Posted by Matt Matza ● Jul 30, 2021 10:35:56 AM
Stock Market vs. Real Estate Investing for Beginners
Stocks and real estate are both forms of investing, just different forms. Investing in real estate is investing in hard assets, such as your own house, office building, or apartment. On the other hand, you can invest in companies by buying stocks. Both are key pieces to a puzzle as you think about your financial future.
A Closer Look at Investing in Stocks
At its simplest definition, a stock is a piece of a company. Stocks can be broken down into ranges and industries. There are small cap, mid cap, and large cap stocks, meaning the size of the company. Apple, Amazon, and Google all fall into the large cap category. Then there are stocks for every industry including real estate, energy, technology, consumer products, etc.
Types of Stocks
Stocks are also categorized as growth, dividend, and/or value. Growth stocks are valued over time, and not necessarily based on what can be earned today. Value stocks are ones people believe are currently trading discounts to their fundamentals. Dividend stocks typically pay quarterly or annual cash (or stock) payments, called dividends. To calculate your total return on a dividend stock, you have to add your dividends to any increase or decrease in the value of the stock while you owned it.
Diversification is critical when talking about stocks to avoid one sector or type from severely impacting your money in a decline. No kind is necessarily better; most financial advisors will tell you it’s about having a healthy mix in your portfolio.
A Closer Look at Investing in Real Estate
There are two ways to invest in real estate: directly or indirectly. An example of investing directly is buying and managing an apartment complex yourself (and dealing with all the headaches too). You could also invest with others directly in real estate and syndicate, or divide amongst, the financing for an apartment complex or office building among colleagues.
Alternatively, you could invest passively in real estate investment trusts or REITs, where you own property or mortgage stocks. If you are looking to invest in rental properties and believe in the secular trends toward rentership but don’t have the money or time, REITs are a great exposure to that asset class.
Owning a Property
You may be asking yourself the benefits of owning property directly when you could invest passively through public markets. Often an investor will believe they have better information about a market (maybe they grew up there), product type, or strategy that would better serve them to invest directly in an asset. This will obviously be more operationally intense to manage with more concentrated risk due to only owning one property, but if their investment thesis is correct, it could provide a greater return.
Another driver of potentially higher returns when investing directly in assets is the lack of middlemen — think of all of the costs associated with being a public company and the infrastructure needed to execute the strategy broadly. There should be less “leakage” of an investment’s return on direct deals.
Which Method of Investing is Best for You?
Neither method of investing is good or bad, right or wrong — just alternative ways to invest. Some of the benefits of investing in stocks are they are highly liquid, to the point where you can buy and sell instantly and are able to monitor your portfolio daily. Investing directly in real estate, on the other hand, gives you more control of your investment. That being said, investing in a single family rental or apartment complex is a lot of work and you won’t regularly know the value of your investment.
Deciding which way to invest comes down to your personal appetite for risk and finances and how passive or hands-on you want to be. For instance, it’s really hard to buy an apartment complex if you have $300, but you could buy $300 worth of company shares. Or let’s say you have unique knowledge of Cedar Park, Texas and managing rentals, plus the funds you need, then you may want to buy a single family rental unit in the area.
How to Start Investing in Stocks
Investing in stocks is substantially easier than it used to be. It costs next to nothing to trade a stock, which is much lower than in the past, and there are many entry points into investing now. You could open a brokerage account with Fidelity, Charles Schwab, Robinhood, or through a host of other platforms. As opposed to trying to pick individual stocks, you could buy a low-cost index fund and get market returns over time. Or you can research company stocks and dive in; when you put your money behind something, you tend to learn about it in more detail.
You could also work with a robo adviser such as WealthFront and select the risk exposure and/or age-based target date investing to customize a portfolio. Options like this didn’t exist 15 years ago and have really democratized the market.
Regardless of the method, over 30 years you can generate a meaningful return if invested with a plan. Use the Rule of 72 to figure out your rate of return and how long it takes your money to duplicate. If your account is making 9% a year, in 8 years your account would double. For the maximum power of compound interest, start investing now.
How to Start Investing in Real Estate
The most common point of entry into the real estate market is your own house. If you are buying real estate directly, you need to finance it, which requires getting a loan from a bank. You can also invest in REITs through platforms such as Crowdstreet, Fundrise, RealtyMogul, and many others.
If you are new to direct real estate investing be sure you know what you are getting into. Most people are unaware of the operational intensities of becoming a landlord.
The Implications of COVID on Investing
If you have disruptive events like a natural disaster, a terrorist attack, or COVID, the whole market tends to get drawn down at the same time. Even if a specific stock has a good outlook, when everybody is selling at once, the price will go down. There are also industries that can thrive during chaos, but it tends to be few and far between and dependent on what the catalyst was that created such “chaos”.
Real estate is market-dependent. If you own hard real estate and your tenants aren’t paying, yet there are laws in place that you can’t evict, you are still on the hook to pay your mortgage.
It’s hard to predict the future, yet there are different types of impact. Hard assets often are a good inflation hedge, and a diversified portfolio of stocks, in theory, should be okay over time.
Investing Resources for Beginners
Investopedia, Motley Fool, and Benjamin Graham’s “The Intelligent Investors” are all great go-tos for beginners. If you really want to deep dive into business and stocks, read Warren Buffet's annual letter. Also, check out different crowdfunding platforms and learn how deals are formed and how to evaluate them. If you think you’re ready to get started investing in real estate, get in touch with us today!