WHERE IS BEST TO INVEST: Real Estate vs. Stock Market

Tuesday Apr 19th, 2022


Over the years I have been asked the question where would I invest...Real Estate or Stocks?
First of all, I invest in both real estate and stocks, simply for diversification.  However, I will attempt to give you my opinion as to the differences.

Of course real estate takes a lot of hands on work.  You have to deal with tenants' issues and you could be sued if someone trips and falls on a shaky plank.  Even if you hire a property manager, you are still  responsible for making sure the property manager is doing his or her job which will entail looking at the financial books and occasional trips to your property as part of managing your asset.

Whereas when you buy a stock, you are buying a share of a company and since you are only a shareholder you will not be required to do any hands on work in the company, other than doing your due diligence as to the whether the company is a sound investment.  In other words, you get to benefit from the company's results but don't have to show up to work.

Real estate has traditionally been regarded as an inflation hedge to protect against a loss in the purchasing power of the dollar.  I have been in the real estate investing market for over 40 years, first as an owner and the last 20 years as an investor.  During this period, the real estate market went up and down and we even had double digit interest rates, (which was about 50 years ago).  I believe, however, those who invest in real estate and not speculate, they would be able to ride out the dips and not lose money.  The real estate market always corrects at some point. 

Stocks on the other hand has extreme fluctuations, you can see your $30 stock go to $10 or to $60.  To invest in stock you should, (1) understand the business, (2) pick companies that have a competitive advantage, (3) the company's management integrity and talent, (4) companies that ensure a margin of safety.  Examples of companies having these qualities are Apple, Coca Cola, Facebook, Blockchain, Health Care.  I am not recommending any, just pointing out these companies have those criteria.

Hands down stocks win in this category as you can cash out of your shares easily and quickly if you need the money.  Whereas in real estate it is not so easy as you will have to do a few steps before the property can be put on the market and then be sold before you can get the money.  This usually takes at least 30 days.

You can diversify and get long term financial gains from both real estate and stocks.  However, they both come with risks.  When choosing the right investment strategy, the best way to hedge against that risks while taking advantage of the potential gains is to diversify as much as you can.  Also remember, you are INVESTING not SPECULATING.  Make sure you are educating yourself by following knowledgeable people in the real estate market as well as the stock market before you plunge into investing.

In the stock market you can diversify by buying mutual funds or buy stocks following the guidelines above "Volatility".

In Real Estate, however, you will need more cash to diversify as you will probably only have a few properties at most.  I chose to diversify by location as I switched from investing in downtown Toronto to places like Waterdown, Grimsby, Stoney Creek and Niagara Falls because I could get better value in those areas, allowing me to buy a townhouse v. a condo in Toronto.

One of the biggest differences between real estate and stocks, is the initial amount of money you need to start.  You can start investing in stocks for as little as $100.  However, in real estate you will need from 5% to 20% to buy a property.

Another difference is the bank will not lend you money to buy stocks, however, you can qualify to have a margin account.  If you buy $10,000 in shares you need to have $10,000 in your bank account. Whereas if you buy a $500,000 property you will need 5-20% of the purchase price as a down payment  and the bank will lend you the balance of the purchase price of $500,000 as a mortgage.

I hope I have been able to help you understand the difference of investing in real estate v. stocks. 
If you are investing in real estate find an investor who has done this before and learn from him or her.  If you are leaning towards stocks again find someone who is doing it successfully and learn from him or her.

I believe education in both areas is mandatory.  Read books on both topics, attend investing clubs, attend classes and courses in both areas and most importantly hanging around the right people.

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