Is Real Estate a Better Investment Opportunity Than Stocks?
There’s a lot of attention being paid to the stock market recently because it is soaring to the highest levels ever. But the question remains – is investing in real estate better than stocks? There are several answers to the question and each answer depends upon the investor and their goals.
Real estate is like any other investment. The values of real estate properties can fluctuate depending upon many factors. Land prices can go up and down due to local, regional, and national economic conditions. This creates an opportunity for a smart investor looking for a short-term or a long-term return on their investment.
Stocks Go Up and Stocks Go Down
Individual investors don’t have much effect on the stock market. The institutional investors who are buying and selling huge blocks of stock have more of an impact. A small investor simply doesn’t have the buying power to influence the market’s movement. In most cases, the individual owner of stock shares is along for the ride provided by the institutional investors.
That means conditions in the stock market can change very quickly with stocks gaining and losing value on a minute-by-minute basis. The stability of an individual stock and its ability to weather economic upheavals, good and bad, is always subject to the goals and strategies of the large institutional investment groups. That strategy is dictated by corporate boards and their financial advisers.
Real Estate Goes Up and Down Also
Everyone knows the value of real estate also goes up and down over time. But the value of real estate depends on other factors influencing its value. The first factor is the real estate’s location. An empty lot on a street corner can be of low value until a Big Box store decides to put an outlet on it. All of the sudden, the property value can skyrocket.
The same is true in the reverse when a highly-valued piece of land suddenly loses much of its value because a new freeway bypasses it. The biggest difference between real estate and stocks is that real estate tends to gain and lose value more slowly than shares of stock. That makes real estate a good hedge against issues like inflation and economic downturns. Investors in real estate generally have more time to respond to changes that may affect the value of their holdings.
4 Ways to Invest in Real Estate
Like any other form of investment, real estate has some great advantages for investors and some not-so-great disadvantages. Real Estate investing can be accomplished in several different ways. Listed below are ways to acquire investments in real estate:
Investing in Commercial Real Estate
Buying commercial real estate properties takes some time to organize and fund. Not many investors have checkbooks big enough to just pay for a property by paying cash for it. Most investors have to arrange financing for the bulk of the purchase. Down payments on commercial real estate are generally set at 20% of the purchase price. This may preclude some buyers with limited resources looking at properties with good growth possibilities.
There’s also the need to rehabilitate property or upgrade it to bring it into compliance with codes or raise rents. That means additional capital being spent before any return on the investment can be realized. Short-term investments, also known as “flips”, can generate a good return for an investor.
Many real estate investors join with others to increase their purchasing power. By joining a real estate investment group or mutual fund, an investor can benefit from group members’ experience and knowledge while reducing their risk or spreading their investment over multiple properties. Many real estate investment groups invest in local properties while other groups take on a more regional approach to investing.
Friends, family, and co-workers are often good starting places to find out about groups or mutual funds. In general, and depending upon the investment philosophy of the group, investments can be paid out via dividends or divided lump-sum payments to group members when a property is sold and profit is realized.
Investing in an REIT
A Real Estate Investment Trust is similar to joining a local investment group, however, the investor’s funds are combined with the funds from hundreds or thousands of other investors and used to acquire an interest in the equivalent of a stock market institutional investment fund. Most REITs invest in income-producing properties that are situated within a specific industry like healthcare, retail spaces, apartment or condominium buildings, and other well-recognized industry groups. REITs maintain a portfolio of investments which individual real estate investors can choose from to place their funds into. Each portfolio has historical performance data to review before investing, similar to a stock’s performance record.
REIT’s are the most like investing in the stock market because the investor is buying shares of a company putting their funds into REITs. Many REIT ETFs generate dividends for investors, like stocks, by putting investor’s funds into REIT groups with a history of paying dividends. For real estate investors who want little risk with a better opportunity for a return, a REIT ETF might be the best solution.
Residential Rental Property
Buy your own residential properties. You can start out small with single family rentals if you want or jump right in to multifamily. This is the most common way for an individual to get started investing in real estate. The gains you can make investing on your own in residential rental property can rival and sometimes outpace any of the other options above if you scale up to multiple properties.
Fast Cash or Long-term Return
Investors in real estate have to decide what type of return and how quickly they want to receive it. REITs can produce dividends over the long term. REITs don’t require a lot of cash to get in, so for the beginning investor with restricted funds, a REIT can be a very attractive way to get into real estate investments. Purchasing real estate and then flipping it or making improvements to it take time and involve significantly more risk. It all depends on what the investor seeks for a return on their investment as far as cash flow and potential profit.
Get Educated and Get In
Real estate investment isn’t for everyone. Smart investors will take the time to understand the nature, benefits, and potential downside to any investment opportunity. Professional investment advice is available from a number of resources. There are online resources that provide advice as well as various REITs and other investment resources that provide information on their trading methods and the results from their protocols. Investors with as little as $500 can get into a REIT or REIT ETF to see if it is right for them. The important thing is to dig deep, learn, discuss, and decide what type of real estate investment works best.