The two poles of investment are real estate and stocks. As physicians, you typically earn enough income to make either type of investment. If you’re looking to invest, you may be wondering where to place this capital. Choosing between stocks or real estate isn’t a red pill/blue pill scenario. Many Americans own both investment vehicles to some degree. During the fourth quarter of 2020, 65.8% of Americans owned homes, which was 0.7% higher than the fourth quarter of 2019, according to the US Census Bureau. On the other hand, nearly 6 of 10 US households invest in securities via taxable accounts, IRAs, or employee-sponsored retirement plans, according to the US Securities and Exchange Commission. However, it’s wise to consider which options make the most sense for your financial goals. Let’s take a look at some of the nuances of investing in real estate vs stocks. Consider these factors when deciding where to put your hard-earned money. Investment in securities Investing in anything comes with some risk, and stocks are no different. But depending on your outlook and circumstances, the potential rewards may outweigh the risks. Here are some potential advantages of investing in securities: Stocks are liquid, with the option to quickly trade on your own or with a broker. At any moment, it’s easier to gauge the value of your stock portfolio than it is with real estate. Diversification is a cornerstone of any securities portfolio. Investors, for instance, typically invest in a mix of mutual funds, index funds, or exchange-traded funds (ETFs), as well as stocks. Buying shares via a 401(k) or individual retirement account (IRA) allows for tax-deferred or tax-free growth. The battle among discount brokers has decreased stock trading costs to $0 in most cases. Although working with a personal broker can be a bit pricier, transaction fees in this case are limited. Furthermore, most brokerages offer a wide array of no-transaction (ie, no load) mutual funds, index funds, and ETFs. Here are some potential disadvantages of investing in stocks and related investment vehicles: It’s hard to refrain from emotional decision-making when trading stocks. When the market drops, it’s tempting to sell, when holding would be the more beneficial move in the long run. When you sell stocks, you may have to pay the capital-gains tax. You may also need to pay tax on stock dividends. Stock prices are volatile. It’s important to take a long view when investing in stocks and funds. Perhaps it’s best to avoid checking their value too many times during the course of a week. Real-estate investment With real estate, you can purchase residential properties—which might include flipping and reselling—or you may want to invest in commercial properties, such as apartment complexes, strip malls, or office buildings. Potential advantages of investing in real estate include: Investing with debt is safer with property. In other words, it is safer to take out a mortgage than to engage in margin trading, which involves borrowed funds. Interest paid on mortgages is tax-deductible. Real-estate investment hedges against inflation because home values usually increase with inflation. Investing in real estate is easier to understand. Investing in stocks requires some knowledge of the stock market, whereas with a home, all you need to do is buy and maintain it with the goal of reselling in the future at a higher value. Moreover, real estate is a tangible asset. Potential disadvantages of investing in real estate include. Real estate is not a liquid investment and can require a long sales process. Securing a mortgage typically requires a substantial down payment. As with stocks, property values do go down, and it’s possible to sell at a loss—as proven by the 2008 financial crisis. Securing a mortgage requires (virtual) reams of paperwork and beaucoup time. Real estate comes with high transaction costs, with closing costs amounting to 6% to 10% of the purchase price. In comparison, most brokerages charge little or nothing in commissions on stock trades. Unlike stocks, real-estate diversification is not an option for most buyers. You must choose a specific location with property, and property values in this area may go up or down. If you have plenty of capital, however, you can buy a portfolio of properties in different areas, and a mix of commercial and residential vehicles. Establishing and maintaining properties typically involves a fair degree of construction and upkeep costs. Despite your most earnest efforts to screen tenants before renting a property, eviction may become a reality if the tenant fails to pay rent, substantially damages the property, violates the rental agreement, or runs amok of health/sound ordinances. Eviction can entail a long and arduous legal process. And, there is a compromise solution: You can invest in real-estate investment trusts (RIETs), which are companies that own and operate income-producing real estate, such as warehouses, malls, hotels, offices, and apartments. These investment vehicles can pay handsome dividends, and various online brokerages offer publicly traded REITs, ETFs, and mutual funds. Whatever stage you are at in your career, it’s important to think through the specific financial milestones you want to hit before retirement, and investments can be an important part of that picture. If tackling investment strategy on your own seems overwhelming, working with a qualified financial advisor may help. Source
