Investing in real estate is a great way to grow your wealth if done responsibly, with conservative financing, and with an understanding of the tax ramifications. Real estate investing is one of the oldest, most respected and profitable ways to earn passive income from your savings. Understanding the basics is important before you purchase your first property.
Asking the questions, “Which is a better investment – real estate or stocks?” is like asking whether vanilla ice cream is better than chocolate ice cream or if a Rolls Royce is superior to a Bentley. There is not a correct answer because a lot of it comes down to your disposition, preferences, and style. It comes down to the specifics of the individual investment. Very few stocks would have beat buying beachfront property in Florida 25 years ago and then cashing in 25 years later. Essentially no real estate could have exceeded the returns earned if you invested in shares of Microsoft, Johnson & Johnson, Wal-Mart, or Dell.
Real Estate: When you invest in real estate, you are buying physical land or property. Some real estate costs you money every month you hold it like a vacant parcel of land that you hope to sell to a developer someday but have to come up with cash out-of-pocket for taxes and maintenance. Some real estate is cash generating – apartment buildings or rental houses, the tenants are sending you checks each month, you pay the expenses, and keep the difference as the profit.
Stocks: When you buy shares of stock, you are buying a piece of a company. Whether that company manufactures automobiles, internet start-ups, or offers a service, you are entitled to a cut of the profit for every share you own. If a company has 1,000,000 shares outstanding and you own 10,000 shares, you own 1% of that company. It is not complicated.
For many people, real estate is the easiest to understand investment because it is simple, straightforward and involves a reasonable exchange between a property owner and the property user. Investing in real estate is much more complex than this, though, because there are several different types of real estate investments including residential, commercial, and industrial, as well as real estate that trades on stock exchanges, known as REITs.