The Pros and Cons of Stocks Vs Real Estate

Guest post by Young

There are several investment vehicles promising fantastic returns and I believe you’ve heard of and, may be, you’ve participated in a few. Every investment vehicle has its own pros and cons. This is why astute investors have strategically diversified investment portfolios that make them richer and generally protect their investment. To help your understanding of real estate investment, we’ll compare it with investment in stocks.

Real estate investment is a dynamic investment that leaves greater control in the hand of the investor compared with stocks. A stock is a nominal representation of the value of your investment in a company. The more the company does well in its line of business the better the value assigned to its shares and the more money that could be made by the investor when such shares are sold or when dividends are paid. Except you have a considerable number of shares in the company, you practically do not have a say in the day-to-day running of the company or the several decisions of the board that could make or mar the company.

However, in real estate, your investment is tangible and your control is greater. You decide what to buy, where and when as well as when to sell. Your investment is relatively secure as you can buy or hold or sell without recourse to any board. Also, the level of knowledge and expertise required to control both investments varies. Without an in-depth knowledge of accounting, human resource and management, an illiterate real estate investor can still make good money.

One of the key concerns of most investors is the level of risk involved in a particular investment and the security of funds. One of the major attractions of real estate is the fact that although it does not always rise in value, it is very stable when compared to stocks. Stocks are subject to high level of volatility. In the United States, in the late 1990’s technology stocks boomed and by early 2000’s when they crashed, many stocks lost over 80 per cent of their value and some became worthless. Some stocks are practically worthless as at today. This is something that is a rarity in real estate. Real estate has the capacity to outpace inflation and it is very resilient.

Of course, real estate has its own down side when compared with stocks. The major difference is in liquidity. Liquidity is the ease and cost with which you can sell an asset and get your money out of the investment. It is much easier to sell your stocks and convert them into money. All you need do is to contact your stockbroker and within two or three days, your stocks can be converted to cash. Although there is always a demand for real estate, the time and energy required to navigate the process leading to a sale ensure that you cannot easily convert it to cash. This illiquidity is also a strength in another sense. It means that you are more likely to hold a piece of real estate longer than a stock. Whilst those trading in stocks often lose focus of the long term perspective.

Furthermore, when we compare overall returns and wealth producing capability of real estate with stocks, we begin to understand why several asset portfolios are heavily tilted in favour of real estate. For instance, the owner of a block of four-bedroom flats in an average location in Lagos or Abuja in Nigeria, may earn at least N2m annually from rents whilst also enjoying the appreciation in the value of his property. Often, when the economic environment is harsh there is a lull in the construction market as more people cannot afford to build. The consequent pressure on the rental market gives the property owners the opportunity to review rents upwards and generate more funds from their investment. Generally, maintenance costs are far below the accrued rental income.

Finally, for tax purposes, owning a piece of real estate is similar to owning a business. You have access to deductible expenses (including depreciation). Depreciation is an allowable tax deduction for buildings .If you keep a good record of your expenses when purchasing or operating a property, with guidance from your accountant, you can claim some deductions. So, back to our question: stocks or real estate? You choose.

I choose a combination of the two almost on 50/50 basis. For the future I will be tilting more towards real estate.

What about you, what is in your portfolio?

In our next post, becoming a millionaire is not a wishing thing, unless in a dream or magic fairy-tales.