Which Is Better - Stocks or Rental Property?

Investors want to know: which is better, stocks or rental property?

When it comes to investing, the best options are the ones that’ll generate the returns that you’re looking for, ones that are in line with your big-picture goals, and that carry a level of risk that you’re comfortable with. With that in mind, diversification can be beneficial as well, and investing in real estate can be a great way to balance out a portfolio that may be heavy on the stocks side, like most 401(k)s.

The good news is that at the end of the day, you don’t have to choose just one. You can easily invest in both stocks and real estate. In fact, many people do both. After all, some 65% of U.S. households are owner-occupied and 56% of American workers participate in an employer retirement plan.

There are many different ways that you can go about getting started with real estate but one of the tried and true methods is investing in rental property. Rental property is a tremendously popular investment for a reason: it offers a number of wealth-building benefits and is a good choice for anyone who’s interested in immediate returns and long-term financial freedom.

Let’s dive in and take a look at both stocks and rental property now and see how they stack up as investments.

Comparing Stocks vs. Rental Property for Investing

First up, let’s take a quick look at stocks. They can be a good investment, as long as you know what you’re doing—or hire someone to do it for you. One good thing about stocks is that you don’t need to invest a great deal of money. You can get started with as little as you’d like. There are many different options when it comes to investing in stocks and plenty of different ways to invest in them. You can go through a financial advisor and have them find stocks for you to invest in, or you can go directly through a stockbroker and buy the stocks yourself or have them set up an index tracker, exchange-traded fund (ETF), or a mutual fund.

There are some downsides to investing in stocks, however. The main one is the level of risk that’s often involved with this type of investment, especially if you’re trading or hand-picking stocks and end up making some losses. 

Now, let’s take a look at real estate investments. Real estate, especially rental property, can be a solid, long-term investment. While it’s true that you will need a higher initial investment if you’re investing in rental property since you’ll need to come up with the down payment, it’s one investment that has helped many investors to grow their wealth, both in terms of immediate cash flow and long-term appreciation. Not to mention, it offers some excellent tax breaks as well that you just don’t get with stocks and shares. Finally, with real estate, you have leverage—that is, the chance to use someone else’s money (the bank’s) to grow your portfolio and returns far more quickly than you’d be able to if you were paying for everything all-cash, something that’s not much of an option with stocks.

Now, let’s take a look at a few other things that make real estate a good investment for many. Let’s see how it compares to stocks.

Why to Invest in Real Estate vs. Stocks

Rental Property Can Help to Hedge Against Inflation

Inflation is continuing its steady march upwards, and it even soared to 8.6% in May 2022. This means that for cash savings accounts and fixed-income investments like CDs and bonds, returns are lower than ever. While inflation is eating away at your money’s purchasing power, rental properties are a solid asset that can help to serve as a hedge against inflation. Property in most markets is continuing to appreciate and is increasing on average between 3.5 and 3.8% per year. Rents are increasing each year as well, with the median rent jumping a whopping 17% between March 2021 and 2022, making rental property a great way to help protect the value of your capital from being whittled away by inflation.

Rental Property Appreciates in Value

Like we just mentioned, over the long term, property values tend to appreciate. Stock values can do this too, but the increases tend to be a lot less predictable than real estate. During recessions, real estate sometimes goes down in value, but it almost always goes back up. It’s remarkably resilient. And when you factor in both appreciation and cash flow, real estate often comes out ahead. Just take a look at this joint study on the rate of return on everything over a 145-year period!

Rental Property Can Be Passive Income

Another benefit of real estate is cash flow. Stocks can give you dividends, but not all do. And often, they’re fairly low as a percentage of your investment. Then there’s the risk that the company will stop paying dividends on its stock. This could happen when there’s a recession or if the company is facing financial difficulties of any kind. It could also happen due to economic sanctions. This can go on for months or even years. However, with rental property, you don’t usually have cash flow problems to this extent. Even during times of economic uncertainty or downturns in the housing market, you’ll still be able to rent out your property, in most cases, and you’ll be able to continue generating rental income each month.

Rental Property Offers Tax Breaks 

Real estate, rental property especially, offers a number of valuable tax breaks for investors. Some popular tax deductions that are available include: 

• Mortgage interest
• Depreciation
• Insurance
• Property tax
• Cost of repairs and maintenance
• Services
• Utilities
• Travel costs associated with property management
• Legal fees

Stocks and shares just don’t offer the same tax breaks. 

With real estate, there are other tax breaks as well. For instance, if you sell the property, capital gains taxes can be deferred through a 1031 exchange, where you sell the property and use the proceeds to buy another one. The taxes that would be owed are deferred until you decide to sell. 

See: Guidebook on Year-Round Tax Strategies – What Every Investor and Landlord Needs to Know to learn more about some of the tax benefits of rental property.

Rentals Can Help You to Create Multigenerational Wealth

Thanks to the 1031 exchange, rental properties can also be a great way to create multigenerational wealth. You can think of it as a “Get out of paying taxes free” card. With real estate, it’s easy to transfer properties to your family members without having to pay exorbitant taxes in the process. The deferred tax that the investor would have had to pay is erased at the time of death. The property can then be transferred to any beneficiaries, and they won’t have to pay it either.

Learn more about The Benefits of a 1031 Exchange.

You Can Add Value to Your Investment

Another great thing about investing in rental properties is that you can make changes that’ll impact the value of your investment or the returns that you’ll get. You can buy a property that’s undervalued and fix it up, helping to improve its value and the asking rent. You can improve the landscaping or add a wrap-around deck. It’s up to you. With stocks, you’re largely at the mercy of the company. The best that you can do is speculate about the company’s practices or whether a share’s value is going to increase or not. You really don’t have any control over the performance of the stock aside from when you buy and sell.

Rental Property Allows You to Use Leverage

One of the best things about investing in rental property is that it gives you the chance to use leverage to grow your investments faster. Instead of paying all cash for a property and then sitting back and collecting the rent from just one property, you could use the funds to secure multiple properties. You could use the funds that you’d have spent on one property as down payments for say, two or three properties, financing the rest. This way, instead of generating returns on just one property, you’d be getting cash flow (and ideally, asset appreciation) from three. But while banks are more than happy to issue mortgages to qualified applicants, you’d have a great deal of difficulty getting them to issue you a similar loan for stocks. The banks just don’t lend out that much money for that sort of thing. Real estate is unique in this way. 

Want to learn more about using leverage to buy rental property? Check out: How Can I Increase My Real Estate Portfolio.

Rental Property Is a Tangible Asset

Real estate is a tangible asset. It has real worth and value. You can see it, live in it, or rent it out. This is something that makes real estate so appealing to many people. Unlike stocks and shares where you’ll own an intangible “stock” in a company, with real estate, the whole property is yours. It’s a great feeling to own real assets. 

Anyone Can Get Started With It

While anyone can get started with stocks, unless you know what you’re doing, you’ll largely be limited to buying things like index trackers, ETFs, or mutual funds. Handpicking stocks takes a great deal of research and you’ll need to know what you’re looking for. Real estate, on the other hand, is an extremely straightforward investment. You can see the property yourself, so you can make sure you’re not overpaying for a property, and there’s a great number of tools out there that make it easy for you to assess how much your ROI will be to help you forecast whether or not the investment will be profitable. You still have to know what you’re doing, but rental properties are something that many people just “get,” whereas stocks often involve a bit more research.

So which is the best option—stocks or rental property? At the end of the day, it depends on your goals, the projected returns, and what you’re looking for. In most cases, both real estate and stocks can be great investments, and often, having a mix of both can prove to be the best option, allowing you to diversify your portfolio. As always, just make sure you assess the viability of the investment in question carefully, running the numbers and ensuring you’ve done your market research—before you dive in.

Start your journey to financial freedom today! Are you looking to get started with rental property investments? Be sure to look at our investment properties for sale. Find properties ready to go, many of them complete with tenants. Once you’ve found a prospective property, take a look at the Renters Warehouse Research Center to get investor-grade information about the market that you’re thinking of investing in. 

Not quite ready to invest? See: Spotting a Good Investment Property to learn more about what you should look for when assessing potential properties.