Investing in Real Estate vs. Stocks: What's the Difference?

Both come with advantages and risks

Image shows the same woman in two outfits, on opposite sides of the image. In the first, she is in a red sweater and orange slacks, reading a newspaper. In the other image, she is in a yellow dress reading something on a iPad. She is standing in front of various buildings. Text reads: "Real estate investments vs. stock investments" The bullets under real estate investments say: "A tangible investment that hedges against inflation. Requires a lot of work and money out of pocket" and the bullets under "Stock investments" read: "A liquid investment that's easy to diversify. Takes special skills and returns fluctuate"

Image by Ellen Lindner © The Balance 2019

There are basic differences when it comes to investing in real estate or stocks, but how well you do with either depends a lot on timing. Very few stocks would have beat buying beachfront property in California in the 1970s and selling 20 years later, and virtually no real estate purchase could have beat the returns you would have earned if you had invested in shares of Microsoft, Apple, Amazon, or Walmart early in the companies' histories.

Timing is impossible to predict when making investment choices. But understanding each type of investment is key to choosing the best strategy to help your money grow and create financial security.

Investing in Real Estate vs. Stocks at a Glance

   Stocks Real Estate
Cash Flow Cash flow in the long-term or when you sell Can generate cash flow on a regular basis
Management Costs Brokerage fees Ongoing maintenance costs
Time and Effort Research up front and checking in regularly Diligent oversight and regular interactions
Volatility Price can change daily Price fluctuations happen over months or years
Liquidity Can sell stock within a day for quick cash Can take at least a month for the sale of property
Diversification Diversify with different stocks or buying a mutual fund Money is tied up in a few properties
Access Get in with little money Must have at least 20% of the purchase price in a lump sum.

Investing in Real Estate vs. Stocks: Cash Flow

When you invest in real estate, you are buying physical land or property. Some real estate costs you money every month you hold it, such as a vacant parcel of land that you pay taxes and maintenance on while waiting to sell to a developer.

Rent from real estate can provide steady, reliable cash flow on a month-to-month basis. Some real estate is cash-generating, such as an apartment building, rental houses, storage sheds, or a strip mall where you pay expenses, tenants pay rent, and you keep the difference as profit.

Cash flow from stock investments isn't the same as cash flow that would come from renting out property you own. Most cash from stocks comes in the long term when you sell. However, investors can be paid while still owning stock through dividends. You can reinvest your dividends. If you use the cash that a company sends you for owning its stock to buy more shares, over time, you should own far more shares, which entitles you to even more cash dividends.

It's easy for stock to become over- or under-valued. Before investing, study the company as a whole, including how much of its profit is paid out as dividends. If a company is paying more than 60% of profits as dividends, it might not have enough cash flow to cover unexpected changes in the market.

The company’s board of directors, who are elected by stockholders just like you, decide how much of the profit gets reinvested in expansion each year and how much gets paid out as cash dividends.

Investing in Real Estate vs. Stocks: Management Costs

Real estate can cost you money every month if the property is unoccupied. You still have to pay taxes, maintenance, utilities, insurance, and more. If you find yourself with a higher-than-usual vacancy rate due to factors beyond your control, you could actually end up losing money every month.

While you may pay brokerage fees or fees to a mutual fund manager for management of your stock investments, these are proportionally smaller than they can be for, say, the cost of running an apartment building or other real estate investment.

Using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.

Investing in Real Estate vs. Stocks: Time and Effort

Compared to stocks, real estate takes a lot of hands-on work. You have to deal with the midnight phone calls about water leaks in a bathroom, gas leaks, the possibility of getting sued for a bad plank on the porch, and more. Even if you hire a property manager to take care of your real estate investments, managing your investment will still require occasional meetings and oversight.

When you buy shares of stock, you are buying a piece of a company. If a company has 1,000,000 shares outstanding, and you own 10,000 shares, you own 1% of the company. Unlike running a small business, owning part of a business through shares of stock doesn’t require any work on your part, other than researching each company to determine whether it is a sound investment. You benefit from the company’s results but don’t have to show up to work.

Investing in Real Estate vs. Stocks: Volatility

Real estate investments have traditionally been a terrific inflation hedge to protect against a loss in the purchasing power of the dollar. While real estate can go down over years or decades in certain areas, most investors who see that starting to happen can sell their investment before they lose money.

The price of stocks can experience extreme fluctuations in the short term. Your $40 stock may go to $10 or to $80. If you know why you own shares of a particular company, that shouldn’t bother you in the slightest. You can use the opportunity to buy more shares if you think they are too cheap, or sell shares if you think they are too expensive. And if you hold onto well-valued stocks over the long term, these highs and lows are often smoothed out. But if you are hoping to make money quickly, the volatility in stock value can work against you.

Borrowing against your investments is much easier in stocks than in real estate. If your broker has approved you for margin borrowing, it’s as easy as writing a check against your account. If the money isn’t in there, a debt is created against your stocks, and you pay interest on it, which is typically fairly low.

Investing in Real Estate vs. Stocks: Liquidity

When it comes to investing, liquidity is the ability to get cash out of your investment easily. Stocks are far more liquid than real estate investments. During regular market hours, you can sell your entire position, many times, in a matter of seconds. It may take a few days to see the proceeds, but you can get out of your investment pretty much whenever you want.

When you own a piece of real estate and need to sell it for cash, it can take at least a month. You may have to list real estate for days, weeks, months, or in extreme cases, years before finding a buyer. Once you find a buyer, your property goes into at least a 30-day escrow, during which time there are inspections, title searches, signing of documents, and bank fund transfers that must take place before the property changes hands, and you get your money.

Investing in Real Estate vs. Stocks: Diversification

Both real estate and stocks can provide long-term financial gain, and both come with risks. When choosing the right investment strategy for you, the best way to hedge against that risk while taking advantage of the potential gains is to diversify as much as you can.

You can diversify much more easily with stocks than with real estate, especially with mutual funds. You can buy stocks in several companies so that if one takes a hit, you could still make money on another. Mutual funds carefully choose stocks to ensure that the funds are properly diversified.

Unless you've got unlimited funds, when you invest in real estate, you will probably only have a few properties at most. That makes it harder to diversify, but even within real estate, you can diversify by carefully choosing the locations and types of properties you buy.

Investing in Real Estate vs. Stocks: Access

You don't need to have huge sums of available cash to begin investing in the stock market. With some mutual funds or individual stocks, you can invest as little as $100 per month. There are also micro-saving apps that allow you to begin investing for less than $25.

Real estate requires substantially more money in your initial investment, as well as the costs of maintenance and improvements. The growth in popularity of real estate investing trusts (REIT) is allowing more people to pool their money to purchase real estate.

Key Takeaways

  • Investing in real estate gives you the benefit of tangible property that can generate income and a hedge against inflation.
  • Real estate requires continued investment in time, effort, and cash, and its real value rarely changes over time.
  • Stocks are highly liquid investments that can both build long-term wealth and provide income via dividends.
  • Investments in the stock market often experience short-term volatility that can lead to emotional decisions to buy or sell at unwise times.