For anyone serious about generating more income, the decision to invest for passive income is a no-brainer. Full-time employees, business owners, and greenhorn professionals alike are aware that investing holds great potential for increasing financial worth and setting the foundation for future opportunities.
Getting on the investment train can help in saving for retirement, expanding an existing business, and supporting others, whether family members or charity organizations. It’s a potentially high-return financial decision that grants greater personal control and power in the long run. But, with that comes great responsibility.
While there are a variety of routes to take, perhaps the two most popular are building a portfolio of stocks, or investing in real estate. Either comes with its own pros and cons and ultimately one must take into consideration their risk appetite, personal preferences, and time ready to spend in investment.
Before moving forward, it’s important to know key differences and make an informed decision. After all, depending on execution, investment is going to make a lasting impact on your financial future.
REAL ESTATE VS STOCKS
In general, real estate is composed of two categories: residential and commercial properties. Investing in residential properties would involve buying a home, “house-flipping” then reselling for a profit. As for commercial properties, these are usually mall or retail spaces, offices or school buildings, or entire apartment complexes. You generate income by leasing out a property for commercial use, whether on a fixed or commission-based arrangement.
In stocks, you go through a broker or an entity authorized to buy stocks of a company. There are diverse options in stocks, from food corporations and technology development companies to companies involved in consumer trends.
Basically, real estate investment involves acquiring a physical piece of property, while stock investment means purchasing a piece of a company. You make a profit in real estate through monthly rental fees or when you can sell a property for a higher value. In stocks, profit is made when the company’s value grows.
There are advantages and disadvantages to either investment route. With neither one being better than the other but simply more suited to different individuals.
RISKS, ADVANTAGES, & DISADVANTAGES
Real estate is generally the more time-consuming of the two. It is an industry that requires plenty of research, renovation, and upkeep. For example, someone renting out a house or residential unit faces risk when handling repairs and other tenant complaints. Managing rent and dealing with tenants are unpredictable factors – how would you handle delayed payments or emergency events affecting residents?
Not to mention, you will need to invest real time overseeing construction, repairs, design, and other facilities serving the property. Hiring a contractor or property manager will save you time, but also cut into your capital.
Risks in the stock market maybe a tad more difficult to grasp for beginners. For example, events on the geopolitical end and company-specific situations may impact stock value. If a company expands into another country which later suffers economic regression, the company (and your stock value) may suffer.
A larger-scale company may offer greater prospect returns, but it would also be more vulnerable to inflation in various economies and world market trends.
It’s important to understand the risks up-front, keeping them in mind as the wider summary of advantages and disadvantages weigh in. Let’s examine several factors one at a time.
- Simplicity. Not all investors have access to information and analytics for an in-depth grasp and foresight of the stock market. Real estate, in comparison, is much more straightforward. Being able to see and touch your assets directly may also yield a greater sense of control and responsibility, whereas stocks have a high tendency to trigger emotional buying or selling.
- Liquidity. This refers to how easily an asset can be turned into cash. Real estate assets do not offer much liquidity, as there is no sure way of guaranteeing a sale in case you need cash for an emergency. As it is virtually hassle-free to buy and sell stocks, they win this round.
- Resilience to inflation. When regional markets or even world economies undergo drastic change, stock values are highly affected by the volatility, and you may find yourself losing suddenly. On the other hand, home values and rent prices tend to increase with inflation. This makes real estate more desirable if you want to avoid a domino effect from greater market shifts that are beyond your control.
- Diversification. This refers how widespread you can lay your resources across different categories or industries. Having diversity in real estate means ownership of properties in multiple locations as well as different building types, which may not be realistic for most. In stocks, building funds across a range of sectors is easy to do, considering how easy it is to buy and sell.
- Tax advantages. Real estate owners may qualify for tax deductions, such as through writing off depreciation as time progresses. Contrariwise, selling stocks may incur capital gains tax, which is made on profits from the sale of an asset.
- Transaction fees. While real estate may help you save on taxes, there’s no denying the bulk of costs that await when buying or selling a property. As a seller, you may spend on advertising, and closing costs such as agents’ fees will impose a deduction on raw profits. Most rental contracts also place maintenance and repair expenses on the homeowner. Meanwhile, it is basically costless to sell stocks.
ON YOUR END…
Both real estate and stocks pave the way for generating passive income, yet neither can completely guarantee a return of investment (ROI).
Amateur investors would do well to consider the following key factors while simultaneously mulling over the above rundown of real estate versus stocks:
- Age. Is a long-term investment viable for you, or do you need to be able to project your ROI within a 10-year mark?
- Investment capital. How much money can you release on investment now? How soon do you think you would need it back?
- Present income. As you wait or work on your investment to come to fruition, do you have enough to sustain your lifestyle? Or are you investing to gain a steady income stream as soon as possible?
- Time. How active or passive can you afford to be on your investment?
These are a few primary factors, in addition to unique personal circumstances, to consider as you decide on the right investment vehicle.
For total beginners, it may be most convenient to flow into stock assets, but this should be done as informedly as possible. Be ready to delve into world events and other social circumstances that could have a hand in the sector (or sectors) you choose to invest in and connect with fellow stock market investors so you can gain insights as you monitor your shares.
Both stocks and real estate are ideal assets to own, and as you build more investment capital, it makes sense to diversify into real estate.
If you are bent on starting with real estate – perhaps you already have a property in mind that you consider feasible for investment – make sure you’re ready to invest the time and hands-on work needed. Do your research and be prepared to curate your attention for passive income opportunities.