While both stock investing and real estate investing are fairly popular investment vehicles, people often think of them as being on opposite ends of the spectrum. Some investors start out with one or the other – usually young investors start out by investing in shares because of the relatively low capital requirements. A relatively safe investor with funds might start with property, but eventually look to participate in some market volatility through stocks.
There’s nothing inherently wrong with preferring a particular investment over the other (I bet you know my preference!). However, it is very important to start diversifying as soon as practicable. The reason for this is that both property and stocks have their own pros and cons, and having both will really round out your portfolio.
In this article I’ll talk about each of these investments, and how they can supplement your portfolio. To start, let’s talk about property:
Investing in Property
Commercial properties feature the buying or building and renting out retail, industrial and office spaces. It requires high startup costs. As such, it attracts high net worth investors with significant capital bases and business acumen. The returns are equally lucrative based on the lease agreements and capital gains where the property is sold. Banks are, however, more reluctant to lend to commercial property owners as it is a riskier investment. Investors who want to avoid the hassles that come with managing their properties can choose to invest in private REITs.
Residential property investment, on the other hand, requires low start-up costs, making it pretty easy for any investor to venture into the industry. With an incredibly growing population, the demand for residential properties has surged over time. Surrey, in B.C., for example, was recently ranked the number-one city ideal for residential property investments.
Almost ten thousand residents move to Surrey each year with South Fraser region projected to absorb 70% of the population in the next twenty-five years. The only downside to investing in residential properties is that you may experience property management problems and deadbeat tenants.
Other Benefits of Investing in Properties
• If you are using debt to finance the investment, it is easier to structure it more safely compared to using debt to purchase stocks
• Property investments provide a hedge against inflation
• The investment is tangible
Cons of Investing in Properties
• It requires a lot of hands-on work
• Unoccupied spaces means loss of revenue, yet you have to pay for maintenance, insurance and utilities
Investing in Stocks
The 2008 financial crisis where housing prices fell by 31.8% may make some investors a little skeptical about putting all their monies in property investments. They will diversify their portfolio by investing in stocks. Of course, this kind of investment involves a great deal of risk. In fact, studies showing nearly 80% of millennials avoid the stock markets
The stock market has become pretty unpredictable over the last decade but remains the most rewarding way to invest, especially for the younger population. Studies show that young investors can accumulate up to $4.57 million by the age of 65 based on interest rates and market returns.The returns exceed what any investor would accumulate using other investment strategies by the time they retire. Here are other reasons you should put your money in stocks:
Offer a Higher Potential for Growth
An example of U.S. stocks shows consistent growth in the long-term compared to property investments and bonds despite occasional ups and downs. This graph shows the performance of stock worth $ 100 from 1926. This stock had an ROI of 10% every year, 5.4% for bonds and 3.5% for short-term investments before it has been adjusted for inflation. The growth may not be consistent, but it shows stocks offer potential growth in the long-term. Investors can reinvest in dividends, and they can hold the shares for extended periods, making them the most significant wealth creators.
Stocks allow more liquidity compared to property investment. Investors can sell their positions in a matter of minutes. Property investment, on the other hand, may take months, days or weeks to find potential buyers.
Easy Loan Acquisition Against Stocks
Your broker only needs to approve you for margin borrowing to obtain a loan. If you don’t have enough money, a debt may be created against stocks and pay interest against it, which may be relatively low.
Diversifying a Portfolio
Investment in stocks allows more natural diversification than in a property investment. Some mutual funds offer stakes as low as $100 per month. Property investment, on the other hand, requires substantially more money.
Cons of Investing in Stocks
• Extreme fluctuations in short periods
• Most investors make decisions based on emotion and end up making losses
I’ve spoken extensively on stocks in this article (which may surprise some of you since this is a real estate blog). I’ve got to admit – while real estate is a relatively safe mainstay for established investors, stocks provides exposure to high upsides and volatility. This is excellent for diversifying a portfolio consisting of many safe investments like real estate and bonds.
You could even go one further, diversifying your portfolio with off-the-wall investments to provide even more upside. Though make sure you’re not falling for any marketing ploys disguised as investment opportunities!
So let me know – is your portfolio built mainly on real estate, or stocks? Do you have both? Share your experiences in the comments below!