Top Reasons to Invest in Real Estate vs Stocks
Real estate and stocks are two of the most popular investment vehicles in the world. Whether you’re investing in buy-to-let property or trying your hand at the stock market, each asset comes with its own selling points and drawbacks. In most cases, what you choose depends on your individual circumstances – how much you have to invest, the flexibility you need and how naturally risk averse you are. In this article, we discuss how property and stocks measure up when compared on common investment factors such as returns, risks and within a portfolio.
The majority of investors primarily consider one thing – the returns that an asset can deliver. When we consider real estate vs stocks, for example, the type of returns an investor can expect varies wildly.
Many investors are drawn to stocks because of the accessibility and quick returns they can provide. While they can still offer long-term returns – research by investment bank Goldman Sachs suggests that 10 year returns for the stock market currently sit at an average of 12.39% – they’re commonly chosen for their flexibility in the short-term.
While two-thirds of the population are looking to invest in stocks in the future, the performance of property over the last three years is making buy-to-let a more attractive proposition. Research conducted by Woodruff revealed that if you track the return on property investments vs. stocks over the past 15 years, property returns are 26% better. This shows that, even during the UK recession, property quickly bounces back to provide competitive returns when compared to stocks.
Unlike stocks, property can offer two varying streams of income – capital growth and rental returns. These different types of returns mean that property can be adapted to a variety of investment strategies over the long-term.
Past performance also highlights the strength of a property investment. Not only has the average UK property price increased by 73% in the last ten years – growing by £122,284 – but the average UK rent is also currently at £1,243pcm.
This means that while stocks can offer more accessibility and flexibility, the returns are incomparable over the long-term, especially when we consider the dual threat of both rental income and price growth.
If the last few years have taught investors anything, it’s the importance of resilience in an investment asset. While it’s important for investors to find competitive returns, security is just as important and even a main priority for many.
During the pandemic, stock prices were significantly impacted. UK property, on the other hand, was relatively unaffected. While it did see challenges, government intervention helped sustain the market. This meant that property prices reached their highest point on record, further boosted by pent-up demand and a chronic undersupply of property across the country.
As a physical asset, buy-to-let property has always been relatively popular with the risk averse, especially when we consider stocks vs real estate. Despite the ongoing uncertainty around inflation and rising interest rates, property prices across the UK are expected to increase by an average of 8.9% by 2027 – highlighting the stability of the asset. Key regions such as London and the Midlands, and city hubs such as Birmingham and Manchester, are set to far exceed this 8.9% prediction.
The liquidity of an investment asset – that is, the ease with which money can be put in or withdrawn – is a common consideration for many investors.
Stocks are one of the most flexible assets on the market and can be bought or sold almost immediately, which is ideal for those that want to make short-term investments and adjust their strategy quickly.
Real estate, on the other hand, is typically a long-term investment. If you’re investing in off-plan property for example, your money is usually tied up for several years before you start receiving returns. The difference is, the potential for gains during that time is much higher.
Ultimately, stocks are much more flexible than property but depending on your strategy, this can be a non-issue. Property has always historically performed better over the long-term and for those that want to take advantage of the higher potential, it’s the ideal asset for holding. If you want to make short-term gains or let a stock portfolio build value over the long-term, that works too.
The accessibility of an investment asset can be a major factor for many people.
Stocks are typically much easier to invest in – both in terms of initial cost and the process itself. Because they tend to be cheaper, it’s easier to build a diverse portfolio of different stocks and let your money do the work.
Buying real estate is a more time-consuming process, although this can be mitigated by working with different partners. It’s also a much higher initial cost, although this is offset by the potential for multiple income streams.
Certain investment strategies around stocks also require much more day-to-day management than a buy-to-let property. While letting agents and property managers can take the grind out of managing a property, maintaining a stock portfolio yourself is much more time consuming.
For many people, this is why they consider investing in a ready-made ‘fund’ or ‘trust’, a collection of stocks or properties that simply requires a cash investment that then starts paying out dividends or hopefully, growing in value.
The Bottom Line
Ultimately, the asset you choose depends on your own financial plan.
If you understand the goals you’re trying to reach, it’s easier to make an informed decision around the asset best suited to your situation.
A key takeaway from any discussion around property vs stocks is that they both have advantages and disadvantages – a time and a place where they can help you find success.
While real estate tends to be the more ‘reliable’ investment asset (it’s important to remember all investments come with risks), there’s no reason an investor can’t use both assets in a wider portfolio.
Diversification is vital for offsetting risk. By having a mix of investment types within a single portfolio, you not only benefit from multiple income streams but you’re not limited by the performance of a single market.
The inevitable highs and lows of different investment markets will typically offset one another. In turn, this mitigates the overall exposure you have, allowing you to reduce risk while maximising returns.
The above is intended as a guide only. Always speak to a financial advisor before you make any investment.