One of the most asked questions in the investing business is which is more profitable: a real estate property investment or a stock investment? Seeing as every investor seeks to make money from his/her investment, it’s not surprising that they are concerned about their return on investment.
However, we can’t simply say that one is more profitable than the other as both have their advantages and disadvantages that play a role in how profitable they are. And of course, the final answer depends on each investor’s preference, personal investment and financial goals, and level of risk tolerance.
Despite this fact, we at Mashvisor believe that a real estate property investment can be much more profitable than a stock investment. In addition, the advantages of owning an investment property certainly outweigh those of owning a share of stocks. Some investment properties are more profitable than others and, of course, there are factors that play a role in how profitable a property investment is – which we will dive into in this article.
So, without further ado, here are 6 main reasons why a real estate property investment is more profitable than a stock investment.
Property Investment is More Profitable Because it is Diverse
By diverse, we mean the many ways property investors are able to make money from a property investment. The world of real estate investing is vast and offers many investment property types and strategies. A real estate investor can make money from buying and renting out single-family homes, multi-family homes (ranging from duplexes to entire complex buildings), townhouses, condos, etc.
In terms of strategies, property investors can start a real estate investing business for the long-term (traditional) or short-term (Airbnb). You can own a long-term property investment following the buy-and-hold strategy, rent-to-own strategy, or investing your money in a REIT (real estate investment trust). Besides Airbnb, real estate investing following the short-term strategy includes fix-and-flips and wholesaling.
Not only that, but real estate investors can make money without direct property ownership! You can start doing that with REITs and wholesaling real estate. You don’t have as many options in the stock market.
Related: Making Money in Real Estate Is Not Hard! Just Follow THESE Strategies
Property Investment is More Profitable Because it Allows for Cash Flow
In real estate investing, a property investment provides real estate investors with a steady stream of cash flow in the form of monthly rent collected from tenants. Cash flow is the profit that property investors make after calculating the difference between their monthly rental income and monthly expenses of their income properties.
Cash flow is an attractive aspect of real estate investing because it pays for the real estate investor’s expenses such as mortgage payments, rental property taxes, operation costs, etc. Moreover, positive cash flow is usually a sign of a successful real estate property investment as it indicates a higher return on investment!
Stock investment, on the other hand, can be profitable and make a good return on investment, but it’s all on paper. Investors in the stock market don’t see any real money until they sell their shares! Real estate investors, however, know exactly how much their property investment is making and when they’ll receive profits.
Property Investment is More Profitable Because it Has Fewer Risks
In general, a real estate property investment has fewer risks than a stock investment, especially when investing in real estate for the long term. Firstly, since real estate investment properties are physical assets, they will always have value. Stocks, on the other hand, are intangible assets and can lose all their value any minute.
In addition, the longer a real estate investor holds a property investment, the lower the risk of loss he/she will face because home prices and equity build over time. Furthermore, property investors also face fewer risks the more income properties they buy and own – this is further explained in our next point.
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Even though a stock investment is more liquid (which many see as an advantage), it’s also very unstable and riskier than a property investment. Investors in the stock market face the risks of unpredictable return on investment and buying/selling shares at the wrong time! While the economy affects the real estate market, it does so to a lesser degree than it affects the stock market.
Property Investment is More Profitable Because it Provides Leverage to Build Wealth
Leverage is a tool that an owner of an investment property can use to build a portfolio of investment properties. When property investors take a mortgage loan for buying a real estate property investment, this gives them the leverage to buy more income properties with less money down!
Let’s give an example for a better understanding: Most mortgage loans typically require property investors to pay 20% of an investment property’s purchase price as down payment, while the bank (or mortgage broker) finances the other 80%. Therefore, if you put a 20% down payment to buy a $100,000 property investment, you would only have to pay $20,000 and have 15-20 (or even more) years to pay the remaining $80,000 plus interest.
Related: Buying an Investment Property: Cash or Mortgage?
Buying an investment property this way means real estate investors have the opportunity to buy several income properties with little money down. The more income properties you own, the more rental income you’ll generate which ultimately pays all your mortgage payments, property taxes, maintenance, management, and other costs. This is yet another reason why a real estate property investment is more profitable than a stock investment.
Property Investment is More Profitable Because it is a Hedge Against Inflation
Historically, cash flow and rental property prices have kept pace with inflation. What this means is that as the cost of living increases so do market prices for investment properties. This makes a property investment profitable because as inflation increases, real estate investors can raise how much they charge for rent, generating a higher rental income. In addition, since mortgage payments are not affected by inflation, they technically decrease as inflation increases.
As a result, with a property investment, inflation will be on the real estate investor’s side. This is not the case for investors in the stock investment. Sure, stock market prices rise over time, however, they are not as directly linked to inflation as real estate income properties.
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Property Investment is More Profitable Because it Offers Tax Deductions
The final reason why a real estate property investment is more profitable is the tax benefits and deductions offered only to real estate investors. An example of tax benefits is that the cash flow that an investment property generates is tax-free. In addition, when real estate investors decide to sell investment properties and reinvest the profits, they will not pay capital gains tax.
As for tax deductions, real estate investors are able to deduct almost all expenses related to their property investment such as property taxes, mortgage interests, insurance, and operation expenses. Exactly how much property investors can deduct depends on their rental income.
These tax benefits and deductions don’t apply to investors in the stock market. Their tax consequences include paying a capital gains tax on any profits they make from selling stocks. Moreover, investors in the stock market are required to pay a tax on dividends they receive even without a sale. This will definitely impact their profitability.
What Determines the Profitability of a Property Investment?
As previously mentioned, some income properties are more profitable than others in the real estate investing business. So, what are the factors that determine the profitability of a property investment?
- Location: Location plays an important role when it comes to everything real estate! Where an investment property is located affects everything related to it including the purchase price, operations costs and expenses, rental income, cash flow, and appreciation – all of which determine the profitability of an investment property. Thus, a profitable property investment is found in profitable locations with high demand for real estate investing.
- Positive Cash Flow: As we said, cash flow is an attractive element in real estate investing. However, cash flow can be either positive or negative. Obviously, a profitable property investment generates positive cash flow. Negative cash flow, on the other hand, means your expenses exceed your rental income, which is the opposite of profitable.
- Appreciation: Lastly, a profitable property investment is one with a high expected appreciation. Why? Simply because as the value of income properties increases over time, property investors will be able to make money by selling them in the future for a price much higher than the initial investment.
Related: Top 6 Characteristics of Profitable Investment Properties
The Bottom Line
Investing in the stock market does have its advantages. However, owning a property investment is more profitable. If you’re planning on buying your first investment property, make use of Mashvisor!
Mashvisor is an online platform that offers property investors (both beginners and experienced) the best tools and data analysis for a successful real estate investing career. To find the best investment properties in any state, city, and neighborhood across the US real estate market, Mashvisor provides the Investment Property Finder, Investment Property Calculator, and Heat Map Function. To learn more about our products, click here.
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