An age-old question and a hard one to answer. Is investing in buy-to-let properties better or worse than investing in the stock market?
The answer as always with these types of things isn’t a simple yes or no, there is an array of contributing factors which means it’s different for everyone. One thing though, that seems to be universally suggested by the ‘experts’ is that you should diversify your investments and create multiple streams of income. To me, this suggests that maybe it's not a question of which is better, rather one of identifying the strengths and weaknesses of each wealth-building strategy.
So, in this article, we thought we’d take a look at a few of the advantages of both and some of their disadvantages.
When you invest in a property you invest in something tangible you physically own a tangible asset. The value of that asset might fluctuate, but at the end of the day, a house is still a house. This is a serious advantage of property investing. Apart from in the case of unexpected disasters eg. natural disasters, your property will always be your property.
The same can’t be said for stocks. The value of stocks is determined, amongst other things by speculation. The company(s) that you invest in might collapse and, as I learned the hard way, over-exuberant speculation can lead to massive downturns in the market. I’m currently sitting on one stock which after valuing themselves too highly dropped over 20% overnight (but that’s why we diversify, I suppose).
The second big benefit of owning buy-to-let properties is creating a positive cashflow property. This isn't necessarily easy, but if it can be managed you could be getting hundreds of dollars a month in profit from a down payment of as little as 20% on a single property.
By building equity we mean you can use the cash flow of the property to pay off the mortgage and reduce the debt. Whilst pocketing some cash at the same time. You can, in a gross over-simplification, imagine it a bit like a savings account.
The final benefit of owning a property is appreciation. This is particularly important if you buy especially low. Properties naturally increase in value over time, and if you hold a property for a significant amount of time the capital gains made through appreciation could be startling.
While properties do appreciate in value, good shares can increase in value faster. For example, house prices went up by an average of 4.9% over the last year, however, S&P 500 went up 21% in 2017 and 6.47% in 2018. Neither is to be sniffed at, however, one is definitely higher than the other.
One of the major problems with investing in real estate is that it costs a lot of money. In general, you need to place at least 20% of the value of the property down which on a cheap property of $150,000, means you’re looking at cash upfront of $30,000. Plus you then have to assume the debt of $120,000 plus interest (which not everyone will qualify for).
With the stock market though you can begin investing with much smaller amounts - though of course, you aren’t going to see the same big cash returns on a $50 investment as you would with $30,000.
Tieing your money up in property can mean you no longer have access to that cash. Selling a property can take months and being forced to sell could mean taking a big loss. Stocks, in comparison, are easier to trade and you could get you money out and back into cash in as little as a few hours. What this means is that if for some reason you need your money - perhaps an excellent investment opportunity arises that you need to move on quickly - then stocks allow a lot more flexibility.
Buying stocks is easy (in theory) - you research and buy them and leave them to grow. Then they either go up or down in value, hopefully up of course. On the other hand, a rental property can be quite a handful to manage with maintenance, tenants, and accounts to deal with.
Whilst you don’t get the same cash returns some stocks offer dividend payouts, either monthly or quarterly which can add up to some impressive gains.
We’ve talked about REITs in the past and it was personally my first foray into real estate investing. Real Estate Investment Trusts (REITs) are a way for people to invest in real estate without having to front all the cash for a property. Instead, they allow you to invest in a diversified portfolio of real estate held in trust. This portfolio pays regular dividends, anywhere between 3% and 10% a year, and your investment should appreciate in line with the properties values that are held.
REITs then, on paper seem like a good compromise. You get a lot of the benefits of property investing and stocks without the high monetary entry barrier and the assumption of mortgage debts. However, again, you won’t receive the same cash returns as you would with a property investment
In the long run, investing in properties is likely to see you build wealth more efficiently. It allows you to purchase an asset and use the asset to pay off its own debts whilst making you some cash. The property will then likely appreciate over the time that you hold it (though not necessarily).
However, investing in stocks and shares is easier, comes with a lower monetary barrier and allows you to keep your money more liquid and accessible in case you need to access it quickly. Plus, whilst an S&P 500 has over the years returned a good average of 8%, there are plenty of stocks and shares that return far higher - just imagine if you’d bought shares in Apple for example in 1980. An investment then of $220 would now be worth $112,268.8, not including dividends. Of course on the flip side, Apple is a one in a million company and betting on volatile stocks could quite easily see you lose money rather than gain.
Thanks for reading and we hope you found this blog interesting! However, do note that the purposes of this article is for general information. We are not licensed financial or legal professionals and as such nothing in this article should be understood to be financial or legal advice. If you are in need of financial or legal assistance please seek the help of a competent professional.
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