Real estate and the stock market aren’t mutually exclusive. In fact, both assets are an important part of a diversified and well-balanced investment portfolio. Stocks are usually the first stop for new investors, while seasoned players track the market daily—and it isn’t hard to see why.
Stocks are far more liquid than real estate, which can often take months to monetize. Investors can liquidate or trade stocks effortlessly as market conditions change. A stock portfolio is also easier to diversify and can provide exposure to more industries and company profiles than real estate—where it is expensive to achieve that level of diversification. And, stock transactions are very inexpensive. Real estate comes with a variety of fees, commissions, and other charges—not to mention carrying costs, but low-fee or no-fee stock transactions are easy to arrange and amply available.
We aren’t denying the benefits of stock investing, but in many ways, real estate ownership outweighs them.
The Advantages of Real Estate
Superior Return on Investment
While stock market returns tend to outperform the owner-occupied housing market, real estate investment assets generally have a higher long-term return on investment (ROI) than stocks. When debt is applied to a tangible investment that is properly managed over time, real estate investments are more reliable and ultimately more profitable.
During times of recession, real estate has historically proven to be a safer investment than stocks. During disruptions to either the overall economy or individual sectors, the stock market can be particularly volatile. On the other hand, commercial real estate, and multifamily property investment in particular, tends to hold steady or experience increased demand during times of economic turmoil.
Unlike stock investment, real estate investments generate passive income every month in the form of rent payments. For single-family and multifamily residential investors that have hired a qualified property manager, each month’s rent helps pay off the mortgage, build equity, and grow the overall value of the portfolio with little or no active participation outside of acquisition or liquidation.
Property ownership comes with a variety of tax advantages, ranging from deductions based on the property’s ownership and financing to the way that gains are distributed to the investor. Here are just a few of the deduction options:
· Deductions, including mortgage interest deduction, for interest up to the first $1 million in debt and deductions for property taxes, operating expenses, including property management fees, and repairs and improvements.
· Depreciation, which allows investors to write off wear and tear on the property over time. Real estate investors are allowed to deduct 3.636% (100%/27.5 years) of the cost basis of their property’s investment from their annual income. This directly reduces the amount of income subject to taxation each year for 27.5 years or for as long as you hold the property.
· Capital gains can be deferred on investment properties with a 1031 exchange. This allows owners to reinvest the proceeds of one investment into another of equal or greater value. Upon your death, ownership passes to your heirs at its stepped up value, meaning neither you nor they ever have to pay capital gains on the growth of the investment. This is a massive savings and it is unique to real estate investing.
· Passive income and pass-through deductions, which include any money that is earned from business activity that investors do not physically participate in—most commonly, rental income. The Tax Cuts and Job Act allows profitable businesses that earn qualified business income (QBI) to use a pass-through deduction. This allows investors to deduct up to 20% of their net business income, thus reducing their effective income tax rate by 20%. It is currently available until 2025.
· If the investor used a portion of the property as a primary residence for at least two of the five years prior to sale, you can avoid capital gains tax on net proceeds of up to $250,000 for single taxpayers or $500,000 for married couples filing jointly.
Apart from a very few notable investment gurus, predicting the stock market is often a futile exercise. Real estate investors, on the other hand, learn concrete lessons from every investment and can more easily replicate their successes by developing targeted strategies.
Access to Information
Real estate investors have more access to information that allows them to make better investment decisions. Property details are public record, and they are easier to discern than the inner workings of corporate entities. In addition, there are a host of technologies available to power research.
In many ways, real estate acts as a bond that you can leverage, and it offers tax advantages and sustained cash flow. These are benefits that you won’t find in the stock market.