Real estate or stocks: Three reasons stock market investors don’t invest in real estate

Jay Reid
Jay Reid
Nov 2 · 5 min read

Liquid funds or bricks and mortar?

Bad tenants aside, the type that are late with rent, don’t bother paying it at all or seriously detract from a property’s value with wild parties, surely investing in bricks and mortar is the best way for investors to use their cash?

First, it’s important to note that stocks tend to increase in value quicker than real estate. Over long periods of time, an S&P 500 index fund has historically produced total returns in the 9–10% range. Meanwhile, real estate prices tend to outpace inflation, but not by much.

It’s tough to make an apples-to-apples comparison of the two. But it’s fair to say that real estate investments have just as much, if not more, return potential as stock investments. When you combine price appreciation, income-rental potential, and the inherent tax benefits of real estate investing, there’s potential for impressive long-term returns.

If you look at the longest time period, you’ll notice that the performance is comparable but with a significant edge to real estate. This is an imperfect conclusion, as there are other ways to invest in real estate besides REITs and they have different investment dynamics.

While, at first glance, this may seem like a no-brainer, you delve a little deeper and find that it’s not quite that simple and these are two very different ball games.

Leverage

For a start, if you’re investing in the stock market, what you see is what you get — unless you’re specifically buying leveraged stock, you pay £10,000 for £10,000-worth of stocks — simple maths really.

The only risk you’re exposing yourself to is the market itself, and if you’re bold enough to be investing those sums of cash, we can assume you would have done your homework on where it’s going.

Beyond this, though, there is no risk of oversized losses past that initial investment — but things are a little more complicated with real estate.

In most cases, you’ll use a mortgage, which in effect is a type of asset-backed lending, meaning you will only pay maybe 10% (usually more than £10,000) as a deposit up front and the rest is borrowed.

And this is where investing this way gets inherently more risky because if a tenant does fail to pay their rent and your mortgage interest payment is defaulted, then the asset backing your loan with the bank — ie your house and investment — could be forfeited.

So, it could be a case of being at the mercy of the stock market, of which investors have a decent enough knowledge of, or of a tenant, whom they may never have even met before.

Capital

It’s not the most common way to do it but properties can be bought outright in cash, while others prefer to pay part upfront and cover the rest with a mortgage.

But with the average UK house price currently standing at roughly £200,000, this is a rather large outlay and most retail investors are not ready to put so much into one single asset.

This is mainly because there is no diversification of the funds and the cash is only covering one deal.

Liquidity

You can let cash loose in the stock market and it has freedom to roam in the sense that shares can be bought and sold as long as the market is open and as long as there is enough of that particular stock being bought and sold at any given time.

You can flirt with different opportunities, jumping from one bandwagon to another, which makes stocks an ideal investment if liquid funds are needed at a moment’s notice to be either reinvested or spent.

Real estate is different, all your eggs are in this basket, you’re cash is locked in, with it taking up to six months to sell a property before you can get back what you put in.

Of course, investing in property could still be done on a shared basis, but even then, the time it takes to sell your shares could prove extremely inconvenient if you need cash quick.

And this isn’t the only thing that affects how much money you have and how easily you can get it, which brings us back to bad tenants — who can take large chunks out by not paying rent, causing damage, taking hours out of your day asking you to respond to issues, not to mention the cost of general repairs and maintenance.

In all, maybe you could compare the stock market to a series of exciting flings and relationships, which could prove short-lived , while you’re married into your real estate investment… for better or for worse.

If all this seems overwhelming, you’re not alone because purchasing property can be daunting and sometimes you need a helping hand.

But don’t worry, most marriages, while they sometimes need a little work, can prove fruitful, and if you need assistance in your real estate investment journey, register at Moveinvest

Jay Reid

Written by

Jay Reid

Building the future of real estate investing!

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