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The age-old question for investors is whether real estate or the stock market represents a better investment opportunity. Which form of investment is more likely to bring in higher returns? Which one is more likely to do well consistently over time? Which investment performs better as a long-term income stream? For those considering investing in real estate, this is a vital question.
If you're just judging on the rate of return prior to taxes, stocks turn out to be the superior investment. Real estate investments over the long-term earn from 3 percent to 9 percent a year, while stocks have come in at 9 percent to 13.5 percent on average. It is also less expensive to invest in stocks. You only have to pay the transaction fee to the broker, and in many cases it is less than $10 per transaction, especially for beginning or small investors. With real estate, you have to come up with certain costs up front: down payments, closing costs, appraisals and inspections, insurance, taxes, and agent costs. Those expenses may eventually be recouped, but the fact remains that it costs more to begin the real estate investment process.
Additionally, if a real estate investment goes bad, the investor not only loses money, but the property may continue to weigh down the investor-owner in terms of taxes, maintenance, and the failure of expected revenue to appear. Then the investor is stuck with an actual piece of property that continues to drain resources until it sells.
However, real estate investment also has its benefits. In terms of leverage, real estate is the far superior investment. Leverage means the capacity to use other people's money, to include other investors in your acquisition of property. You can, of course, invest other people's money in stocks, but it is harder to do and less reliable. Investors are more willing to invest in a property or a well-defined development project where they receive tangible results and returns. With greater likelihood of obtaining investors to collaborate with you, the possibility for investment expands, and you can invest more money in more properties and receive greater returns this way.
In terms of taxes, real estate investing allows more tax deductions than stocks do. For real estate investments, you can deduct mortgage points and any money you spend in advertising, vacancies, or maintenance from your taxes. Capital gains vary from 5 percent to 25 percent and depend on how long you own the property and on your income tax bracket. By contrast, stock expenses are not deductible, and the government will take 15 percent off the top of your profit when you sell.
Every form of investment has its benefits and drawbacks, but real estate investing has proven to be consistently reliable and more profitable in the long-run for those who commit to it.
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