Why Invest in Real Estate vs. Stocks

Today, investors have many options. With high-tech brokerages, retail investors have greater access and control over their stock market trades. But a well-diversified portfolio should include a variety of asset types. Read on to learn why real estate deserves a place in any portfolio.

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Benefits of Investing in Real Estate

Real estate syndications, real estate investment trusts (REITs), and real estate exchange-traded funds (ETFs) give investors avenues into the world of real estate without having to purchase and assume responsibility for managing a property. Start-up costs range from just a few dollars for REITs and ETFs to $50,000+ for real estate syndications.

In the past, the high cost of entry excluded many investors from reaping the advantages that real estate investing offers over stocks. That is no longer the case, but the perks of real estate do vary based on the specific mode of investment. Here are just some of the benefits of investing in real estate vs stocks:

Real Estate Can Provide Passive Income

Passive income tops the list of reasons to invest in real estate over stocks. Real estate investment is one of the rare ways to get a second stream of income without committing to another job.

That passive income usually comes from the property’s rental revenue. Investors in real estate syndications can enjoy passive income without the effort of owning and managing an income property themselves. For those who do decide to purchase a property, the income is likely to feel anything but passive even if it is characterized as such.

Real Estate Better Hedges Against Inflation

Savvy investors know that a dollar under the mattress today will be worth less in the future. Ideally, investment helps grow wealth, but it also plays an important part in simply maintaining it. Inflation is to be expected but can be planned for by investing in assets that tend to outperform the market during inflationary periods. Real estate is one such asset.

During most periods, and especially during inflationary periods, the value of real estate continues to rise. But properties under a fixed-rate mortgage or that have no debt encumbrance stay at the same monthly cost. Ideally, investors see substantial gains during scattered periods of significant appreciation, and those gains keep them at or above the rate of inflation.

Real estate opportunities across the spectrum, including syndications, REITs, ETFs, and the outright ownership of property all reflect this benefit.

Real Estate Offers Several Tax Advantages

Investing in real estate yields tax advantages not available to stocks. There are great deductions possible like mortgage interests and points, but the best of all is depreciation. Depreciation allows the owner to write off a portion of the purchase price over time.

Completing a 1031 exchange, which is selling one investment property and purchasing another like property with the funds in another way investors can avoid paying capital gains upon the sale of a property. For this tax break, the term “like property” is somewhat flexible. This means that investors can sell a property at a profit and then purchase a better, more valuable property without paying taxes on the first transaction. This cycle repeats, and the owner can continue to increase the value of the property owned, all without paying taxes on the profit realized each time.

Real Estate Investing with Debt Creates Less Risk

An income-producing property requires a higher buy-in than stocks. But, the initial investment for real estate is much less than the property’s actual value, and most owners usually finance the bulk of the purchase price. Given that real estate usually appreciates in value, there is an assumption that the down payment amount can be recouped.

Conversely, purchasing stocks with debt, called margin trading, is very risky and should only be undertaken by experienced investors.

Real Estate Investments Can Be Leveraged for Greater Returns

In the event that property values do not outstrip the rate of inflation, real estate investment provides another vehicle to help investors get ahead: the leveraging of debt.

Leverage is all about maximizing the ratio of returns to the money invested. By purchasing a property with debt, the investor stands to see greater returns in proportion to the amount tied up in the property.

For example, the rental income from a $500,000 property should be more than that of a $100,000 property. Or, if each property appreciates 3%, the more expensive property will yield a greater return upon selling it. Those bigger returns can, in turn, be used to place down payments on more properties to produce income and appreciation. Ideally, leverage creates a chain reaction of increased revenue and value.

Always Research Prior to Investing

Real estate offers many undeniable perks to investors, but not all investments are created equal. While real estate is a key component in portfolios to hedge against inflation, it is not without risks or downsides.

Real estate can seem like a sure bet, especially with constant headlines about soaring property values. Unfortunately, there is no guarantee to earn a profit, and real estate projects can tie up capital for a long time.

Remember that investors do not have to choose only stocks or only real estate. Plan your investment portfolio to include both asset types for maximum diversification!

Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More

Related Posts