Real Estate vs Stocks: Tips for Investors
We are not here to convince you why stocks are better than real estate, or vice versa. Instead, we want to establish how a balance of real estate vs stocks means returns in an investment portfolio. Because each investment has different risk and return characteristics, they can be used together to effectively build a net worth portfolio.
Do stocks outperform real estate? Sometimes, but the greater returns are offset by different risks than investing in real estate vs mutual funds vs bonds or other investments. Here’s our collection of tips for investing well in all classes of assets, especially the complimentary categories of stocks and real estate.
Investment Tip 1: Chase Long-Term Gains and Cut Short-Term Losses
Depending on your stage in life, the point of investing is to maximize either your current income or your future earning potential through growth today. It’s important to remember the end goal when identifying an investment, because the investment type could change between and within stocks vs real estate.
For instance, a stock in your portfolio might start rising in value and keep climbing. The temptation to sell in these scenarios is mighty, because that will be a big amount of income in the present. But continuing to build those gains might be even more lucrative in the long run. Research the company or index and see how the stock investment has grown over time. If they continue to seize more of the market each year and grow, then your future return will grow right along with them.
The same potential growth is possible in a real estate investment. If a market is hot and getting hotter, it can be tempting to sell. However, since the goal with real estate is overall to provide “mailbox money”--money that shows up in your mailbox with minimal effort--the value of time can more greatly benefit your finances through a paid off mortgage and increased rents.
Whether it’s stocks or real estate, it’s important to remember the end goal--income or growth?
On the flip side, a real estate investment will be part of monthly or quarterly income through payments like rent, cash from the sale of a property, or repayments from developers you have supported with an investment. In some of these situations, your income might be right on par with your needs and the returns on other similar properties in your area. But in others, your income might be sinking based on changes in the area or the market. Holding on to the real estate could ultimately end in a loss. The same is true of stocks. When the value of shares is sinking over time, exiting early may just give you the opportunity to re-purchase the same shares later at a lower price while helping the value build back up again.
There’s an old trader saying that highlights this concept “It’s okay to be wrong. It’s not okay to stay wrong.” Recognizing that your original reason for the purchase isn’t working allows you to redeploy your investments to other areas and find success.
Quick note: there is incredible literature and academia behind avoiding short-term returns and trends. When looking for returns, we encourage to investors to start with at least 10-year returns. Shorter returns, such as 1- and 3-year, can be misleading and cause entrepreneurs to invest in bubbles and overpriced assets.
Investment Tip 2: Use Real Estate Income to Diversify Investments
While you definitely want to accrue gains and cut losses, it’s important to note the differences between real estate and stocks are as drastic as the similarities.
Why invest in real estate? Because it’s a secure long-term investment that is very likely to grow in value with time. When most people think of real estate, they love the idea of a renter paying down the mortgage. This ultimately leaves a family with reliable income in retirement and having benefited from today’s cheap interest rates.
But these benefits are accompanied by a lack of long-term liquidity. Even in a booming seller’s market, there is never a guarantee your real estate will sell quickly, or for the listed price. Additionally, the illiquidity means the investor must accept that opportunities will likely be missed because equity is “tied up” in the property. This is why we advocate for liquidity strategies for real estate investors.
But in the short term, real estate is a source of liquidity in the form of monthly income. What many savvy investors do is use this income to reinvest gains in the stock market for additional growth. Why invest in stocks? These shares of ownership in a company can grow value exponentially and be purchased or sold much more easily than real estate. Plus, you are always paid the amount each share is worth.
This strategy of combined investment allows you to retain the long-term asset of real estate until the time is right to sell, while still growing additional wealth through stocks.
Investment Tip 3: Leverage the Best of Each Asset
We all know the story of an old farmer sitting on prime real estate for decades before selling for a windfall. And you may have a friend who owns a stock that pays double-digit dividends. But which outcome is more likely? How do you use stocks with real estate to build a successful investment strategy?
With today’s ultra-low interest rates, investors can find immense difficulty in generating enough income for their retirement. This is where “mailbox money” from real estate we mentioned earlier can be attractive. Because the purpose of the real estate investment is to generate income, the investor is willing to sacrifice some liquidity for more income. They maintain long-term liquidity through diversified stock/bond portfolios and get the monthly benefit of higher income from real estate.
On the other hand, stocks have been proven to be excellent long-term wealth creators. For this reason, we favor an investor benefiting from long-term growth in the stock market. Many people don’t realize that the worst 20-year performance in the S&P 500 is 7% per year.
For younger couples with IRA money that cannot be accessed until they are 59 ½, we can allow the money to grow annually in stocks. For older couples, we earmark money for future generations and allow those funds to grow for the long-term. Such mental accounting helps people remember the purpose of the money and maximize its value and potential over the long-term.
Invest with Confidence: Work with Delta Wealth Advisors to Grow Wealth
Investing in stock and real estate are both great ways to grow long-term wealth. Balancing both in a portfolio allows investors to make the most of all opportunities. Real estate investments serve as a source of passive monthly income, serve as a buffer against the impacts of inflation, and come with many tax advantages. Stocks are a low-fee investment that can be easily bought and sold, where it’s easy to diversify your portfolio and grow returns in tax-advantaged retirement accounts.
Delta Wealth Advisors is highly experienced at helping our clients grow wealth using all these strategies and more, as well as handling the bookkeeping, accounting, and tax preparation to protect you from unexpected fees or penalties.
Delta’s investment team is responsible for sourcing, vetting and providing suggestions on a variety of real estate investments. These investments range from safer investments in industrial and medical office buildings to multi-family apartments. For clients looking for more aggressive real estate opportunities, Delta has a portfolio of development opportunities. Many of these development opportunities are exclusive to Delta Wealth clients.
Unlike other competitors, Delta Wealth Advisors does not charge commissions on sourced and vetted real estate investments.
Let us help you invest to meet your current income needs as well as secure the future you imagine. Contact Delta Wealth Advisors to create and cultivate the strategies that will help you thrive.
