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- May 1, 2024
- Investments, Real Estate, Real Estate Education, Tax Benefits
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Should I Invest in Stocks or Real Estate?
Well, the short answer is ‘both’! You should invest in both stocks and real estate. A simple reason for this is diversification. Most people invest in stocks because it requires little effort. Also, a significant portion of people’s retirement savings are often invested in stocks. However, investing in real estate can require more effort. Even if you opt for passive investing, you will need to find a competent operator. Nonetheless, it’s equally important to allocate a portion of your wealth to real estate for diversification. Let’s try to understand the kind of diversification you achieve when you decide to invest in real estate instead of stocks.
Diversification
Low Correlation with Stocks
Real estate has a relatively low correlation with stocks over shorter time periods. This means their prices don’t move in tandem, providing diversification benefits by not having all investments tied to the stock market’s performance.
Diversification by Property Type
Within real estate, you can diversify across different property types like residential, commercial, industrial, etc. These different sectors can perform differently based on varying economic factors.
Geographic Diversification
You can invest in properties across different geographic markets and regions, which can mitigate risks from local economic downturns impacting your entire portfolio.
Investment Strategy Diversification
Real estate allows diversification by investment strategy – e.g. buy-and-hold rentals, fix-and-flips, REITs, crowdfunding etc. Each has different risk/return profiles.
Active vs Passive Investing
You can mix active rental property investments that you manage yourself with passive syndications/funds for diversification of effort and expertise required. Stocks only allow you to invest passively, there is no option for active investment. Real estate allows you to choose whether you want active investing or passive investing.
Potential for Multiple Income Streams
Real estate can generate rental income in addition to potential appreciation, providing diversification of income sources compared to stocks. While stocks have an equivalent called ‘dividends’ usually cash flow can be substantially higher than dividends.
Tax Treatment
Besides all of this, the tax treatment for real estate is vastly different and can yield a completely new set of diversification benefits. Here are some of them:
Deductions Galore
Real estate investors can take advantage of numerous deductions like mortgage interest, property taxes, operating expenses, and depreciation to reduce their taxable income.
Defer Capital Gains
Strategies like 1031 exchanges allow deferring capital gains taxes when selling appreciated properties and reinvesting the proceeds.
Depreciation Benefits
You can deduct a portion of the property’s value annually through depreciation, providing tax savings.
Pass-Through Deductions
For pass-through entities like LLCs, certain qualified business income can be deducted.
Estate Planning Advantages
Real estate can provide tax benefits for estate planning and transferring wealth to heirs.
Again, the point here is not to invest solely in real estate. If your portfolio consists only of stock investments, we encourage you to invest in real estate to achieve diversification and obtain tax benefits. On the other hand, if a large portion of your net worth is tied up in real estate, I would advise you to consider investing in stocks!
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