Real Estate vs. Stocks
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Real Estate vs. Stocks: What's the Difference?
The decision to invest in stocks or in real estate depends largely on the investor's goals and objectives. When it comes to real estate, many factors must be taken into account, including location, substance, price, and long-term development. In the same manner, as when investing in stocks, these and other factors should be considered when investing in real estate. A good wealth manager has a thorough understanding of the advantages and disadvantages of different asset classes, such as real estate and stocks, and can offer you advice based on the current market conditions.
Both asset classes have their advantages and disadvantages, which will be explained below.
Real Estate
There are two main types of real estate: commercial real estate and residential real estate. In the opinion of many investors, real estate feels more tangible than other asset classes, such as stocks. However, it is not always easy to earn a profit from real estate. It is possible, for instance, to purchase a cheap property, renovate it, and then resell it at a higher price. Renting out real estate is another option for earning a regular income.
Advantages of Real Estate
- There is the possibility of depreciating the wear and tear of commercial properties. Moreover, there are other tax deductions that can be utilized.
- Home ownership: The monthly payment on a mortgage may be less or similar to that on rent. Furthermore, there is no longer a direct increase in rent.
Disadvantages of Real Estate
- High initial investment: Due to the high initial investment, real estate is usually financed with loans (mortgages), thereby reducing the eventual return and income.
- There are high maintenance and ancillary costs that are often underestimated. Taxes, notary fees, broker commissions, and government fees are examples of transaction costs. There are also ongoing costs associated with property ownership, such as maintenance and care, renovations and refurbishments, insurance premiums, various service contracts, and costs related to property management and rental.
- A major disadvantage of real estate is that it is not very liquid. It is not possible to sell a property overnight if money is urgently needed. Additionally, commissions and fees are usually associated with the sale.
- The long-term trend of real estate prices is usually upward, but this is not always the case, especially when inflation-adjusted real estate prices are considered. Due to decades of rising real estate prices, the last real estate crisis in Switzerland in the early 1990s has been forgotten. However, real estate crises may recur from time to time, as the financial crisis of 2007 to 2009 impressively demonstrated, which originated with a real estate crisis in the United States and spread to Europe as well.
- Unlike shares, risks cannot be diversified as easily. It is possible to diversify an investment portfolio by purchasing properties in different locations. Each property, however, may also pose a cluster risk on its own.
Stocks
By investing in stocks, the investor acquires a small stake in the company. Therefore, the risks associated with the investment are closely related to the company. In good times, a company's value increases, while in bad times, it decreases. However, there can be both internal and external influencing factors (for example, the Financial Crisis or Corona crisis). An external event's impact on the value of a company can be both positive and negative.
Advantages of Stocks
- One of the major advantages of investing in stocks is that it is generally possible to start out with a smaller sum than it would take to buy real estate. In this way, the investment amount can be adjusted with some degree of flexibility, and the entry process can be simplified.
- Stocks traded on the stock exchange are typically very liquid. The process of buying and selling them is quick and easy.
- With a well-balanced portfolio of securities, the risks of stocks can also be well diversified.
- Low operating costs compared to real estate.
- In comparison to real estate, there are fewer fees, taxes, and charges.
Disadvantages of Stocks
- An important disadvantage of stocks is that they fluctuate in price on a daily basis.
- The proper allocation of stocks is a challenging task.
o A company's true value is difficult to determine.
o Some industries are more vulnerable to crises than others.
o There is a confusingly large selection of stocks.
The advice of an expert, such as an independent wealth manager, is therefore recommended, particularly when investing in individual stocks.
Possible Alternatives: REITS, ETFs and Real Estate Funds
The purchase of a REIT (Real Estate Investment Trust) can be a good compromise between investing in the stock market and investing in real estate. In this case, investments are made in a large portfolio of real estate. Real estate can also be diversified in this manner. Investing in real estate in a diversified manner is also possible with certain ETFs that specialize in real estate or classic real estate funds. In the case of real estate funds, in some cases you are required to pay a very high agio (surcharge on the value of the properties contained). You pay substantially more than the value of the real estate portfolio, often at a time when the properties themselves are already highly valued. Such phenomena are typically observed during periods of low interest and require further investigation. A high real estate price accompanied by a high agio are especially risky for investors. During the Financial Crisis, open-end real estate funds were also difficult to exit and sell. Since properties had to be sold at the wrong time, liquidation was only possible with high losses. An independent wealth manager, who understands the various risks associated with real estate funds can be of great assistance in this situation.
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