Real estate and stocks are two of the biggest asset classes that investors choose to invest in. But most don’t do both - many either stick to the stock market or stick to real estate. Sometimes, speaking to real estate investors, they think stock market investors are silly. And vice versa. The truth is, there are pros and cons to both real estate and stocks. But when thinking about real estate vs. stocks - it’s not an either/or game. It should probably be an “and” game. Trish Peterson of Island House Real Estate and Stephanie Mackara of Charleston Investment Advisor tell us why you should consider investing in both real estate and the stock market. And why, especially given the current economic conditions, this could be a smart move for your money. First, it’s essential to have a conversation about asset classes. There are four main asset classes:
When you’re just getting going earning income, you are probably your biggest asset. Your goal should be to take as much excess money as you can out of the “You” bucket, and deploy it to other asset classes - a business, stocks, or real estate. Many people do this instinctively by using tools like a 401k. But those that hit the upper levels of net worth are usually much more purposeful about saving and investing in other assets. That’s where both real estate and stock investing come into play. They both have pros and cons. And we recommend that savvy investors invest in both stocks and real estate. Pro: Real Estate Is A Physical Asset
When you buy real estate, you’re purchasing an actual “thing” - whether a house, duplex, commercial, etc. That’s pretty easy to understand, and by being real, you have some intrinsic value. If future inflation is something you’re concerned about (especially with all of the money the Federal Reserve is printing), then this could be a stable asset to help hedge against inflation. Pro: There Are Tax Benefits To Real Estate Investing
There are significant tax benefits to investing in real estate. You only pay taxes on your net income when you rent a property. As such, your mortgage interest, insurance, and more are all tax-deductible expenses. Your renters can pay off a property for you over time, and your tax bill may be minimal or even nothing.
Cons: Real Estate Is Work
First, real estate is work - and it can be a lot of work. One aspect of real estate to consider is that you can either put in money or your time to get things done. And the more money you put in, the less you earn. It does require oversight and management.
Con: It's More Expensive To Start
Even with today’s technology and services, real estate is still more expensive to invest in than stocks.
The Pros and Cons of the Stock Market
Pro: Easy To Buy And Sell
Compared to real estate, paper assets like stocks and bonds are easy to buy and sell. You can invest in minutes, do it from your mobile phone, and not think twice about it. There’s no real paperwork involved, and you can invest as little as $5.
Pro: The power of compounding
When you invest in the stock market, you benefit from compounding returns or interest, what Albert Einstein referred to as the 8th wonder of the world. The money you invest can work for you and grow without much effort on your behalf.
Pro: Some Tax Benefits For Certain Accounts
There are some tax benefits for investors in stocks. You can use a an IRA, ROTH IRA or 401k and see your investments grow tax-deferred or even tax-free. Con: Volatility
One of the biggest cons of stocks is that the value can fluctuate widely - even during a single day. Individual stocks are known to go to $0 when a company declares bankruptcy or goes out of business. And plenty of investors have lost it all investing in the stock market.
Con: Some Tax Issues
While you can invest in an IRA or 401k, your contributions to these accounts are limited. If you want to invest beyond that, it’s taxable. And taxable investments are subject to capital gains tax. We believe that by having both stocks and real estate, you get diversification across asset classes, and they can both serve as a hedge against the other.
When you hear that the average millionaire has seven streams of income, it’s because they’ve diversified their assets. And 90% of millionaires own both stocks and real estate!
If you are looking for guidance on how to avoid the cons of investing and better diversify your asset classes contact Trish or Stephanie.