Is Real Estate a Good Investment?

Real Estate vs. Stocks: Which Is the Better Investment?

Should you invest in real estate or stocks? Both investments have pros and cons you need to understand.

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Best Financial Advisors Find a Financial Advisor Near You | NerdWallet How to Choose a Financial Advisor in 5 Steps 5 Best Wealth Management Services Investing in real estate may seem like a smart financial move, but it may be even smarter to compare it to investing in stocks before making any big decisions.

Real estate vs. stocks

The main difference between investing in real estate and investing in stocks is that real estate involves buying properties and renting them out or investing in REITs (real estate investment trusts), whereas investing in stocks involves buying a small slice of a company and waiting for those shares to increase in value. If you're trying to choose between the two, the good news is, you don't have to: Many people do a bit of both. It’s also important to know that you can purchase shares in real estate investments without the headaches of actually buying, managing and selling properties.

An alternative to traditional real estate: REITs

Don’t feel like flipping homes or building a rental property empire? Fortunately, there is an easier option: investing in real estate investment trusts, or REITs. REITs are companies that own (and often operate) income-producing real estate, such as apartments, warehouses, offices, malls and hotels. The most reliable REITs have a strong track record for paying large and growing dividends. Many online brokers offer publicly traded REITs and REIT mutual funds and ETFs — meaning you can buy them in the same place where you can buy stocks. » Ready to invest? Check out the best online brokers for stock trading » Ready to invest? » Ready to invest?

Real estate vs. stocks: Which makes more money?

There are lots of metrics you can look at when figuring out if investing in real estate or stocks will make you more money. If you're going to attempt to answer that question you have to decide what type of real estate you're comparing to which stocks. The average stock market return, as measured by the S&P 500 index, is about 10% per year. Some years are up, some years are down, but over time, if you invested in an S&P 500 index fund, you'd average about 10% minus inflation. Make sense of the markets with The Nerdy Investor A weekly wrap on what's moving markets, plus two monthly deep-dives on how to improve your investing, straight to your inbox. Subscribe for free From 1972 to 2019, REITs, on average, returned an 11.8% total annual return compared to the S&P's 10.6% . That's not to say that REITs always perform better than the S&P 500. Each investment you make should be examined closely and taken into consideration with the rest of your investment portfolio. And, if you invested in an S&P 500 index fund and a REIT, you would have more diversification than if you invested in one or the other.

Pros and cons of investing in real estate

Traditional real estate investments can be broken down into two broad categories: residential properties — like your home, rental properties or flipping homes to buy, then resell for a profit — and commercial properties, such as apartment complexes, office buildings and strip malls.

The pros

Investing in real estate is easy to understand. While the homebuying journey can be complicated, the basics are simple: Purchase a property, manage upkeep (and tenants, if you own additional properties beyond your residence), and attempt to resell for a higher value. Also, owning a tangible asset can make you feel more in control of your investment than buying slivers of ownership in companies through shares of stocks. Investing in real estate is easy to understand. Investing with debt is safer with real estate. Also known as your “mortgage,” you can invest in a new property with a 20% down payment or less and finance the rest of the property’s cost. Investing in stocks with debt, known as margin trading, is extremely risky and strictly for experienced traders. Investing with debt is safer with real estate. Real estate investments can serve as a hedge against inflation. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation. Real estate investments can serve as a hedge against inflation. There can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $750,000 in mortgage debt. There also are tax breaks when you sell a principal residence, such as an exclusion that may allow you to avoid capital gains taxes on net proceeds of $250,000 if you’re single (or $500,000 if you’re married and filing jointly). If you own and sell commercial property, you may be able to avoid capital gains through a 1031 exchange (if you reinvest proceeds in a similar type of property). And investment properties can earn tax breaks through depreciation, or writing off wear and tear on the property. Learn more about tax breaks related to homeownership in this tax guide. There can be tax advantages to property ownership. » Ready to get started? Check out our list of the best lenders for investment properties » Ready to get started?

The cons

Real estate investments can be more work than stocks. While purchasing property is easy to understand, that doesn’t mean the work of maintaining properties, especially rental properties, is easy. Owning properties requires much more sweat equity than purchasing stock or stock investments like mutual funds. Real estate investments can be more work than stocks. Real estate is expensive and highly illiquid. Investing in real estate, even when borrowing cash, requires a large upfront investment. Getting your money out of a real estate investment through resale is much more difficult than the point-and-click ease of buying and selling stocks. Real estate is expensive and highly illiquid. Real estate has high transaction costs. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. That’s a hefty cut compared with stocks, especially now that most brokers charge no fees for stock trades. Real estate has high transaction costs. It’s difficult to diversify your investments with real estate. Location matters when investing in real estate. Sales may slump in one area, while values explode in another. Diversifying the purchase of real estate properties by location and type (a mix of residential and commercial, for example) requires much deeper pockets than the average investor has. It’s difficult to diversify your investments with real estate. The return of your investment isn't a sure thing. While property prices tend to rise over time, there’s always a risk of selling a property at a loss — the 2008 financial crisis and post-pandemic uncertainty in the housing market are reminders of that. This is also true of stocks, of course. The return of your investment isn't a sure thing.

Pros and cons of investing in stocks

Buying shares of stock has significant pros — and some important cons — to remember before you take the plunge.

The pros

Stocks are highly liquid. While investment cash can be locked up for years in real estate, the purchase or sale of public company shares can be done the moment you decide it's time to act. Unlike real estate, it’s also easier to know the value of your investment at any time. Stocks are highly liquid. It’s easier to diversify your investment in stocks. Few people have the time — let alone the cash — to purchase enough real estate properties to cover a broad enough range of locations or industries to have true diversification. With stocks, it’s possible to build a broad portfolio of companies and industries at a fraction of the time and cost of owning a diverse collection of properties. Perhaps the easiest way to get that diversification: Purchase shares in mutual funds, index funds or exchange-traded funds. These funds buy shares in a wide swath of companies, which can give fund investors instant diversification. It’s easier to diversify your investment in stocks. There are fewer (if any) transaction fees with stocks. While you’ll need to open a brokerage account to buy and sell stocks, the price war among discount brokers has reduced stock trading costs to $0 in most cases. Many brokers also offer a selection of no-transaction-fee mutual funds, index funds and ETFs. There are fewer (if any) transaction fees with stocks. You can grow your investment in tax-advantaged retirement accounts. Purchasing shares through an employer-sponsored retirement account like a 401(k) or through an individual retirement account can allow your investment to grow tax-deferred or even tax-free. You can grow your investment in tax-advantaged retirement accounts. » Ready to start investing? Check out the best online brokers for stock trading » Ready to start investing? Brokerage firms

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on Charles Schwab's website

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on E*TRADE's website

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on Vanguard's website

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on Fidelity's website

The cons

Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view on the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility. Stock prices are much more volatile than real estate. Selling stocks may result in a capital gains tax. When you sell your stocks, you may have to pay a capital gains tax. If you’ve held the stock for more than a year, however, you may qualify for taxes at a lower rate. Also, you may have to pay taxes on any stock dividends your portfolio paid out during the year. (Understand more about taxes on stocks.) Selling stocks may result in a capital gains tax. Stocks can trigger emotional decision-making. While you can buy and sell stocks more easily than real estate properties, that doesn’t mean you should. When markets waver, investors often sell when a buy-and-hold strategy typically produces greater returns. Investors should take a long view of all investments, including building a stock portfolio. Stocks can trigger emotional decision-making. Explore more on Article sources NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines. Morningstar. Time for a Second Look at REITs. Accessed May 20, 2024. About the author Voigt Kevin Voigt is a freelance writer covering personal loans and investing topics for NerdWallet. He previously was a reporter with The Wall Street Journal and business producer for CNN.com in Hong Kong, where he was based for nearly two decades. What Will a Financial Advisor Cost You? Start With What You Need By Arielle O'Shea Do You Need a Financial Advisor? 7 Ways to Tell By Taryn Phaneuf How to Find Cheap or Free Financial Advice By June Sham 3 Steps to Prepare for Your First Financial Advisor Meeting By June Sham