When you’re looking to invest money, you have two main options – real estate or the stock market. The question is which is safer and which will generate the most return on investment (ROI). Also, you need to think which of the two is more accessible to you. You can just as easily buy some stocks or a property, but understanding how the stock market works is not for everybody, whereas anyone can get a grasp on real estate. After all, a house is a house, you can have a look at it and think of ways to make it profitable, but stocks and bonds are subjected to the whims of the market and you have no control over that.
Let’s have a look at the benefits of investing in real estate and see how they compare with stock market investments.
Real estate is a hedge against inflation
You don’t need a degree in economics to understand inflation and how it erodes the value of your money. Depending on economic circumstances, inflation ranges between 2 and 5% per year. Sometimes even more. When prices are adjusted for inflation, the value of your money decreases year after year. At least, if you’re relying on cash savings. Investing your money is a way to beat or at least keep up with inflation, and some options are better than others.
In times of economic uncertainty, investing in stocks or bonds is very tricky. Even the Oracle of Omaha, the famous Warren Buffet, admitted to that. ‘It’s not a secret that stocks do poorly in an inflationary environment’, he once said and he should know about things like that.
Let’s see how real estate compares to stock investment with respect to inflation. Ideally, you should invest in real estate before an inflationary surge. If you take out a mortgage, your interest rates will remain fixed so you won’t be affected by inflation when it comes to the money you need to pay. But, the value of your property will rise and so will the rent you can charge. So you earn more, but pay the same mortgage, which makes investments in the real estate market a good hedge against inflation.
Better Return on Investment
If you invest in the stock market, what sort of ROI can you expect? For the past century, the stock market’ ROI has been around 10% per year on average. Keep in mind we’re talking about an average value here. Some years are better, some are worse. Likewise, some stocks perform well, while others tank. For the average investor, it’s a bit like playing the lottery.
You’re way more safer when you put your money in properties and the ROI is better, under any scenario.
Say you want to buy a property that’s worth $500,000. You can do that by investing only $100,000. If you use it as a rental, you can break even between the rent you get and the payments you have to make in one year. In the meantime, you can expect the value of your property to rise by 4% a year. Again, on average. The value of your $500,000 property will go up by $20,000. But, let’s not forget you only invested $100,000, so your ROI is actually 20%.
That’s already double the ROI you can expect of a stock market investment.
If you don’t mind a bit of work and invest in a fixer-upper, the ROI you get can be way higher. Let’s say you invest the same $100,000 to buy a house that’s $300,000. It’s a run-down house, but with some repairs the same house can sell for $500,000. The rehab costs, maybe, $80,000. In six-months time, the completely refurbished house is again on the market. After paying back the money lender you can expect to make a profit of around $60,000, give or take. What was your original investment again? A $100,000 investment got you $60,000, which puts your ROI at 60%. Not bad at all.
And the year is only halfway through. If you put your mind to it, you have another six months to buy and fix another house. And get another 60% ROI. By the end of the year, your total ROI will be a staggering 120%, way, way above what the stock market has to offer.
Demand for real estate can only increase
No matter the economic context, people will always need a house to live in or real estate to start up a new business. Some years can be slower on the real estate market, but in the long term the demand will be always rising.
The same cannot be said of stocks. Even when you do due diligence and research the market to the best of your abilities, you cannot tell what the future will bring. Just take a look at the impact the Covid-19 pandemic had on the stock market. With the world economy at a standstill, the stock market took a severe beating. Things have improved considerably, but the stocks performing better at the moment are not necessarily those that did well two years ago.
By mid-2021, experts recommended investing in Pfizer, Johnson & Johnson or companies producing medical equipment. Short-term, that’s guaranteed to generate some profit, but you don’t know what next years will bring.
The pandemic also slowed down the real estate market, but that was only a temporary setback. Transactions have picked up and the market is booming. People still need houses.
You can increase the value of your property
If you invest in the stock market, you can only hope you’ll make a profit. Even if you diversify your investment, you cannot be sure your stocks will perform as expected.
With real estate things are far more simple. You can visit a house, see what it has to offer and how it can be improved. There’s no ifs and buts. You repaint the house, refurbish the kitchen and build a nice patio, and you have a much better house. And it will generate a good profit whether you sell or rent it. The point is, it’s all under your control. You’re not tying your economic prosperity to the stock market’s fluctuations. The word itself, fluctuation, says it all. It’s about going up and down. Most of those who invest in the stock market have the ups in mind, but sadly many lose all their money with the downs of the stock market.
All in all, investing in real estate is the safer option and the return on investment it generates beats the ROI in stock market investments.