Real Estate vs. Stocks: Which Will Get You the Best Return?

Both stocks and real estate can be solid investment options. One is not necessarily better than the other. They each have their pros and cons, and both can be included in a diversified portfolio.

Many investors hold both types of assets in one form or another. In the case of stocks, this can include individual stocks as well as stock mutual funds and exchange-traded funds (ETFs). In the case of real estate, you can invest in individual properties as well as REITs and funds that invest in real estate.

Whether to invest in either or both—and how to make those investments—is a decision each investor must make based on their own goals, risk tolerance, and other factors.

Investing in real estate vs stocks: key differences

Investors should consider investing platforms such as JP Morgan, Public, and others when investing in stocks, real estate, or other alternative assets.

Investing in real estate

Real estate investments generally fall into two categories, residential and commercial real estate. You can invest in these through tangible property that you own and manage, or through a REIT or real estate trust.

A residential property can be your own residence, a second home such as a vacation home, a rental property, or a property that you might try to flip for a profit. Residential rental properties include condos, duplexes, and single or multi-family homes.

Commercial real estate can include properties such as an office building, a warehouse, an apartment building, retail space, and more.

You can also invest in raw land you might use for residential, agricultural, commercial, or industrial purposes.

Benefits of investing in real estate

• Passive income. Real estate investments can generate passive income from rental income. While being a landlord does entail some work, typically you are not working every day.
• Growth of equity. Real estate has the potential to appreciate in value, which allows investors to build more equity in their holdings.
• Inflation hedge. Real estate has historically served as a hedge against inflation, as property values and tenant rents often rise during periods of inflation.
• Tax benefits. Investing in real estate can offer tax benefits. For example, you may be able to deduct your mortgage interest or property taxes paid.

Disadvantages of investing in real estate

• Lack of liquidity. Unlike real estate, stocks can be bought or sold on any day the stock market is open. Selling a real estate property is generally more complex and takes more time.
• Negative cash flow. This can happen if the rental income from the property falls short of your mortgage payments, property taxes, and maintenance costs for the property.
• Requires hands-on attention. You need to be sure the property is maintained, and rents are collected. You can hire a property manager to handle this work, but there are costs involved. None of this is involved with stocks—but you can bypass this work if you invest in real estate through a REIT or real estate trust.

Investing in stocks

Stocks often form the core growth component in the portfolios of many investors. Stocks have a number of advantages and disadvantages.

Benefits of investing in stocks

• Higher growth potential. Stocks generally have higher long-term growth potential than real estate investments. For example, the average gains on housing prices have generally lagged gains in the stock market over most trailing periods.
• High liquidity. Stocks can be bought or sold on any day the stock markets are open for trading. Real estate, on the other hand, can take time to sell. You must find a buyer, negotiate the price, and go through the closing process.
• Diversification is easier to achieve. This can be done easily by holding stocks across various industries and market segments. Investing in stocks using mutual funds and ETFs makes diversification even easier to achieve.

Disadvantages of investing in stocks

• Volatility. Individual stocks can be volatile. Not only is the share price susceptible to market and economic factors but the price can be impacted by issues unique to the individual company.
• Tax costs. Investors can owe taxes on shares held in a taxable account. This may include capital gains taxes or taxes on dividends.
• No control over value. Investors can’t increase what stock is worth. With real estate an owner can improve the value of a property through making improvements to the property.

When should you invest your money in real estate?

The decision to invest in real estate is an individual one. Before you invest, you should determine whether real estate is right for you. Consider the following:

• Does the lack of liquidity work with your overall financial situation?
• How will adding real estate to your portfolio benefit you and how does it fit with your long-term financial goals?
• Can you take advantage of the potential tax benefits of real estate investing?
• Do you have the means to manage one or more properties? If not, can you afford to hire a property manager?

Instead of buying individual properties, you might want to consider investing through a REIT, mutual fund or ETF, or a private equity real estate fund.

Ways to invest in real estate

There are several ways to invest in real estate, including:

Homeownership

The only real estate investment many people will make is purchasing the home they live in. While you may not think of your home as an investment, you can benefit from any price appreciation over time. You may also decide to turn your home into a rental property in the future. Through home equity loans and HELOCs, your home can also be a current source of funds.

Rental properties

A rental property might be a single-family home, a duplex, a condo unit, an apartment building, or another type of property that you can rent out to tenants. Rental properties offer the chance to invest in real estate and potentially benefit from any appreciation in the property's price over time. You also benefit from any rental income paid by tenants.

Raw land

Purchasing land can be an investment in the future. There is generally no rental income derived from raw land, at least initially. Your income or gains will generally come from someone wanting to purchase the land from you or someone wanting to rent the land to construct some sort of building on it, or possibly for farming.

Commercial properties

Commercial properties can include office and industrial buildings or retail space such as a strip mall or an apartment complex. Commercial properties will generally be more expensive to purchase and maintain than residential properties due to the sheer size difference in many cases.

REITs and funds

REITs, which stand for Real Estate Investment Trusts, allow you to invest in various types of real estate and mortgages on real estate by purchasing units of an investment fund. A single REIT can invest in many residential or commercial properties and mortgages or a combination of these assets. Because individual REITs trade much like stocks, they are more liquid than other real estate investments, with a much lower entry point. You can purchase a REIT for as little as it costs to buy a single share.

In addition, a number of ETFs and mutual funds invest in REITs. All of these can offer a level of diversification that a single residential or commercial property can’t provide. On the other hand, the opportunity to benefit from the appreciation of a single property is diminished.

When should you invest in stocks?

When and how much to invest in stocks depends on the individual investor. That said, investing in stocks is typically a core part of most investors' portfolios. Stocks are often the growth engine in their overall asset allocation.

Investing in individual stocks instead of an investment fund, such as a mutual fund or ETF, is yet another decision you have to make. Of course, it’s always possible to invest in both.

Ways to invest in stocks

There are several ways you can invest in the stock market.

Individual stocks

Investors can purchase shares of individual stocks such as Apple, Microsoft, Berkshire Hathaway, and any other stock listed on the various exchanges. When you buy shares in a specific company, your returns will be largely tied to the underlying performance of that company.

By investing through an online brokerage such as Fidelity, or Robinhood, you can buy a minimal number of shares, including fractional shares in some cases. The advantage of picking individual companies is that if you do a good job, you can outperform the market.

Conversely, if your stock picks don’t perform as well as the market, you might have been better off using stock mutual funds or ETFs to invest in stocks.

Mutual funds

There are numerous mutual funds that invest in stocks in one fashion or another. Some mutual funds are actively managed. In those, fund managers choose which stocks to hold in the fund based on their analysis of the markets, individual stocks, and other factors.

Index mutual funds are another popular investing option. These funds are passively managed and seek to replicate the performance of the fund’s underlying index. There are mutual funds that track the S&P 500, the Russell 2000 index (small-cap stocks), and the total market (U.S. or foreign). Index funds can also target different market caps and investment styles, such as growth and value.

ETFs

ETF stands for exchange-traded fund. In many ways, stock ETFs are similar to stock mutual funds because they comprise individual stocks. But ETFs differ from mutual funds in that they are traded like stocks daily on the stock exchange. This allows investors to use vehicles such as stop orders on ETFs as a way to limit downside risk.

While active ETFs exist, most tend to be passively managed index funds. Also, ETFs tend to be more tax-efficient than mutual funds and often have lower expense ratios (fees).

TIME Stamp: Stocks and real estate can work together to grow wealth

Whether through individual stocks or real estate properties—or funds that invest in either—there are many ways to add stocks and real estate to your portfolio.

However you decide to invest, be sure to consider your investment objectives. This includes your time horizon, your financial goals, and your risk tolerance.

Both types of investments can help you grow your net worth, just be sure to understand the pros and cons of each category before investing.

Frequently asked questions (FAQs)

What is the 2% rule in real estate?

The 2% rule states that the monthly rent from an investment property should be at least 2% of the purchase price of the property. This is not hard and fast, and there is nobody enforcing this rule. However it is a good metric to keep in mind as a real estate investor to help make sure that your investment is ultimately a profitable one for you.

How much is real estate more like stocks vs. bonds?

Real estate and stocks are different types of investments. But real estate is a more similar investment to stocks than to bonds. For example, while some stocks pay dividends, the biggest stock and real estate gains are the result of capital appreciation. In contrast, bond investors generally look for regular income when investing in bonds.

When you include taxes and interest, is real estate worth it vs stocks?

Whether real estate, with all of the potential costs and illiquidity, is worth it compared to stocks depends on your circumstances.

If you have the financial wherewithal to invest in both, it can be a powerful combination due to the diversification benefits. You can trade stocks as needed for short-term liquidity needs and hold your real estate investments for the longer term.

Is real estate the best long-term investment?

It’s hard to say that real estate or any other investment is the “best” long-term choice for any investor. For example, if you look at the long-term returns of real estate compared to stocks you might find that stocks have outpaced real estate over many time periods.

To determine the long-term growth potential of any investment, you’ll need to research the broader asset class and the individual stocks or properties you are considering.

How much should I invest in stocks vs. real estate?

The answer to this question will vary from investor to investor. The best asset allocation for a portfolio will typically include stocks, bonds, and cash. It may also include alternative assets such as real estate. While there is no set allocation for stocks, real estate, or any other type of asset, generally real estate will comprise a smaller percentage of most investor’s portfolios than stocks.

That said, someone who is primarily a real estate investor may have a larger allocation to real estate than most investors.