real Estate Investment VS Real Estate Stocks

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Written By Adrian Cruce

 

 

 

 

 

If you have your financial goals sorted out – for example, retirement finances, repayment of debt, etc. – you might find yourself curious to check out the investment channels such as real estate and stocks. The actual decision-making, however, boils down to which one you actually put your money down on.

If you are one of those who is trying to make up their mind at this time, then these are the grounds you need to focus on:

Intrinsic value

You are in control of every single physical real estate investment made. Whether you wish to make actual improvements, raise rents, refinance your mortgage, and/or find new tenants, it is all up to you. Given the fact that you are still heavily affected by market condition, investing in real estate provides you with ownership of a tangible asset that has an intrinsic value. On the other hand, when you are investing in stocks of a listed company, you are just minority investor. You do not have any control over the company, and you never know what is going to happen with your investment. It may rise meteorically, or it may crash in a matter of a few minutes. Thus, there is always a high degree of volatility involved in a stock investment. Plus, stocks do not provide you anything tangible, and their intrinsic value is negligible.

Initial corpus and ticket size

Real estate investment is capital intensive, and it requires a considerable amount of funds to start with. If you make a wrong decision and end up locking your funds in a bad real estate investment, it affects your financial profile quite significantly. Although, in case of stocks, you can start with any amount and test the waters.

Leveraging

Having leverage in a market that is poised to grow, is an investors’ dream. Regardless of the fact that inflation is beaten up by real estate only, in the long run, a three percent increase in property where the put down is 20% cash, gives you a return of 15% return (cash-on-cash). In the duration of 5 years, the value of the real estate may double up. On the other hand, with stocks, you may be reaping only 7-9% a year on an average including dividends, in the long term but there is no surety about a company’s performance, and your investment plus the leverage may put you in a troublesome situation. Leverage, in case of stocks, can destroy your financial goals if your investment goes down, so be sure to run the numbers for a worst-case scenario, beforehand! Nevertheless, real estate investments hardly go down as sharply as stock prices.

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Taxes

Taxes are another aspect to be taken into consideration when preparing to invest in real estate or the stock market. Property owners have to pay property taxes every year, based on the assessed value determined by the local authorities. Thus there is always a cost involved in maintaining a property. However, tax payers who own real estate are entitled to certain benefits. For instance, there are certain exemptions available to the home owners if they have availed of home loan. Bear in mind, that stocks come with their own tax liabilities as well, with capital gains tax being levied on any profit made from selling stocks. Even if you are not selling stocks, you are liable to pay taxes on the dividends you receive. However, there is no holding cost in case of stocks. Of course, you have to manage the demat account, which is available at marginal charges.

Ease of quantification

Calculating realistic expenses and rental income are all you need when it comes to understanding the returns on investment in real estate. You can incur a profit even when you are borrowing money. For instance, you have borrowed at a 3% rate, and you are renting out at a 6% rate, then you are still profiting! If you have the financial resources, then real estate provides ample chances to make profits. Real estate investors not only build wealth from the cash flow component but also the appreciation in capital values which are fairly transparent and can be easily worked out. Whereas, if you are investing in stocks, then you have to make your decisions based on what was reported by the company. This can be a slippery slope, as companies often polish the numbers to appear successful.

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Unperceived volatilities

The issue with investing in real estate is that its valuation may vary from time to time, without you being aware of internal challenges that are depreciating the value of the house such as termite infestations, dampness, issues in the foundation, etc. The same can be said for stock investments surprisingly. When it comes to the stock investment scenario, the price of the stocks you have purchased is not in your hands; it is more at the mercy of the market condition as well as the company performance which in turn banks on a number of variables. Therefore, both the avenues come with their own sets of challenges which surface only once you have commenced traversing down the path.

Peace of mind

Making money for the sake of making money can be addictive for those who know how to let their money work for them. As mentioned above, real estate investment provides for tangible assets; you can surmise the value of those assets every time you see them with your own eyes. On the other hand, if you look at the numbers on paper delineating your stock purchases, they do precious little to give you the impression of their perceived value in liquid currency. The icing on the cake is the fact that your real estate keeps accumulating appreciation in value, by the time you pass it down to your descendants. No such luck assured when it comes to stock- even the stocks in the most successful business enterprises now may depreciate in value later.

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Contributing factors

Stock prices can be dependent on a number of factors. To put things into perspective, an international incident in Europe may affect the shares of a company you have invested in. However, real estate is much more local. It is not dependent on the outside world or any global events or sometimes even macro-level events at a domestic level.

In conclusion, while both avenues of investment come with their own set of pros and cons, it can be surmised that the real estate investment domain is relatively more stable and safe, and better in terms of long-term returns.

This Article Is A Guest Post By: Girish Bindal

Girish Bindal is the Head of Content at Makaan.com, PropTiger.com & Housing.com. He draws from more than a decade of cross-industry experience and has worked for brands in the Real Estate, Recruitment and Consulting domain. In his current capacity, Girish is known to gel the news, numbers and opinion to drive the content consumption. With an analyst’s approach and a sharp focus on numbers, Girish has been organically progressing the brand to build a growing base of audience. An audience who are keen to buy property.