The stock market and real estate market both experience ups and downs, so it’s hard to judge which is the better investment. If you’re considering cashing out some of your stock holdings to buy real estate — either for your personal use or as an investment property — consider these pros and cons before making your decision.
Stocks Have More Liquidity Than Real Estate
“When you purchase stock, you have the benefit of it being liquid,” said Sean Burke, vice president and director of institutional money management at Stuart Estate Planning Wealth Advisors in Coconut Creek, Florida. “You can choose and adjust the risk by diversifying, changing the positions to be more defensive, or taking some of the profits off the table when you feel the risk is too high in the markets or the positions.”
However, there are disadvantages to stocks as well.
“The cons [are] that you do not own a hard asset, and you are relying on markets and company leadership to increase in value or generate income via dividends — which can fluctuate or be eliminated altogether,” Burke said.
Real Estate Is a Hard Asset That You Can’t Lose
“The benefits of owning a real estate rental property are that you own a hard asset that no one can take away from you,” Burke said. “You can rent that property to generate significant passive income. This gives you the opportunity to be a disciplined investor and wait for the market conditions to be right to sell the property for a gain, or hold the property to continue to collect the income.”
But unlike stock, real estate is an investment that you have to continually pour money into.
“You are responsible for repairs and updates to the property,” Burke said. “You are putting a lot of eggs in one basket, meaning that you are betting on the property value and income potential of one property (for most people who can’t afford multiple properties). If you have to take out debt to purchase the property, you have the risk of having to make the payments without having tenants. In the current environment, many landlords have had to carry the burden of the debt payments, property taxes and repairs, without receiving a dime from their tenants, and there is nothing that they can do to remove them from the property.”
Owning Real Estate Can Benefit You and Your Family
Being a homeowner can have benefits that go beyond the financial.
“A home to live in and raise a family in is less of an investment financially and more of an investment in your family and the security of having a permanent residence,” Burke said. “The true return on a home after years of paying interest (if financed), property taxes, repairs and upgrades, and inflation/cost of living is debatable. A positive for many people is that making a mortgage payment and building equity is forced savings.”
Should You Sell Stock To Buy Real Estate?
There is no one-size-fits-all best investment, so you need to figure out which investment works for you based on the associated pros and cons. However, if you are living in an area that has extended the eviction moratorium, Burke said that now may not be the best time to invest in a rental property.
“I would imagine that many people who are or are considering becoming small- or medium-sized landlords will rethink the risks associated after the eviction moratorium policy,” he said. “When that policy comes to an end, I believe many small landlords will sell their property because they have not been able to collect rent for so long [that] it has become more of a hassle than it’s worth, and the risk is higher that their income can be taken away by the government at any time. The landlords that will not sell their property will likely have major repairs to make, which will be costly and take those properties off the market for some time. Real estate can be a great part of a portfolio, but in my opinion should not be the majority of the portfolio for the average investor, especially if it is only one property.”
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Allen Thuma, CFA, portfolio manager and research analyst for Buckingham Advisors in Ohio, also believes that, overall, stocks are the better investment.
“While investing in stocks comes with risk, we believe it is better in the short- and long-term to invest in stocks over real estate,” he said. “For starters, stocks have historically proven as a better hedge against inflation through superior returns over real estate. It is easier to diversify stock positions to limit single-investment risk when compared to real estate positions, which typically take large initial investments and/or debt to make a purchase. Because stocks are liquid, easier to diversify, better historical performers against inflation and easier to purchase, we believe there are better opportunities in stocks than positions in real estate for the average investor.”
If you’re unsure what’s best for you and can afford to do so, you may consider having investments in both stocks and real estate.
“If economic activity continues to rebound and interest rates remain in check, both asset classes will perform well,” said KC Mathews, executive vice president and chief investment officer at UMB Bank. “At the current time, we own both asset classes.”
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