Investing in the real estate market has significant advantages over investing in the stock market. Real estate is a tangible asset that investors can physically see and touch. It is a hard asset that tends to hold its value well over time due to limited supply. Real estate also has the potential to generate monthly cash flow and higher returns through appreciation over the long run.
Less Volatility Than Stocks
The real estate market is typically less volatile than the stock market. Housing prices move at a slower pace and fluctuations tend to be more gradual compared to the rapidly changing stock prices. Real estate values are also backed by the physical property as opposed to company stock which can become worthless overnight if a company goes out of business.
The real estate market is influenced primarily by supply and demand as well as interest rates, whereas the stock market is affected by a host of complex factors including the economy, industry changes, company earnings, and future growth prospects. It is difficult for investors to determine how all these factors will impact stock prices, which contributes to significant price swings and market volatility. In contrast, real estate remains a simple asset class with more stable and predictable driving forces. Changes in housing prices and rents tend to happen steadily over longer periods of time. This is why real estate is less volatile than the stock market.
Higher Returns Over the Long Run
Historically, real estate has achieved higher returns than the stock market over the long term. According to a study by CBRE Research, US commercial real estate gained an average annual return of 8.6% over the past 20 years compared to 6.7% for stocks and 4.8% for government bonds. Residential real estate also gained 6.5% per year on average during the same period. While year-to-year returns may vary, real estate tends to experience significant price appreciation over decades that surpasses inflation and the returns of most other asset classes.
Real estate provides more tax benefits compared to other types of investments. Investors can deduct mortgage interest, property taxes, operating expenses, and depreciation to lower their tax burden each year. When an investment property is sold, capital gains up to $500,000 for a couple can be excluded from capital gains taxes. Real estate also allows tax-deferred investing through vehicles such as 1031 exchanges that allow you to swap one property for another without triggering capital gains taxes. These substantial tax benefits are not available with stocks and bonds.
Cash Flow And High Yields
Income-producing real estate can generate ongoing monthly cash flow in the form of rental income. Investors typically earn higher yields from real estate than fixed-income investments like bonds. Residential rental yields in the US average 6-8% per year historically while commercial real estate yields 8-12% or more depending on the property type. These consistent cash distributions and high yields provide real estate investors with strong passive income and cash flow to fund their living expenses or reinvest into more properties.
More Control And Flexibility
Real estate gives investors more control and flexibility compared to stocks. Investors have a say in important decisions such as choosing a property and setting rent rates. Real estate also allows you to leverage your investments through mortgages and low-interest loans to maximize returns. Investors have the option to improve and renovate their properties to potentially boost value and rental income. It is also easier for investors to exit from real estate when needed as properties can be sold at fair market value, unlike stocks which may need to be sold at a loss in a down market.