In Arizona, Nevada, California, and Florida, real estate prices soared in 2004 through 2006. Other parts of the country experienced similar booms, but these four states experienced some of the best gains.
Real estate investing became a popular past-time for newer investors looking for quick gains. Rumors abounded, telling of people who flipped a house and made $50,000 in a matter of a month. The housing bubble burst in 2008 and gains began to turn into losses.
Stock prices plummeted after large financial firms and insurance companies began to file for bankruptcy in 2008. This was largely due to irresponsible lending practices. As firms went down, the economy entered a recession. Real estate and stocks both took hits. This begs the question—which is a better investment, stocks or real estate? It depends on your risk tolerance and your goals.
Determine What Is Best For You
To determine if one investment is better than another, the first thing you should do is define “better.” Develop investment criteria, goals, a timeline and define the amount of risk you find acceptable. This will help you define a good investment.
Some investment criteria could be:
- The acceptable return on investment (ROI) for your plans and abilities
- Your goals and which investment is most likely to help you accomplish them over your allotted time frame
- Do you prefer portfolio diversity?
- Do you need your investment to produce income soon, or are you looking for capital appreciation?
- The tax consequences, fees and minimums required
- How much money do you have to invest?
- How much risk are you willing to take on?
Look over the trends for real estate ROI for the area you looking to buy into. Compare the amount of money you'd spend on real estate to the number of stocks you could purchase with the same or better ROI.
If your goals are to purchase as much land as possible in the shortest amount of time, stocks may not be a good option. However, if your goal is to build a diverse portfolio, real estate is a tough area to be diverse in unless you are purchasing land around the country.
Stocks are much easier to sell than real estate. If you want to be able to sell your investments when you think they are worth the most, keep in mind that real estate can take an extended amount of time to sell. The prices may change before you are able to sell.
Generally, stocks are able to be sold in a 24-hour period, making it a much more liquid (the ability to convert it to cash) investment.
While real estate is a very tangible asset that will always be worth something, significant investments are required to improve housing that needs to be "flipped" to make money on it. If you just own land, there may not be any costly improvements needed, but you will be paying real estate taxes.
Similarities as Investments
Stocks and real estate have many similarities as investments. Some similarities include:
- Both stocks and real estate involve trade-offs between risk and return.
- Both can be bought by novices, but shouldn’t be.
- Both can make you a lot of money, or lose you a lot of money.
- With both stocks and real estate, if you use leverage (borrow money to buy the investment), you can lose more money than you invested.
- Both stocks and real estate can be easily bought through publicly traded funds like stock index funds or REITs (Real Estate Investment Trusts). This is usually the best choice for those without the knowledge and experience to evaluate individual stock and real estate purchases.
- Both stocks and real estate can produce income; stocks by paying out dividends, and real estate through rental income or increased value when sold.
Both stocks and real estate can be appropriate investments for retirement. Is one better than another? Some will say stocks are better, and others will claim real estate is. It entirely depends on your individual goals and circumstances.