Investing is part of any healthy financial plan. But if you're new to the game, it can be overwhelming and intimidating. Where do you start? What do you even invest in?
Should you try the stock market? Are you ready to invest in real estate? There are pros and cons to both options.
The important thing isn't deciding which route is better, but deciding which is better for you. Here are some of the important things to keep in mind when considering whether to invest in the stock market or in real estate. (And please note: In this article, "real estate" refers to buying physical property, rather than investing in real-estate investment trusts or executing trades in the industry sector.)
Investing in the stock market
Here are some of the advantages of stock market investing.
- Liquidity: You can withdraw your money at any time. Stocks are much more "liquid" than homes, as there's no shortage of willing buyers in the stock market. You don't need to worry about long, drawn-out negotiations or closing costs, as you would if you decided to unload an income property.
- Passivity: Apart from the initial research and monitoring your investments, investing in stocks is relatively hands-off. You won't get any late-night calls from tenants with plumbing emergencies.
- Potential: You have the potential for huge gains (especially if you invest wisely).
But the stock market isn't without its drawbacks.
- Research: You'll need to do lots of homework. You don't have to spend hours each day analyzing stocks, but you should have a basic working knowledge of what you're investing in and why in order to make an informed decision and maximize your returns.
- Losses: You face the potential for huge losses. Remember the market crash in 2008-2009, when the U.S. market dropped by 50%? Even if you had invested in an S&P 500 index fund (as opposed to individual stocks), you would still have watched half of your portfolio vanish. (Then again, you would have seen a similar affect on your home value in many parts of the country.)
Investing in real estate
If you're stock-shy, or if you want to diversify, real estate poses some distinct advantages:
- Control: You have more personal control over your investment. You can directly add value to your property through better management, physical improvements, and an understanding of local market tastes. You can also see exactly what you're investing in, if that aspect is important to you.
- Clarity: It's still a lot easier to understand than a company's quarterly earnings statements (unless you're already well-versed in SEC filings).
- Cash flow: If you're a buy-and-hold investor, you'll enjoy monthly cash flow. Once you have a renter locked into a lease agreement, you can look forward to a steady income stream every month. (And it's the best kind of income: passive!) This is tough to replicate in the stock market, where dividend payouts can vary wildly due to a number of factors.
- Passivity: You can hire a property manager in order to make the investment truly hands-off. You'll still need to "manage the manager," but you won't, for example, have to drive to the house to conduct showings.
That said, real estate also carries drawbacks:
- Responsibility: You have more personal responsibility for your investment. (Remember that late-night plumbing emergency?) Maintenance, upkeep, and improvements are on you, so you'd better be willing to deal with them. Even if you outsource the work to a property manager or contractor, you still need to make the decisions, approve the expenses, and oversee their efforts.
- Research: You still have to do some research. If you don't understand the current rental rates in your area or what your target residents are looking for in a property, you could find yourself sinking money into investments that don't give you the return you hoped for.
The bottom line
You want to invest in something that will give you the biggest bang for your buck -- not just monetarily, but in terms of overall satisfaction.
If you hate the idea of being a landlord and beck-and-call repairman, then skip the investment property (or be diligent about outsourcing the work). If analyzing and comparing numbers makes you mad, shy away from complex stock-market trades (or get a trustworthy advisor who can help guide you).
Whatever direction you decide to pursue, make an informed choice. Good luck and happy investing!
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