Real Estate vs. Stocks: Which Is the Better Investment? - NerdWallet (2024)

MORE LIKE THISInvesting

To grow your wealth, which is the better strategy: Investing in real estate or building a portfolio of stocks?

Real estate vs. stocks

The main difference between investing in real estate and stocks is that investing in real estate involves buying properties and renting them out or investing in REITs (real estate investment trusts), whereas investing in stocks involves buying a small slice of a company and waiting for those shares to increase in value.

If you're trying to choose between the two, the good news is, you don't have to: Many people do a bit of both. It’s also important to know that you can purchase shares in real estate investments without the headaches of actually buying, managing and selling properties.

Advertisement

Charles Schwab
Interactive Brokers IBKR Lite
J.P. Morgan Self-Directed Investing

NerdWallet rating

4.9/5

NerdWallet rating

5.0/5

NerdWallet rating

4.1/5

Fees

$0

per online equity trade

Fees

$0

per trade

Fees

$0

per trade

Account minimum

$0

Account minimum

$0

Account minimum

$0

Promotion

None

no promotion available at this time

Promotion

None

no promotion available at this time

Promotion

Get up to $700

when you open and fund a J.P. Morgan Self-Directed Investing account with qualifying new money.

Learn More
Learn More
Learn More

An alternative to traditional real estate: REITs

Don’t feel like flipping homes or building a rental property empire? Fortunately, there is an easier option: investing in real estate investment trusts, or REITs.

REITs are companies that own (and often operate) income-producing real estate, such as apartments, warehouses, offices, malls and hotels. The most reliable REITs have a strong track record for paying large and growing dividends. Many online brokers offer publicly traded REITs and REIT mutual funds and ETFs — meaning you can buy them in the same place where you can buy stocks.

Real estate vs. stocks: Which makes more money?

There are lots of metrics you can look at when figuring out if investing in real estate or stocks will make you more money. If you're going to attempt to answer that question you have to decide what type of real estate you're comparing to which stocks. The average stock market return, as measured by the S&P 500 index, is about 10% per year. Some years are up, some years are down, but over time, if you invested in an , you'd average about 10% minus inflation.

Since 1972, REITs, on average, have returned an 11.9% total annual return. That's not to say that REITs always perform better than the S&P 500. Each investment you make should be examined closely and taken into consideration with the rest of your investment portfolio. And, if you invested in an S&P 500 index fund and a REIT, you would have more diversification than if you invested in one or the other.

Pros and cons of investing in real estate

Traditional real estate investments can be broken down into two broad categories: residential properties — like your home, rental properties or flipping homes to buy, then resell for a profit — and commercial properties, such as apartment complexes, office buildings and strip malls.

The pros

  • Investing in real estate is easy to understand. While the homebuying journey can be complicated, the basics are simple: Purchase a property, manage upkeep (and tenants, if you own additional properties beyond your residence), and attempt to resell for a higher value. Also, owning a tangible asset can make you feel more in control of your investment than buying slivers of ownership in companies through shares of stocks.

  • Investing with debt is safer with real estate. Also known as your “mortgage,” you can invest in a new property with a 20% down payment or less and finance the rest of the property’s cost. Investing in stocks with debt, known as margin trading, is extremely risky and strictly for experienced traders.

  • Real estate investments can serve as a hedge against inflation. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation.

  • There can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $750,000 in mortgage debt. There also are tax breaks when you sell a principal residence, such as an exclusion that may allow you to avoid capital gains taxes on net proceeds of $250,000 if you’re single (or $500,000 if you’re married and filing jointly). If you own and sell commercial property, you may be able to avoid capital gains through a 1031 exchange (if you reinvest proceeds in a similar type of property). And investment properties can earn tax breaks through depreciation, or writing off wear and tear on the property. Learn more about tax breaks related to homeownership in this tax guide.

» Ready to start investing? Check out the best real estate crowdfunding platforms

The cons

  • Real estate investments can be more work than stocks. While purchasing property is easy to understand, that doesn’t mean the work of maintaining properties, especially rental properties, is easy. Owning properties requires much more sweat equity than purchasing stock or stock investments like mutual funds.

  • Real estate is expensive and highly illiquid. Investing in real estate, even when borrowing cash, requires a large upfront investment. Getting your money out of a real estate investment through resale is much more difficult than the point-and-click ease of buying and selling stocks.

  • Real estate has high transaction costs. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. That’s a hefty cut compared with stocks, especially now that most brokers charge no fees for stock trades.

  • It’s difficult to diversify your investments with real estate. Location matters when investing in real estate. Sales may slump in one area, while values explode in another. Diversifying the purchase of real estate properties by location and type (a mix of residential and commercial, for example) requires much deeper pockets than the average investor has.

  • The return of your investment isn't a sure thing. While property prices tend to rise over time, there’s always a risk of selling a property at a loss — the 2008 financial crisis and post-pandemic uncertainty in the housing market are reminders of that. This is also true of stocks, of course.

Real Estate vs. Stocks: Which Is the Better Investment? - NerdWallet (4)

Pros and cons of investing in stocks

Buying shares of stock has significant pros — and some important cons — to remember before you take the plunge.

The pros

  • Stocks are highly liquid. While investment cash can be locked up for years in real estate, the purchase or sale of public company shares can be done the moment you decide it's time to act. Unlike real estate, it’s also easier to know the value of your investment at any time.

  • It’s easier to diversify your investment in stocks. Few people have the time — let alone the cash — to purchase enough real estate properties to cover a broad enough range of locations or industries to have true diversification. With stocks, it’s possible to build a broad portfolio of companies and industries at a fraction of the time and cost of owning a diverse collection of properties. Perhaps the easiest way to get that diversification: Purchase shares in mutual funds, index funds or exchange-traded funds. These funds buy shares in a wide swath of companies, which can give fund investors instant diversification.

  • There are fewer (if any) transaction fees with stocks. While you’ll need to open a brokerage account to buy and sell stocks, the price war among discount brokers has reduced stock trading costs to $0 in most cases. Many brokers also offer a selection of no-transaction-fee mutual funds, index funds and ETFs.

  • You can grow your investment in tax-advantaged retirement accounts. Purchasing shares through an employer-sponsored retirement account like a 401(k) or through an individual retirement account can allow your investment to grow tax-deferred or even tax-free.

» Ready to start investing? Check out the best online brokers for stock trading

The cons

  • Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view on the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility.

  • Selling stocks may result in a capital gains tax. When you sell your stocks, you may have to pay a capital gains tax. If you’ve held the stock for more than a year, however, you may qualify for taxes at a lower rate. Also, you may have to pay taxes on any stock dividends your portfolio paid out during the year. (Understand more about taxes on stocks.)

  • Stocks can trigger emotional decision-making. While you can buy and sell stocks more easily than real estate properties, that doesn’t mean you should. When markets waver, investors often sell when a buy-and-hold strategy typically produces greater returns. Investors should take a long view of all investments, including building a stock portfolio.

Track your finances all in one place

Find ways to invest more by tracking your income and net worth on NerdWallet.

Sign Up

Real Estate vs. Stocks: Which Is the Better Investment? - NerdWallet (5)

Real Estate vs. Stocks: Which Is the Better Investment? - NerdWallet (2024)

FAQs

Is it better to invest in real estate or stocks right now? ›

Generally, stocks have proven to be more profitable than real estate. For example, U.S. housing prices have grown 5.4% year-over-year from March 1992 to June 2023, according to data analytics firm CEIC. During the same period, the S&P 500 has increased 8% in price.

What makes more millionaires stocks or real estate? ›

It's harder to get rich off stocks than it is to get rich off real estate. The main reason why is due to the absolute amount of money you need to risk to get rich in stocks. Even if your $5,000 stock investment goes up 50%, that's only $2,500.

Do stocks return more than real estate? ›

Stocks typically have yields between 8 percent and 12 percent, while real estate tends to provide returns between 2 percent and 4 percent per year. However, external factors such as trends and emotional investment decisions can lead to lower choices and returns.

Why do you prefer stocks over real estate? ›

Pros and Cons: Stocks

Unlike real estate, stocks are liquid and are generally easily bought and sold, so you can rely on them in case of emergencies. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio.

Is it ever a bad time to invest in real estate? ›

Of course, there are risks involved when investing in real estate, and it's important to be aware of them in today's economy. The primary risks include: Economic instability: This can have a significant impact on real estate investments and lead to increased vacancy rates and decreased profits from rental income.

Do REITs outperform the S&P 500? ›

Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.

What grows faster real estate or stocks? ›

Historically, the stock market experiences higher growth than the real estate market, making it a better way to grow your money. Stocks are more volatile than housing, making real estate a safer investment. Stock earnings are taxed as capital gains when realized. Stocks have no tangible value, whereas real estate does.

What creates 90% of millionaires? ›

Real estate investment has long been a cornerstone of financial success, with approximately 90% of millionaires attributing their wealth in part to real estate holdings.

Do rich people buy stocks or real estate? ›

Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.

Are REITs safer than stocks? ›

Are REITs Risky Investments? In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments.

What does the rule of 72 tell you? ›

Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.

What is the average ROI on real estate? ›

Residential properties generate an average annual return of 10.6%, while commercial properties average 9.5% and REITs 11.8%. Investors typically analyze data pertaining to specific geographic regions or metropolitan areas to compare returns and the cost of capital to inform their investment decisions.

What is the best place to invest money? ›

Best investments to get started
  • High-yield savings account (HYSA) If you want higher returns on your money but are nervous about investing, consider opening a high-yield savings account. ...
  • 401(k) ...
  • Short-term certificates of deposit (CD) ...
  • Money market accounts (MMA) ...
  • Index funds. ...
  • Robo-advisors. ...
  • Investment apps.

Is real estate a good investment in 2024? ›

No — experts do not think there is a housing market crash looming in 2024. Lending standards are much more strict now than they were before the Great Recession, and with low inventory and high demand both continuing, the housing market is not likely to enter a recession in the coming year.

Is real estate a smart investment? ›

Investing in real estate can be a good idea if done thoughtfully and strategically. It offers the potential for steady income, capital appreciation and tax benefits.

Why investing in stocks is better than property? ›

The pros. Stocks are highly liquid. While investment cash can be locked up for years in real estate, the purchase or sale of public company shares can be done the moment you decide it's time to act.

What is the average return on real estate investment? ›

Residential properties generate an average annual return of 10.6%, while commercial properties average 9.5% and REITs 11.8%. Investors typically analyze data pertaining to specific geographic regions or metropolitan areas to compare returns and the cost of capital to inform their investment decisions.

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Corie Satterfield

Last Updated:

Views: 6149

Rating: 4.1 / 5 (62 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Corie Satterfield

Birthday: 1992-08-19

Address: 850 Benjamin Bridge, Dickinsonchester, CO 68572-0542

Phone: +26813599986666

Job: Sales Manager

Hobby: Table tennis, Soapmaking, Flower arranging, amateur radio, Rock climbing, scrapbook, Horseback riding

Introduction: My name is Corie Satterfield, I am a fancy, perfect, spotless, quaint, fantastic, funny, lucky person who loves writing and wants to share my knowledge and understanding with you.