Is it better to invest in stocks or real estate?
This is one of my most common questions, so I thought I would share some pros and cons of each.
Investing in the traditional stock market is easy. It takes almost no effort and very little up front money. Although some index funds have minimum investments, the ETF equivalent often doesn't. You can start investing with less than $100. If you're investing well and using the right accounts, you can get substantial tax benefits for doing so. Of course, there is always the potential for loss of capital. The market may be down, and stay down, for long periods of time. The longer your investment time horizon for stock market investing, the less likely you are to lose money. In fact, if you hold investments for multiple decades the likelihood of losing money drops to almost zero.
Real estate has the potential to generate positive cash flow, and thus returns, even when the stock market is down. Not only does it generate cash (creating a cash-on-cash return), it also appreciates in value. This type of investment can also can carry substantial tax benefits, although these are slightly more complicated than just using your 401(k). It generally requires a down payment, separate emergency fund for the property, and potentially additional up front cash - making the barriers higher to get started.For reference, our initial investment for our rental property will be nearly six figures between down payment, LLC formation, furnishing of short term rental, repairs, etc. In addition, it often involves taking out more debt (which may be a horrible idea depending on the rest of your financial situation). Real estate is an asset class that historically does well during inflationary periods, like now. Stay tuned for more Air BNB info!
The ultimate solution is to do both (which is what we do). I am of the personal opinion that investment real estate should come later in the financial plan for most people, especially new white coats.
I am tracking in detail our returns from our stock market investments vs our short term rental for April 2022 to April 2023... Which do you think will return better?!
Can't wait to share the results - check back for the final winner!