One of the longest standing and most complicated questions in front of any investor is whether to buy an investment property or stocks. Both types of investments have multiple pros and cons, which makes the decision rather problematical. Here we show you the 8 most important advantages of buying an investment property over investing in stocks:
1. You Have Full Control
The moment you buy an investment property, you are in charge. Instantly you become the CEO, if you want to look at it that way. You are free to decide on how much to spend on improvements in your rental property; you are free to increase or decrease the monthly rent; you are free to decide who your tenants will be; you are free to sell your property whenever you decide to do so. Alternatively, if you own stocks, chances are your share will be negligible compared to the overall value of the company, so you will have virtually no power over anything that the company might do or not do. Thus, if you are one of those people who like to be in control of their money and to be the one making the decisions, real estate investing is the right option for you.
Related: 8 Steps to Becoming a Landlord
2. Tangible Assets
When you buy an investment property, you have something that you can physically see, touch, feel, and even smell. Thus, for many investors a tangible asset makes them more comfortable with such an investment. Stocks, on the other hand, are not even sheets of paper anymore; they are just something that you own but never get to actually see.
3. Less Volatility
While stocks have the advantage of being way more liquid and flexible (you can sell them at any moment), they are also very, very volatile. The general state of the economy affects real estate properties too but to a much lesser extent than it affects stocks. Consequently, if you buy an investment property instead of stocks, you will enjoy a higher sense of stability for your investment.
4. More Isolated and Protected
Related to our previous point, if you buy an investment property, you can also benefit from more isolation than if you invest in stocks. Real estate is generally local. Rental properties in strong, growing markets are likely to be quite protected from events in both the national and global economy – both in terms of property value and monthly rent. Prices in 24-hour cities such as New York City, San Francisco, London, Paris, and Singapore fall the least, recover the fastest, and appreciate the most.
Don’t forget to check out Mashvisor for comparative and predictive analytics that will tell you the best cities and neighborhoods for traditional and Airbnb investment properties throughout the US at the moment.
Related: Top 5 Major Cities for Buy-and-Hold Investment Properties
5. Hedge Against Inflation
If you decide to buy an investment property, for once, inflation will be on your side. In the long run, real estate property prices tend to go along with inflation. This means that you can raise the rent on your investment property as inflation increases. It also means that the value of your rental property will go up enough to cover for inflation. Meanwhile, your mortgage payments will remain the same in nominal value, so they will actually decrease in real terms with inflation. This is not necessarily true for stocks. Equity investments don’t follow inflation as directly as real estate prices do.
6. Easier to Analyze
In order to buy an investment property and see whether it will be profitable for you, all you need is some basic math to do the calculations. Calculating realistic expenses and rental income is all you need to see whether an investment property is a good idea or not. Your life as a real estate investor has been made even easier by the hundreds of online real estate calculators that you can download for just a few dollars. You don’t even need to use spreadsheets anymore to make your calculations. Analysis is less straightforward with investing in stocks. In addition to the cash flow, you will need to also factor in the underlying equity component. For any data on your stocks, you will need to trust the company with the figures in their reports. And needless to say, there are hundreds and hundreds of ways to massage the numbers to make them look better than they are and to keep investors happier than they should be.
7. More Leverage
When you buy an investment property through a bank loan, you benefit from significant leverage. Most loans require a down payment equal to 20% of the property purchase price, while the bank finances the other 80%. So, let’s say you want to buy an investment property that costs $100,000. You will have to pay $20,000 now, and you will have 15 or 20 or even more years to pay the remaining $80,000 (plus the interest). However, as soon as you find your first tenant, you will start making money (maybe $800 or $900) on the entire value of your property, i.e., on all the $100,000. Being able to finance the purchase of your rental property in this way gives you the opportunity to buy an investment property early in life when you still have very little savings and to start making money right on. It also gives you a chance to invest in several properties at the same time which will increase your rental income as well as your net worth. If we go back to the $100,000 property, with a down payment of 20%, you can buy five of those for a total value of $500,000. With stocks, you can only buy stocks worth this $100,000.
8. Tax Benefits
Last but not least, when you buy an investment property, your cash flow will essentially be tax free. You will get tax deductions on the mortgage interest, the operating expenses, property taxes, insurance, and depreciation. With regards to depreciation, the IRS allows you to write off the value of your property over 27.5 years, so on paper depreciation will count as negative income. Exactly how much in total you can deduct will depend on your rental income, but this is definitely a major advantage which you cannot enjoy when investing in stocks.
With this article, we don’t mean to say that real estate investing is an all-happy, problem-free way of making money. What we want to show you is why you should consider to buy an investment property rather than invest your money in stocks. Once you’ve made the decision to become a real estate investor, you should visit Mashvisor for thousands of real estate properties and analytics throughout the US.
Related: How to Start Learning About Real Estate Investing