Is it better to build wealth through real estate or stocks?
As mentioned above, stocks generally perform better than real estate, with the S&P 500 providing an 8% return over the last 30 years compared with a 5.4% return in the housing market. Still, real estate investors could see additional rental income and tax benefits, which push their earnings higher.
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.
Historically, stocks have offered better returns than real estate investments. "Stocks have returned, on average, about 8% to 12% per year while real estate has generated returns of 2% to 4% per year," says Peter Earle, an economist at the American Institute for Economic Research.
Real estate has much better tax advantages, better use of leverage at lower risk, but timing is important, and downturns last for years. Stocks don't usually make people rich, but if you know how to value income producing real estate and how to evaluate rental markets you can make much more money than through stocks.
But just because it's the "American Dream" and a tangible sign of success for many, it doesn't mean it's your best option if your goal is building wealth. While real property can boost your balance sheet and play a part in growing your wealth, it's critical to understand that you don't have to buy property to get rich.
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.
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.
The government provides tax incentives to promote real estate investment, including deductions for mortgage interest, property taxes, and depreciation. These tax benefits can significantly reduce your overall tax liability, leaving you with more money to reinvest. Real estate investment is not a get-rich-quick scheme.
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
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.
How hard is it to get rich from stocks?
Yes, you can become a millionaire from stocks. However, it's not easy and it takes a lot of time. That's why you need the right strategy – such as buying and holding stocks and consistently investing. If you follow the right strategy, making money in the stock market can be easier than you think.
Instead, cash-flow real estate is the place to protect and grow money. On the flip side, cash-flow real estate — commercial real estate where you are making a monthly profit off of rent after your mortgage payments, property taxes and maintenance — is a great way to grow your money.
No matter how much their annual salary may be, most millionaires put their money where it can grow, usually in stocks, bonds and other types of stable investments. Millionaires put their money into places where it can grow, such as mutual funds, stocks and retirement accounts.
Buy a Rental Property
One of the key ways to build wealth fast -- and over the long term -- is to earn passive income. And one of the best ways to generate passive income is to own one (or several) rental properties.
This is a general rule of thumb that determines a base level of rental income a rental property should generate. Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price.
While get-rich-quick schemes sometimes may be enticing, the tried-and-true way to build wealth is through regular saving and investing—and patiently allowing that money to grow over time. It's fine to start small. The important thing is to start and to start early. Earn money and then save and invest it smartly.
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.
Equities and real estate generally subject investors to more risks than do bonds and money markets. They also provide the chance for better returns, requiring investors to perform a cost-benefit analysis to determine where their money is best held.
Direct real estate investments may be more expensive upfront but give investors increased control and flexibility. Both real estate and REITs can help investors hedge inflation and market downturn risks. Both can also be a source of regular cash flow, though REITs are a much more passive investment than real estate.
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double.
Is it smart to invest in real estate?
Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property. The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.
On the whole, real estate is a less volatile asset than stocks. The price of real estate moves slowly and in a more predictable manner. That is different from what can happen to the value of a company's shares. Share prices can rise sharply or fall very quickly in response to political and economic news.
For more than 200 years, investing in real estate has been the most popular investment for millionaires to keep their money. During all these years, real estate investments have been the primary way millionaires have had of making and keeping their wealth.
Choose the right career
And one crucial detail to note: Millionaire status doesn't equal a sky-high salary. “Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.”
On average, a millionaire's most valuable property is valued at $953,917. Many are actively expanding their real estate portfolios and own about two homes. About 19% of millionaires own three homes or more. By contrast, the average worth of demi-billionaires' property is valued at over $10 million.
