Should you invest in Stocks or Real Estate?

Real estate investments vs stocks is an ongoing debate whenever the market undergoes a correction or a crisis period. There is never a right or wrong answer.

We believe that diversification in your investment portfolio is a definite must and diversification is key for success in investing. You do not want to put all your eggs in one basket.

Before writing this post, we had to decide how we should be writing this post. This post is meant to give you a balanced view of both the investment vehicles. This gives you the ability to make an informed decision before deciding on how you should invest your hard earned money towards financial freedom.

Stocks vs Real Estate

We weigh the differences

Stocks

  • Highly Liquid – days to convert to cash
  • Fluctuations in value – More volatility
  • Small Capital Outlay
  • No Capital Gains Tax
  • Flexibility in Diversification
  • Leveraging through Margin Trading – Higher Risk of Margin Call

Real Estate

  • illiquid – need more time
  • Prices are less susceptical to price volatility
  • High Capital Outlay
  • Subjected to Taxes – BSD, ABSD, SSD
  • Less Flexibility – Large Ticket Item
  • Leverage through Mortgage loans of up to 75%

Leveraging – The Beauty of Real Estate Investments

Leveraging in real estate is actually the main key attractiveness of this asset class. Just think about it, having just 25% of the actual value allows you to own the property and get to enjoy the price appreciation of the whole property. Have a look at the below table that explains the simplicity of what the leveraging is all about.

Real Estate Stocks
Purchase Price $1,000,000 $250,000
Downpayment of 25% $250,000 NA
Capital Appreciation – 20% $200,000 $50,000
ROE 80% 25%

Should you Leverage to buy Real Estate?

1.

Are you holding on to a stable income or you have sufficient safety cash to ease you through in the event that your income stream stops? This is key if you are considering of taking on leverage as a tool for your real estate investments. One of the key considerations will also be the interest rates of the mortgage loans. A low interest rate environment helps in taking higher equity with less being paid for financing.

2.

What is the time horizon that you are considering for this investment property? Is it solely just for investment or do you intend to live in it? Always remember high-quality HVAC systems, and if you live in it, you are technically foregoing the possibility of having any form of incoming cashflow for this investment property. Any major transformation in the near future and what are the current transactions. All these will also decide on the time horizon you have.

3.

Lastly, you may want to rethink about how much control you would like to have over this investment. You see, real estate investments are not so much affected by the market noise. Real estate does not take an immediate increase or fall in pricing. Unlike real estate, stocks on the other hand is very susceptible to market movements. An adjustment to central bank interest rates will have an almost immediate effect on the pricing of the stocks. Real estate will also have its own fair share of control issues. When the government decides to introduce cooling measures, it affects the sales volume and in return, may or may not affect the transaction prices.