For any individual, an investment that generates sufficient returns is a good investment prospect. Investing in real estate means buying, holding or selling a piece of land or property with the expectation to earn some return on it. Investing in stock means buying, holding and selling a piece of a company to earn profit and dividends. Before deciding which one is better among real estate and stocks, consider the following differences:
Real estate investments are tangible. You physically own a piece of land or property. Stocks are not tangible.
Use of leverage in real estate is very much structured and safe as compared to stock markets. Even a fixed rate for 30 years is possible for real estate but for stocks the rate is variable.
Compounding of returns
Suppose an investor buys a piece of land costing $500,000. He pays $100,000 and the rest is leveraged by a bank. If the inflation rate for the year is 3.5%, the property is worth $517,500. The investor has invested $100,000 so his return on investment is 17.5%, adjusting for inflation the return is 14%. Compounding of this return over the years will give a significant profit to the investor. Considering cash inflows from rent are equal to cash outflows to the bank for mortgage payments. Thus, there is no such advantage in holding stocks.
Margin trading or borrowing against stocks is easy and needs little paperwork. Borrowing against the real stock is difficult; it takes a lot more time, effort and documentation. Margin loans are called off when the stock fall below a certain level. Real estate margins are called off when the investor stops making payment which happens very rare.
The stock price fluctuates very frequently and it takes a whole lot of vigilant time and effort to keep track or predict changes. Real estate prices usually move slowly but steadily and in the long run, are possible to foretell.
Transaction cost for real estate is much higher. Brokers Commission, taxes, inspection fees, etc. can sometimes cost 8%-10% of the property’s cost. For index ETFs, transaction costs are minimal.
Impact of inflation
If the rate of the mortgage is fixed, an increase in inflation will also raise rents you get on your property, at stable mortgage payment, while stock markets dip and rise every day due to economic factors like inflation, interest rate, etc.
Income Tax advantage
Real estate owners can show the depreciated cost for tax purposes and deduct mortgage interest. In stocks, there is no hiding place from taxes.
Therefore, all types of investment carry some risks; so do your homework well before investing. The real estate industry stands up with a few bonus points as there is no chance of loss in this sector. Housing and resale value is a backup for investors in real estate!
So if you are planning to invest in real estate, have a look at flats in Mumbai. Real estate developers such as Haware properties construct in prime locations with luxurious amenities alluring investors to potential buyers to take advantage of the foolproof benefits of investing in the real estate sector rather than stocks and shares.