For many decades, the debate between investing in stocks or real estate has sparked conversations among financial experts and individual investors alike. Each asset class has its unique set of advantages and drawbacks, and the decision often comes down to personal goals, risk tolerance, and financial situation. Being heavily involved in the real estate industry myself, I might lean toward real estate as an asset class, but let’s take an unbiased look at the factors you should consider when deciding which investment is better for you.

Leveraged Funds vs. Full Investment

One of the significant advantages of real estate investing is the ability to leverage funds. When purchasing real estate, you often only need to put down a fraction of the property’s total value—typically 10-20% as a down payment—while financing the remainder with a loan. This means your initial investment has the potential to control a much larger asset. For instance, if you purchase a $300,000 property with a 15% down payment of $45,000, you reap the benefits of appreciation on the full $300,000, not just your initial $45,000.

Let’s say you sell this property five years later for $400,000. That’s a $100,000 gain in appreciation, more than doubling your initial investment. Comparatively, a $45,000 investment in the stock market would need an annual return of approximately 17% over five years to achieve the same result—a feat not easily guaranteed.

Maintenance

While leveraging funds in real estate offers significant upside, it’s important to consider the costs and responsibilities of property maintenance. Real estate investing often involves becoming a landlord or hiring a property management company. Managing one or two properties might be manageable for many individuals, but as your portfolio grows, so do the complexities.

Even with a property management company—which typically charges 8-15% of the rental income—unexpected issues like replacing a water heater or addressing structural repairs can arise. These costs can eat into your profits, making real estate a more hands-on investment compared to the stock market. Stocks, in contrast, don’t require maintenance, aside from monitoring your portfolio and staying informed about market trends.

Cash Flow & Increasing Rents

One of the most appealing aspects of real estate investing is the potential for cash flow. By purchasing properties at the right price and managing them effectively, you can generate steady monthly income through rent. Even if your property doesn’t produce cash flow initially, rising rental rates over time can improve your returns. With the ongoing housing shortage and steady demand for rental properties, landlords are often in a strong position to increase rents year after year.

In contrast, stocks typically generate income through dividends, which can be less predictable and may not offer the same opportunities for steady increases over time.

Real Estate is Highly Illiquid

One of the largest downsides to real estate investing is its illiquidity. Selling a property involves preparing it for the market, listing it, negotiating with buyers, and navigating the closing process—all of which can take months. This lack of liquidity makes real estate a less flexible investment compared to stocks, which can be bought and sold quickly with a few clicks. For investors who value the ability to pivot their strategy or need quick access to cash, stocks may be the better option.

Diversification

Stocks offer unparalleled ease in diversifying your investment portfolio. By investing in index funds or exchange-traded funds (ETFs), you can gain exposure to a broad range of companies across different sectors and geographic regions. Real estate, on the other hand, often requires significant capital, making it harder to achieve diversification without substantial resources. However, real estate investment trusts (REITs) can provide a middle ground, allowing investors to gain exposure to real estate without the burden of direct ownership.

Tax Advantages

Real estate investing comes with a variety of tax benefits, including mortgage interest deductions, property depreciation, and the ability to defer capital gains taxes through 1031 exchanges. Stocks, while offering tax advantages such as lower long-term capital gains rates, don’t provide the same range of deductions. Understanding these tax benefits can play a significant role in your overall investment strategy.

Conclusion

When it comes to choosing between stocks and real estate, there is no one-size-fits-all answer. Both asset classes offer compelling benefits and unique challenges. Real estate provides opportunities for leverage, cash flow, and long-term appreciation, but it requires hands-on management and is less liquid. Stocks, on the other hand, offer ease of entry, liquidity, and diversification but can be subject to greater volatility.

Ultimately, the best investment depends on your financial goals, risk tolerance, and personal preferences. For many, a balanced approach that includes both real estate and stocks can provide the best of both worlds, ensuring diversification and a mix of short-term and long-term growth opportunities.

About Me

Sam Wurm

Executive Vice President of Nebraska Realty and Embarc Realty

402-570-8002 | sam.wurm@nebraskarealty.com

As Executive Vice President for Nebraska Realty, my team and I are focused on driving creative growth and innovation in the real estate industry. We are committed to delivering consistent results to buyers, sellers, builders, and developers, and I'm excited to be a part of a team that emphasizes forward-thinking. Outside of work, I enjoy traveling and exploring new restaurants with my wife, Abby, and spending time with family and friends. My Christian faith is an important part of my life, and I'm grateful for the incredible support system that surrounds me every day.