If you’re at the beginning stage of investing, and you clicked on this article, there’s a good chance you’re wondering, “Wait, how do I know if real estate is a better bet than the stock market?  Or is one even better than the other?”

Well, spoiler alert, I have my own bias.  I’ve built my life around real estate and it’s paid off many times over (with a bit of hard work, of course).  

That said, there are pros and cons to investing in real estate and investing in the stock market (and other assets, for that matter).  It’s definitely worth exploring the differences between them.  Much of it comes down to lifestyle and how hands-on vs. hands-off you’re willing to be.

The Stock Market: Pros and Cons

Pros:

Any type of investing requires you do your homework, so it’s not quite accurate to say that investing in the stock market means you just “set it and forget it.”

But that said, you will most likely have far more free time on your hands if you invest in the stock market over real estate.  

For one thing, a stock portfolio doesn’t require a team of subcontractors, a real estate agent, a potential buyer/tenant or a banker.  Then there’s the consideration that a share of stock is not a physical item, and therefore you won’t have to drive anywhere, inspect anything or run errands.

Time is a precious commodity we are constantly evaluating against money.  For some people, the time (and energy) factor means that real estate is a deal-breaker, and the stock market a more realistic choice.

I’m no expert in stock investing, so take this with a grain of salt, but at long as you do your homework upfront you are most likely to get a reasonable, if not really good return over time. Mutual funds are a particularly great way to do this: you can quickly diversify by owning a share of multiple different, strongly-performing companies.

There are so many more resources and gurus available today to help you start out on the right foot.  As long as you apply common sense (don’t buy penny stocks, make sure you diversify) then you are looking forward to a nice return in the next 20 to 30 years.

There’s a certain enjoyment that comes from feeling like you’re witnessing history in the making, and the stock market is a great place for that.

Culture and technology drive the economy, and vice versa, and the results play out on Wall Street.  It’s a fun and tangible way to stay educated on current events as well as historical trends, and to even use that knowledge and “data” to make predictions about where the future is headed.

It’s always better to invest more than less when you invest in anything , because a bigger investment means a bigger return. But the need to invest a large sum of money can be a big entry barrier for many people. The advantage of the stock market is that you can get started with as little as a few hundred bucks.

Real estate, as we have all seen in recent years, is hardly “cheap,” and will almost certainly require you to take out loans (unless you have a nice nest egg already saved up).  There is also the cost of closing on a property, of renovating and maintaining it, to name just a few.  There are certainly more moving parts in real estate, and that includes parts that will cost you.

I hesitate to put hard numbers on things, and a decent house in a good area will be a cheaper investment than one share of Berkshire Hathaway, but generally speaking, real estate will cost you more upfront.  The downside of that is offset by cash flow, which I’ll get to later in this article.

Cons:

Investing in a share of stock means — for the most part — you make no money off it until you sell it.  Yes, you can earn dividends to cash out from time to time, but usually it’s a small return (unless you learn advanced techniques such as trading in options, these approaches are not for the average investor).

The only serious money you earn from stocks is the money you earn when you actually sell it.  It doesn’t matter how “high” your stock price rises — that rise in price means nothing until you sell it.  And once you do, that share of stock is now gone and you can no longer profit off it.

Because stocks don’t generate cash flow and only bring you money when you sell them, you will need to wait a while for the stock value to become high enough that you feel incentivized to sell.

What we are talking about is closer to decades than years, let alone months.  The main exception to this is if you decide to become a day trader, but that is something no one should try unless they really know what they’re doing (not to mention it will involve much more time and energy).

Even if you make the most educated choices possible with your portfolio, some of them are probably going to drop, rather than rise.  The economy (read: Planet Earth) can be an unpredictable thing and much of the stock market is based on assumptions made from what has happened in the past.  While there’s a good chance those assumptions will hold true, there will always be some surprises.

Of course, the same applies to real estate to some extent, but real estate is at least tangible (like gold) and people will always need a decent place to live.

The Real Estate Market: Pros and Cons

Pros:

There’s a reason that wealth has historically been associated with land:  it’s limited and almost always in demand.  People need a space to live, whether they own it or rent it. 

Certain neighborhoods or areas do depreciate in value but overall, real estate goes up.  Look no further than the housing crash in 2008 to the housing shortage crisis nation-wide now: even when demand goes down, it comes back up again.  If you do your homework you will know which neighborhoods have the best outlook, giving you an even further advantage.

Real estate is an old game, but a solid one.

This, right here, is the Number One reason I love real estate.

When you buy a share of stock, the only money you can earn with it is the money you get when you sell it (including any dividends).  In other words: there is no actual money going into your pocket until you sell it.  It’s a one-time pay-off.

Compare that to real estate: You can own a house (or apartment complex), anticipate one day earning money from selling that house, and then earn money in the meantime by renting it to others.  Money that you get right now, right into your pocket.

Think of it this way:

When you own a property, it’s like owning a goose that lays eggs.  You can earn money off the eggs now, and also when you sell the goose.

When you own a share of stock, there are no eggs.  There’s only the money you earn when you sell the goose.

Of course it’s a simplistic analogy, but it gets the point across: real estate, with enough work upfront, has the potential to earn you money both now and later.  Maintaining cash flow isn’t always easy, of course, but it’s more than possible.

This one is slightly more emotion-based, but I believe it’s still important.

A share of stock sits in a digital folder.  You can’t touch it, smell it, walk inside it, admire it from across the street.  There is something very satisfying, by contrast, about physically laboring and putting effort into a property, and then being able to see and enjoy the results of your labors.  

Even a new layer of paint in a kitchen, or a new fence in the backyard is a visible and pleasing sign of your progress and your investment.  What’s even better is that it can bring joy to and improve the lives of those who will reside there.

Cons:

Real estate has many moving parts.  There will be many jobs that need to be done, and multiple people needed for those jobs, from the buying process, through the renovating and maintaining process, all the way until you decide to sell the property.

You will need to be very organized if you want to stay on top of things.  Because you will depend on others (whether it’s a realtor-broker, a handyman or a home inspector) you will need to learn how to build stable working relationships with others.  You may find yourself having to confront someone on a delicate issue every now and then.  You will also find yourself in the humble position of needing to build trust and rapport with moneylenders who are also trustworthy.

By now it’s probably clear that real estate is not for the half-hearted.  You will need money upfront (forget those sketchy “no money down” strategies), and for what you don’t have on hand you will need loans.  This means taking a risk and investing some of your time in order to come out ahead.

If you outsource other people to renovate or maintain your property you will accrue additional costs.  If you decide to take on some of the work yourself, you will accrue additional time.  These time and money sacrifices are temporary as your investment becomes profitable, but in the meantime it will take a definite amount of discipline and strategizing.  

Conclusion:

I’ve done my best to be fair about the pros and cons of each of these types of investing and hopefully it’s helped you get a clearer perspective.

If you have the money and the time, it’s my personal, experience-based opinion that real estate investing is the way to go.  You may have to put in a bit more time and money upfront, but it will generally pay off faster and bigger if you keep a good head on your shoulders and know what you’re doing.

But real estate investing is a lot of work and it certainly doesn’t fit everyone’s lifestyle.  The stock market is still a great opportunity to make your money go further, and for some people, it’s the more logical choice.