What are the differences between investing in real estate and stocks?

If you invest in real estate, you are actually purchasing a tangible, physical land or property. Investing in stocks is entirely different; if you purchase shares of a business, you are buying a claim to a piece of the company itself.

The risks associated with each investment type differ. When you own real estate, you incur maintenance costs, capital costs, taxes and maybe development costs each month. That said, the values of physical assets are less likely to become worthless than stocks.

Investing in Real Estate

Many investors are more comfortable with real estate investments because they are real. You can touch, feel and inspect the property that you own. Additionally, you as the property owner have more control over the value and use of your investment than the standard stockholder does.

Real estate investments fall into two broad categories: residential and commercial. Residential real estate includes all single-family units, buildings meant for one to four families, cooperative units and condominiums. Typical investing strategies include land development, home flipping or acting as landlords for rental purposes.

Commercial real estate investments focus on land or buildings that have profit-generating activity and generally have higher start-up costs than residential investments. Rental properties housing five or more family units are considered commercial as well. Most commercial real estate owners generate income through rent from office and retail space leases.

Investing in Stocks

Outside of preliminary research to determine which to purchase, investing in stocks does not require much work on your end. Stocks are really just pieces of legal title that operate as claims to company profits (and possibly dividends) as they are realized.

You are not an employee of the company, nor do you participate in nearly any management decisions. (Shareholders do participate in votes regarding management, such as electing members to the board of directors.) To this extent, stocks represent an easier investment, but they leave you at the mercy of others' business prowess.

Stocks are more liquid assets than real estate. It is easier to buy and sell shares than it is to list and sell property. Even though you can borrow against both investments, it is easier to borrow against stocks.

Real Estate Vs. Stocks

Generally, buying and holding stocks (and reinvesting dividends) is considered the best way to accumulate wealth over the long run. The average annual rate of return on the U.S. housing price index over the 113-year period between 1900 and 2012 was 7.2%. Over the same period, the Dow Jones Industrial Average realized an average annual rate of return of 9.2%.

That said, real estate tends to see less erratic swings than the stock market. You can also see more tax benefits from owning and depreciating real estate assets. Both investments, however, have a proven long-term track record of generating returns.