One question that is always on top of a new investor’s mind when starting their investment journey “Which is a better investment option – stocks and bonds or rental real estate?” Both options have their pros, and we are here to shed more light on the topic to help you make an informed choice. Of course, as commercial real estate investment advisors our opinion in this matter may be considered by some as biased. We at PRI believe that commercial property investments are better than the stock market and here is why.
1. Control over investments:
Many people prefer to buy investment properties since they have total control over the property. They are free to decide how to finance the property, how much should be the maintenance expenses, the monthly rate, etc. And before purchase, the investor can physically check the property and even search and find different properties on the market.
Whereas with stocks, it is not a physical asset to see and manage. This is a piece of paper that tells you that you are a partial owner of the company. Therefore, you become invested in the performance of that company.
If you own a store and it shows a profit at the end of the year, you as the store’s owner will have more money in your pocket, right? Same thing with the stock market. If your company shows growth (makes money), you make money because you are part owner of that company. You do not have full control when investing in stocks. And since the share you invested will depend on the company’s performance, you practically have no power over anything. The only choice is to choose the company you want to invest in. You simply try to buy the stock while it is relatively low-priced and sell it at a higher price.
2. Return on investment:
When you purchase a property, you generate a steady source of cash in the form of the monthly rent. Also, an investor can boost this ROI by finding the right property and altering it in a way to boost the rental income to keep generating positive cash flow. But in the case of stocks, it is all on paper. Stock investors won’t see any money until they sell their shares. Also, the volatility of the share market makes managing the finance harder, and there’s guarantee whether you will receive a positive ROI.
3. Hedge against inflation:
Rental property investments can be a potential hedge against inflation as historically inflation and rental rates go hand-in-hand. This means the price of the properties increases as the cost of living increases. Property investors can increase the rent as the inflation increases, and value the property as per the inflation rates. This is not the case for stock investors. Although prices do rise over time, traditional equity investments are not linked to inflation as directly as real estate investments are.
Rental properties have fewer risks compared to stocks. The longer the hold your investment property, the fewer the risks and losses. Equity and property prices rise over time. While the stock has the advantage of being liquid, they are very unstable. An average stock investor cannot predict their returns and sometimes tend to buy and sell at the wrong time. Though the economy affects the real estate market, it’s impact is far less than compared to the stock market.
5. Buy low, sell high:
In the stock market, you make money by buying low and selling high. But the volatile nature of the stock market makes it impossible to do it consistently as there’s no way to accurately predict the performance of the company you have invested in.
In real estate, there are several ways where you can buy low and sell high. You basically buy a property that is on the market for a low price since it might have deferred maintenance, bad management or needs to be rehabbed, or is being foreclosed. Then you buy-fix and hold or buy—fix and flip. Either way, if done right you can generate a more positive cashflow.