Buying a Rental Property Vs. Stocks: Which is a Better Investment?

By rotide
Created 08/06/2019 - 06:19

They can each be great investments depending on the amount you're willing to invest and how much time you can dedicate to your investments. Both can easily help you reach your financial goals and start or expand a business-rental properties are especially good for this, as each property essentially is a business from the start. The following are some pros and cons to each approach as well as the amount of responsibility you'll be undertaking.

Risk level

There is no such thing as a risk-free investment. Risk is also a relative concept, and different investors are likely to have different opinions on the subject. Generally, however, stock investors will likely believe that rental properties are high risk in that they require a great deal of extra work. Having to run a tenant screening [1] for each potential renter, keeping up with regulations, and all the other managerial duties acquired rental properties can be a lot, though technology and landlord management software have made things much smoother than before. There are also risks of tenants damaging property or being unable to pay rent, which will certainly hurt overall profits. Many investors may consider these risks to be deal breakers.

Rental investors would likely tell you that stocks are high risk due to their volatile nature, and your entire investment can be lost in one bad market day. There is some truth to each of these opinions, although it is worth noting that shelter is a human necessity, so rental property owners do have an advantage in that they are likely to have a stable cash flow even in recessions.

Return on investment

With any investment, cash flow is the most important factor. A steady return will allow you to pursue your other goals or at least reinvest for the future. As already mentioned, rental properties tend to have an advantage in this department.  The cash yields from a property can vary significantly based on location and other factors, but it is a guaranteed cash flow, and it typically starts greater than returns on stock investments. Rental properties also tend to appreciate in value over time.

This is not to say stock investments can't make good returns. They obviously can and do, or else no one would be interested in them. It is all on paper, however, until you actually sell your shares. The largest profits typically come from long term position trades [2] on the stock market, which can require years of study and discipline to perform successfully.

The good news is that all the lessons learned in the market are applicable to future endeavors.

Once you're comfortable trading safer stocks, you can move onto bigger projects. For example, you may consider moving into the foreign exchange market, arguably the most profitable market in the world. A quick look at a forex interest calculator [3] can show you how much you stand to gain trading positions on foreign currencies.

Combined benefits

Instead of choosing between one of these investments over another, there is a third option that allows for the benefits of both. This is the Real Estate Investment Trust (REIT [4]). These are basically corporations that collect revenue through the rent and sales of properties that they own. They allow for investment in real estate without the investors having to actually buy and manage the properties themselves. Most of them are also traded publicly on stock exchanges, so they have the benefits of stock trades including lower purchase costs and liquidity.

Ultimately, rental properties are usually the lower risk option, but this comes at a significantly higher investment costs and a great deal of responsibility. Stocks are easier to trade, but the market requires a large time investment to learn properly. Which option is better for you will come down to how much time and money you can sacrifice for your investments.  

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