When it comes to investing your money, there is a wide range of possibilities, outcomes, and levels of commitment that you can choose from. The most popular investments, however, tend to be stocks and real estate.
Investing in the stock market has traditionally been the most well-known and popular option among investors. However, under the right set of circumstances, real estate can be the better, more lucrative alternative. Investing in real estate can result in lower risks, higher rewards, and other benefits.
What exactly makes real estate the more lucrative option when it comes to investing? Why shouldn’t I simply stick with the stock market? In this article, we will answer those questions and more as we guide you through all the reasons that we think real estate is the better investment opportunity out of the two choices.
Why Invest in Real Estate: 6 Reasons Rental Properties Are More Lucrative than Stocks
1. Real Estate Investments Generate a Steady Cash Flow
When you choose the right rental property to invest in and it is properly managed, you could end up generating a consistent income for years. In fact, you don’t even have to limit yourself to residential rental properties! Many real estate investors choose to focus on commercial properties such as strip malls or office buildings.
The thing is, if you are expecting to make quick and easy money with real estate, you will most likely be disappointed. Not all real estate investments are able to generate a profit immediately.
For example, if you buy land or a property that needs upgrades before you are able to rent it out, you will only be spending money until you’re able to either flip the property or rent it out to a tenant. This is often a huge reason why investors tend to choose the stock market over real estate.
However, by investing in the stock market, you will not have the same opportunities for cash flow as you would with real estate investments. This is because stock investments are long-term and will only generate a profit once they are eventually sold.
While stocks may earn you dividends on a monthly, quarterly or annual basis, that income is not even comparable to the profit that you could earn if you invested in real estate instead.
2. You Can Delegate the Management of a Real Estate Investment
One hesitation that many investors have about real estate is the hard work that goes into making a property successful. Trust us, we know that making a rental property as profitable as possible can be a huge responsibility that is time-consuming and costly.
The fact is, managing a rental property is not an easy job! From finding high-quality tenants to collecting rent and maintaining the unit, you will have your hands full if you choose to invest in real estate over stocks.
The thing is, all of these responsibilities are also pretty easy to outsource if you choose the right people to work with. We recommend finding a reputable property manager in your area to take care of all the tasks and hard work that come along with owning a rental property.
In fact, you will most likely earn even more money from your investment property by hiring a property manager. This is because they are experts in their field and can often offer you a higher success rate when it comes to finding good tenants, marketing your property, maintaining the home, and even charging a higher rental rate.
While hiring a property manager does mean a few extra fees, it also means that you can collect your income from your investment without the stress of managing the property yourself. This is ultimately the best way to earn a passive income in the long run.
3. Stocks Can Be Unpredictable
One of the main benefits of choosing real estate as an investment opportunity is that it is often protected against inflation. But what exactly does this mean? Well, you will be able to avoid losing money over time. Real estate usually has an excellent appreciation rate over time, especially if you choose a property in a popular area.
Stocks, however, will not offer you the same level of stability that real estate will. If one of your investments does not end up taking off, you will most likely lose the purchasing power of your initial investment funds.
On top of that, it is pretty common to experience extreme fluctuations when it comes to stock investments in the short term. Your $50 investment can very quickly go to either $30 or $100.
This can make the investment process nerve-wracking and stressful, and it can make financial planning for your future all the more difficult. Real estate has a much more stable reputation, and when you invest in it, you will be able to plan for the future much more accurately.
4. Real Estate Is More Likely to Appreciate Over Time
As we mentioned above, real estate investments are a better option in the long term compared to stocks. The fact is, if you invest in real estate for a long period of time, chances are, the value will appreciate.
While it is true that unexpected things can happen and the value of your property can go down, these events are not all that common, and the decrease in value is only temporary in the end.
Generally, buildings and land are far more likely to increase in value than depreciate, and even if they do, it is sure to go back up if you wait long enough. This means that over time, your real estate investment will definitely be worth far more than you paid for it.
Further, it is possible to increase the value of your property by doing upgrades and renovations. By making the right improvements, you can fast-track the appreciation of your property. However, if you choose to do this, you will have to make sure that you are being strategic about these improvements and not just spending money.
5. Investing in Real Estate Comes with Tax Deductions
In most situations, paying your taxes can be a hassle. Deductions are often few and far between. However, when you invest in real estate, you will most likely be able to get deductions with your mortgage interest and your property taxes.
When you are the owner of a rental property, there are quite a few different deductions that you are able to do come tax season. In fact, any expenses that you cover while managing your investment property can most likely be written off on your taxes.
With your rental property, you will be able to deduct your property taxes, property management fees, mortgage interest fees, and any costs that you have incurred while maintaining or repairing the property.
When you invest in the stock market, however, you will not be able to get the same amount of tax deductions. Generally, stocks will only become deductible when they are associated with charitable donations or contributions to your retirement account.
6. You Can Defer Your Capital Gains Taxes with Real Estate
When you sell stocks, you will typically have to deal with capital gains taxes. However, when you invest in real estate, you may be able to defer taxes on your capital gains. This is done by purchasing a “like-kind” immediately after selling your previous one.
This process is called the 1031 Exchange, and real estate investors often use it to defer taxes that they would normally have to deal with when selling a property for profit. Examples of different kinds of investment properties that could qualify for a 1031 Exchange could include the following:
- Switching land for an apartment complex.
- Exchanging a ranch for oil and gas royalties.
- Swapping out an industrial property for a residential one.
At the end of the day, stocks, bonds, trust certificates, inventory, and trade stocks usually will not qualify for the 1031 Exchange, meaning you will have to deal with the capital gains tax that comes along with them.
Risks to Consider when Investing in Real Estate
While investing in real estate can be way more lucrative than investing in the stock market, it is important to know what the risks are before jumping head-first into buying your first investment property.
A Lack of Research Can Be Detrimental
One mistake that investors make is not doing their research before buying a rental property. We recommend familiarizing yourself with everything you need to know about renting out a property and enlisting the help of a property manager to help you do it right.
You Can’t Liquidate Easily
Real estate is an investment that cannot be easily liquidated, meaning your assets will not be as accessible as they could be with stocks or other forms of investment. If you find yourself in a financial bind, you won’t be able to cash in your investment easily or quickly.
Is Real Estate a Good Investment: Bottom Line
At the end of the day, investing in real estate is an excellent way to grow your assets, generate a steady amount of cash flow, and make your money go farther in the long run. While stocks may be the most popular option among many investors, we promise that if done right, real estate will prove to be the far more lucrative option for you.
If you have any further questions regarding how to invest in real estate strategically, contact our team at Blanket for our professional expertise.
