Real Estate vs Stock Market. Which one should you Invest in?

There have been many discussions about whether the stock market or real estate produces better returns. Many proponents of the stock market simply point to the historic returns of the stock market compared to the historic returns of real estate. It is true that the stock market has out-gained the housing market over the years. The problem with this argument is that you are comparing housing prices to stock market prices. 

If you are buying a home as an owner occupant with cash, then the historic gain of housing prices may be a good indicator of your return. However, real estate investors do not consider an owner occupant purchase with cash a true real estate investment. 

Real estate investing is not about housing prices; it is about a number of things, most importantly cash flow, which historic housing prices make no account for.

Determining which investment is a better idea is entirely dependent on your own financial goals.
Whenever you are considering any investment you have to first of all consider what your financial goals are, and start from what’s pushing you to invest in the first place.

Sure, glancing at the surplus of cash and accumulated savings may prompt you to think about the potential returns that you could be generating and perhaps even be the first step in facilitating a passive income for yourself, but there’s a lot of things to consider.

Let’s take the two asset classes you’ve described: stocks and real estate, let's  breakdown their key characteristics, describe what kind of investor they would be right for, and identify key advantages and disadvantages.

REAL ESTATE

Real-estate is not only a very interesting asset class, but owning a home represents an important milestone in one’s life . There’s no arguing that owning a house brings you a satisfaction and peace of mind that no other asset can ever. Money is ever fleeting if it’s parked in cash, but real-estate has utility beyond its market (or even numismatic) value. 

Getting closer to owning a house, debt-free, should be the goal of every investor – permitting they don’t already. However, let’s consider if you’re an investor that already owns a home, and is now looking towards the same asset class as an investor to generate returns.

Advantages

Real-estate is a real asset; something you can feel and see. The biggest advantage is security by utility.
Over the past 20 years we’ve seen several periods of financial market turmoil which have greatly affected asset prices; real-estate price are subject to fluctuation and will generally correlate closely with the overall economic performance. 

However, notably, these fluctuations are not as volatile as the price-action in the stock market. That’s not to say that real-estate prices don’t fall in declining markets – they do. However, whenever you bank on the stock market, you stake the performance of the company and their ability to generate future positive cashflows and value for the shareholders. 

Companies as separate legal entities, can fail and many do – leaving the investors with close to nothing. When times are tough investors may be prompted to redeem a lot of unrealized gains and exit their positions. 

When everyone in the market starts divesting funds it causes the asset prices of the stocks to fall as the market fails to match buyers and sellers at the same price level; demand falls – the supply increases – prices fall. 

However, certain investors may be more advantaged during the next stock market pullback and keep holding their shares, and they’re left to watch the market devalue their portfolios. The aggregate change in sentiment introduces more systematic risk to their holdings.

Real-estate is advantageous in that your property cannot be reduced to a value $0 under normal conditions. Since real-estate is tangible it always carries with it a utility. Even under the worst economic conditions an investment in property at least guarantees a roof over your head.
Real-estate is more practical and easier to understand.

The stock market is a vehicle by which investors speculate the performance of publicly traded companies, without being able to do anything themselves about it. They are left at the mercy of price-action – which for novice investors may be extremely frustrating. 

Frankly, it’s very difficult to explain why prices move in the way that they do, but the worst thing is that there is nothing that can be done about it.

Real-estate investing gives almost every investor the opportunity to become an activist.
Pricing of real-estate is based commonly on the tangible traits and surroundings. Some of the factors commonly used to value a property; location, floor plan, size, age, equipment, number of rooms, and condition. 

These are logical characteristics that one can physically tend to in order to estimate the value of their property and try and increase it. If a house doesn’t sell there’s a reason for it that is much easier to comprehend than with a stock.

Disadvantages

Unfortunately, investing in real-estate can be very troublesome.
Real-estate investors face very obvious barriers of entry due to the high capital requirement to enter the market. To even consider real-estate investing and investor needs to allocate at least $100,000. One way to avoid the high capital requirement is to leverage yourself through a loan or a mortgage, which can in turn yield the investor a significant upside - while maximising risk.

Big issue with real-estate investments is their liquidity. Entering and investment position would be an arduous process in real-estate that requires a lot more than just a push of a button. There is a high carry associated with managing real-estate that begins, and ultimately ends, with stacks of paperwork that must be prepared by an attorney. 

From the moment when you decide to purchase a property, to the time until you are able to generate returns could be weeks or months . Furthermore, exiting from a real-estate investment takes even longer, and you likely won’t close at the price you want.

Illiquidity of the real-estate market makes the asset very unattractive to investors that may need to liquidity in the short-term , but may serve as an appealing asset class for long-term investors with the goal of financial preservation.

The real-estate market is susceptible to bubbles and crashes just like any market, however it is their illiquidity that makes it sometimes appear as though they are less volatile.

STOCK MARKET

Investing in the stock market has been a staple for most investors. Many people might be dissuaded from investing in the stock market due to an existing learning curve – although most people overestimate how complicated investing in the stock market really is.

Check out my other answers related to the stock market; how to get started, and how to learn more .
Investing in the stock market can be as complicated or as simple as you want it to be , and doesn’t have to be an overwhelming experience, and it certainly comes with it’s own advantages and disadvantages.

Advantages

Investing in the stock market comes with a lot more flexibility.
The capital requirement to start investing in the stock market is a lot less than in real-estate. You can start speculating on stocks with as little as $10. With barriers of entry in regard, stock market investments are a lot easier to diversify than real-estate.
What is diversification and why should you diversify your portfolio?

It’s a notion as simple as the time-old saying “don’t put your eggs all in one basket”. When any sort of investments are concerned, diversity is security. There is a reason why every successful entrepreneur has multiple forms of income facilitating their wealth in different forms of passive income.

When you limit yourself to just one investment you expose yourself fully to the risk it carries.
The stock market is a vehicle by which investors are able to support successful companies, and expose those that fair poorly. By buying and selling stock investors contribute to a price-discovery process that values a company. Well, sometimes that value becomes $ 0. If that’s your only investment then the value of your entire portfolio is also effectively worthless.

However, the stock market grants investors a solution; choice .
There are thousands of stocks listed on world wide exchanges that give investors access to vast array of varying business models, ideas, management styles, markets, sectors, and strategies. 

Every company has its own unique risk profile. For instance; a large company like Proctor & Gamble will generally be considered less risky than a newly listed cannabis manufacturer stock. 

However, when you assume more risk, you increase your potential for earning greater rewards. PG most likely won’t increase 100% in value over the next year, but a stock like $ACB (Aurora Cannabis) might. Does that mean that you have to choose one over the other? No, you can easily balance your portfolio to contain different stocks to diversify away the idiosyncratic risk associated with individual companies.

Trying to do the same with real-estate would be difficult and it would require a lot of capital.
Additionally, unlike with real-estate, stocks are liquid assets. It is possible to sell part of your holdings, or liquidate your entire portfolio.
Try selling half the guest bathroom of your house next time you need some liquidity.

Disadvantages

Investing in the stock market comes at a lot of risk. Although you can manage this risk through careful portfolio selection, optimisation, and risk management, you still are exposed to systematic risk or market risk. When the financial markets are in crisis, stocks sell off. The demand for more liquidity causes the price to drop, and even those who wish to hold their assets long-term will lose unrealised returns.

Passive investment in the stock market is only one method of investing, and historically it has proven to be the most successful one. However, there is a myriad of disgruntled traders out there that have invested actively and lost their shirts. Many of them will say “the market is rigged” , and they are right to be sceptical of whether everything that occurs across exchanges is fair. 

There are many things that can influence your experience with the stock market; starting from your broker, to the execution, the market conditions, and your own perception the price-action before you. The stock market isn’t perfect; there are flash crashed – where prices shoot up or fall 10% at a time for just a few minutes, order flow manipulation – orchestrated by high frequency trading, and price slippage.

At the end of the day, as a stockholder, you may enjoy certain privileges as voting rights or dividends, but you are still not ever able to manipulate the underlying asset as an investor. The frustration of only being able to watch is ever present, and the satisfaction of “calling it right” – occasionally – may not be enough.

SUMMARY
Real-estate investments require a lot of capital - and it’s going to be tied up for a long time before you can enjoy any profits.
The stock market offers a wide diversity of assets at different levels of risk, but sifting through can be challenging.
At the end of the day, don’t put your eggs all in one basket. Every asset has it’s advantages and disadvantages.