Stocks and real estate are two of the most well-known investments that have generated long-term gains for many investors. Stocks give you partial ownership of a corporation, and your shares will gain value as the corporation continues to gain market share and deliver exceptional financial growth. On the other hand, real estate is tangible land that you own. Some real estate investors aim for cash flow, while others look to flip properties for solid profits.

It’s possible to accumulate enough stocks and real estate properties to retire early and generate enough cash flow to cover your living expenses. However, it takes a lot of time. Since investing is a long-term journey, it’s good to know the strengths and weaknesses of each investment before putting your money on the line. 

How Stocks and Real Estate Compare

Stocks vs. real estate is a personal decision. You have to assess the pros and cons of each investment before making a commitment. These are some of the factors to consider when deciding where to put your money.

Initial Investment

It costs a lot less to invest in stocks. Many brokerage accounts let you trade fractional shares, meaning you can get exposure to your favorite company for as little as $1. Meanwhile, you have to make a big down payment just to buy a property. You’ll also have to square off against high monthly mortgage payments, but it’s similar to what you would pay in rent.

Liquidity

A key advantage of stocks over real estate is how liquid they are. You can buy a stock at 9:55 am and sell it by 10 am if you change your mind. You don’t have that type of flexibility with real estate. It can take several months or even more than a year to sell a real estate property, depending on the price and market.

Leverage

This is where real estate starts to shine. Stock margin lets you borrow against up to 50% of your portfolio. If you have a $100,000 portfolio, brokerage accounts typically let you borrow another $100,000. This brings your purchasing power to $200,000.

Real estate is a different beast that lets you borrow with 33x leverage. If you want to buy a $1 million property, you might get away with only putting $30,000 down. That’s a 3% down payment, and some lenders let you do that if you have a good credit score and a low debt-to-income ratio. A lower down payment increases your monthly mortgage and can temporarily result in private mortgage insurance.

Increasing Your Leverage

Real estate investors also win in this category. If you want to increase your leverage with a stock portfolio, your portfolio must go up. A 20% gain typically means that your leverage goes up by 20%. However, your stock portfolio can also lose leverage if your portfolio loses value.

Stocks are more susceptible to sharp and immediate corrections than real estate, and that can put a lot of pressure on investors who use margin. That’s why it’s beneficial for most people to avoid margin. Granted, there are some creative ways to use margin that can boost your wealth without putting all of that extra money into additional stocks.

Real estate also benefits from appreciation. As a property’s value goes up, you can borrow more money against it. However, real estate has another lever. Each mortgage payment you make increases leverage. While you can make deposits into a brokerage account just as you would make mortgage payments, real estate investors can have their tenants make the mortgage payments. You can earn a much higher yield with real estate properties than you can with dividend stocks. 

When you want to borrow capital against your property, you can take out a HELOC or a home equity loan. Some real estate investors tap into the home equity from one rental property to make a down payment on another rental property. You can also use stock margin for this purpose.

Tax Breaks

Real estate crushes stocks in this category, and it’s not even close. Yes, you can reduce your tax bill on stocks by holding onto your shares for more than a year. Then, you will receive the more favorable long-term capital gains tax rate for stock sales and dividend payouts. This tax rate is lower than ordinary income tax rates.

Real estate is on a different level. You can gradually depreciate any rental property each year to create a paper loss. This paper loss can be used to offset your income and reduce how much you owe in taxes. Plus, Section 179 of the IRS tax code can help real estate investors avoid taxes completely as they build massive portfolios.

Investors who use Section 179 can run cost segregation studies for their real estate properties. This study allows you to write off your property’s entire value in the first year (or a lower amount if you want to gradually depreciate some of its remaining value). If you earn $500,000 in one year and put $30,000 down on a $1 million rental property, you can use a cost segregation study to show a paper loss and not owe any taxes on the $500,000. 

Stock investors have traditional and Roth retirement accounts. Those are good resources for minimizing how much you owe in taxes, but real estate is the better investment for minimizing your tax bill.

Long-Term Returns

If you know nothing about stocks, you can buy shares in a reliable ETF or mutual fund instead. Some people outperform professional day traders and fund managers just by holding good ETFs. Real estate requires much more research to deliver enticing long-term returns, but some stocks can comfortably breeze past real estate.

Finding generational stocks like Nvidia before they get big can crush the returns of any real estate property. Nvidia has soared by 1,700% over the past five years. Over that span, an investor could have turned $1,000 into $18,000. 

Stock investors who do their research can find assets that more than double over the next five years. It’s very hard to find those types of opportunities in real estate. However, stocks can go through sharper dips than real estate. Stock investors will be tested more often due to market noise, while real estate investors are locked into a buy-and-hold strategy.