A:

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.

Investing in 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.

RELATED FAQS
  1. How much of the global economy is comprised of the real estate sector?

    Find out how much of the global economy consists of the real estate sector, including output from commercial and residential ... Read Answer >>
  2. Why can real estate be a good addition to a traditional stock and bond portfolio?

    Discover why real estate can be a good addition to a traditional stock and bond portfolio. Real estate is affected by economic ... Read Answer >>
Related Articles
  1. Investing

    Real Estate Vs. Stocks: Which One's Right For You?

    There are ups and downs for both real estate and stock investments, so before diving in, know the differences between the two.
  2. Investing

    Is Now A Good Time To Invest In Real Estate?

    From carrying costs to investment risk, there's a lot to consider before you invest in real estate.
  3. Financial Advisor

    Why Real Estate is a Good Fit for Older Investors

    Real estate investing can be a good fit for older investors. Here are three reasons why.
  4. Investing

    The Risks Of Real Estate Sector Funds

    Discover the risks and rewards of investing in real estate funds, as well as some of the best and worst performers.
  5. Investing

    4 Key Factors That Drive the Real Estate Market

    Whether you are investing directly or indirectly in property, you need to know the factors that affect its value.
  6. Investing

    10 Habits of Highly Effective Real Estate Investors

    The best real estate investors all share these traits and practices.
  7. Investing

    Exploring Real Estate Investments

    Discover how owning properties can give you a roof over your head or a check in your pocket.
  8. Investing

    How You Make Money In Real Estate

    If you're interested in the real estate game, make sure you know what factors will affect whether you make money or not.
  9. Investing

    How Much Money Do You Need To Invest In Real Estate?

    Here's a rundown of how much investors need to get started in real estate investing.
RELATED TERMS
  1. Real Estate

    Land plus anything on it, including buildings and natural resources.
  2. Commercial Real Estate

    Property that is used solely for business purposes. Examples ...
  3. Private Equity Real Estate

    Private equity real estate is an asset class that consists of ...
  4. Commercial Property

    Commercial property refers to buildings and lands that are intended ...
  5. Real Property

    Any property that is attached directly to land, as well as the ...
  6. Blanket Mortgage

    A mortgage which covers two or more pieces of real estate. The ...
Hot Definitions
  1. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  2. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  6. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
Trading Center