Investing in Real Estate Vs. Stocks – Which Is Best for You
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
The stock market is a wild fight between the bear market (depreciation) and the bull market (appreciation). That’s an understatement for anyone who has been paying attention to it recently. If you have an investment portfolio, it has likely taken a beating this year and, depending on your risk tolerance, you may be questioning your investment strategy. Your retirement accounts may look like they are on the ropes struggling to stay on their feet as stock prices continue to slide.
But the housing market is not on the ropes. It’s been swinging punch after punch while prices continue to rise. This is making people ask the question: Real estate vs. stocks, which is a better investment? If you own a home, you may be watching your property value increase while your stock portfolio decreases.
Volatility is nothing new in either market. Remember the 2008 housing market crash? It also brought down the stock market.
So then, is one of these types of investments really better than the other?
Jump To
Understanding the markets
What is the stock market?
A broad definition of the stock market is that it is a place to buy and sell shares of publicly held companies. Stock investing is when you buy and sell small pieces (shares) of all types of companies both inside and outside the U.S. As a company’s value grows, your piece of the company increases in value. But as the value of the company falls, so does the value of your share.
What is the real estate market?
Investing in the housing market (what most people mean when they talk about real estate investing) means buying or selling physical properties for investment purposes. This can include rental properties and investment properties. Or it could mean buying, selling, or investing in your own home. When you sell a property, you hope it gained value since you purchased it, giving you a return on your investment.
Many people, typically accredited real estate investors with more cash flow, invest in commercial real estate, which can yield higher returns but takes often requires funding a real estate investment until the property is built and sold, which could take years. For this type of real estate, investors can use real estate crowdfunding platforms like Fundrise, some of which allow investors to enter with just $500.
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
Key features of the markets
Stock market features
The stock market can be intimidating for beginners because of its presumed complexity. Terms like trading volume, bid-ask spread, and bull and bear markets make people want to change the subject. But really, unless you’re a professional stock trader, you only need to learn a few basic concepts.
One of these is diversification, or the ability to invest in a wide variety of products or fields to decrease risk. The stock market offers some advantages that other markets do not. The level of diversification it offers is one of its biggest advantages. Investment options include mutual funds, real estate investment trusts (REITs), target retirement funds, index funds, bonds, and foreign investments. All these options enable you to spread your investments into a wide variety of asset classes with very little effort.
Another important piece to understand about the stock market is this: it is the backbone of a free-market economy. It gives regular citizens—such as you and me—the ability to own a piece of the economy and benefit from its success. It offers passive income to anyone who has the ability to make an initial investment, which can sometimes be as low as $1 (although it is more often somewhere between $500 and $2,000).
Real estate features
The real estate market involves owning a tangible asset, such as a home or business property. There are several unique aspects to this type of investment that can make it more or less interesting to an investor depending on their needs and resources.
Unless you have a TON of cash laying around to pay in full, buying a real estate property usually involves a mortgage and paying a down payment. This is much higher than the typical minimum investment for a brokerage account. And mortgages come with interest rates, although these are often low and offer tax advantages.
Real estate investment usually involves long-term investment. This is because the costs of property management tend to be higher than the cost of holding a stock, and the interest rates tend to be lower. But over time, these balance out, and you begin to earn a solid return on your investment. The costs of a property manager, if you are renting out your house, can also cut into this income. But short-term investment is very common in the housing market—aka house flipping—and buying, renovating, and selling houses can also earn you a solid income.
Investing in Real Estate Vs. Stocks
Market | Key features | Advantages | Disadvantages |
Stock market | Diverse asset classes, direct reflection of a country’s business economy, passive income | Easy diversification, low costs, low initial investment cost | High volatility, management fees, transaction costs |
Real estate market | Tangible asset, usually a long-term investment, less diverse investment | Low volatility, tax advantages, increased cash flow (rentals) | High initial costs, high ongoing costs (maintenance/repairs), tax costs |
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
Costs and fees
Stock market costs
Management fees
An expense ratio, the most common type of management fee, charges a percentage of your total assets for the cost of management. It is typically paid annually. If you invest with a robo-advisor, you can expect to pay 0.25% to 1% of your investment balance.
Custodian fees
In addition to management fees, you may be charged a set dollar amount yearly—usually $10-50—for completing specific IRS regulations.
Loads and commissions
You are often charged a one-time load fee when purchasing a stock or fund. This is paid to the broker for their services. A back-end load fee is a one-time fee charged when selling a stock or fund. Ally Invest charges a $0 commission fee to buy most U.S. stocks and ETFs, and only a $0.000130 trading activity fee (TAF) for selling equity shares.
Real estate market costs
Mortgage interest
Most people take out a mortgage when purchasing a property, which comes with an interest rate. Right now, average interest rates are more than 5% of your loan for a 30-year fixed-rate mortgage. This can, over time, cause you to pay substantially more for your loan than the initial amount.
Maintenance and repairs
You will be responsible for maintaining your property. This could be everything from mowing the yard ($50 per week) to replacing a broken window ($350) to installing a new roof ($12,000-15,000).
Property taxes
You will be required to pay a yearly amount to your local government to continue owning your property. These taxes vary widely depending on the location of the property, but the states with the best property tax rates are Hawaii (0.28%), Alabama (0.41%), and Colorado (0.51%).
Pros and cons
Stock market
Pros
- Passive income. Our only way of predicting the future is by looking backward. And if we look back over the years, the stock market and the housing market have performed at very similar rates—both have hovered around 10% annual return. The big difference, though, is the stock market is usually a passive investment whereas the housing market tends to be an active investment. This means that many people who are investing in the housing market are also the ones fixing the homes, updating them, selling them, and putting in much of the other work involved. Those who invest in the stock market are usually doing no more than the purchase and the sale.
- Dividends. Investing in the stock market not only gives you money when you sell the stock, but it also means you get dividends, or periodic payments paid to a company’s shareholders, from the stock’s increase in value. These can be a valuable addition to your regular income without any extra work.
Cons
- Transaction costs. The cost of buying and selling stocks can add up, especially if you buy and sell on a consistent basis. Transaction fees cut into your income and can make active investing a costly pursuit.
- Management fees. There are fees involved in managing your portfolio, and if these are high they may cause your investments to perform poorly. Compound interest is the power that makes your investments grow. But high management fees will hurt this growth.
Housing market
Pros
- Tax benefits. Some mortgage interest can be written off on your taxes. And there are other ways to decrease your tax liability through property ownership such as writing off repairs for rental properties.
- Rental income. If you own a rental property, it offers a benefit similar to investment dividends. It gives you a steady income, which improves your cash flow.
Cons
- Renovations. You are the owner, so you must fix everything. This could mean something as simple as a new toilet handle. Or it could mean putting tens of thousands of dollars into a new roof or foundation.
- Property taxes. The government requires property owners to pay property taxes every year.
FAQs
What about REITs?
Real estate investment trusts (REITs) are a great alternative if you’d like to invest in the housing market but don’t want all the work of owning a home. These trusts invest solely in the housing market, but you can buy them through your brokerage account, giving you a passive method of investing in real estate.
Does more volatility make stocks more dangerous?
Stock prices tend to go up and down more often and at more extreme rates than housing prices. This makes the housing market seem safer. The important thing is to look at the bigger picture. If you are investing for the long-term, look at the average instead of daily, monthly or even yearly returns. Stock market averages over the long-term—five years, ten years, and longer—are about the same as real estate averages.
What is real estate crowdfunding?
Real estate crowdfunding (like Fundrise) is another alternative to buying a property outright. It allows you to pool money online with a group of people to purchase a property. This may allow you to enter lucrative markets while diversifying your investments and lowering your risk.
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Returns
- Averaged Stock Pick Return over 593% (vs. 165% for the S&P)
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering 50% off its top stock-picking service for new members (Limited Time)
The bottom line
Is one investment better than the other? The simple answer is no. But there may be one that is better for you. The most important thing to remember when choosing your investment strategy is diversification. No matter what market you focus on, always diversify. Ideally, this means you should invest in both markets, even if you like one better than the other.
If you invest in the stock market and don’t want to manage a rental, buy REITs. If you love managing rentals or business properties, put money into index funds or ETFs (exchange-traded funds) that match your goals. Diversification is how you will win the fight for financial independence.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
A veteran wordsmith and research nerd, Brittany Wren spent a decade working in higher education where she helped people overcome challenges to chart a path forward. These days, she writes about personal finance, careers, parenting and education. Her content has been published by a wide variety of brands including T-Mobile, Intuit, LifeLock, Reliant Fund Administration and CURO Financial Technologies Corp.
Share this article
