Finding the ideal investment vehicle can be a challenge for many individuals. Investment requires financial commitment and a certain tolerance for risk.
Though the rewards are promising, the occurrence of risk can often lead to loss of income. Investors therefore often attempt to find options with the lowest possible risk and the best returns.
The most popular investment options known today are real estate and stocks. These two options are perceived to provide some of the best returns available. Yet, the question has been raised as to which of the two assets are more suitable to an investor.
While they both have their pros and cons, real estate has, over the years, proven to be a more reliable investment. In this article, we explain why real estate is preferable and the reasons to consider real estate investment over the stock market.
The Potential for Consistent Cash Flow
Investing in property has the potential to provide reliable passive income each month. Residential properties, such as multi-family properties and commercial buildings, tend to provide some of the best returns in rental real estate.
When managed properly, these returns are enough to cover the property’s expenses and provide a decent profit to the owner.
Unlike rental properties, investing in the stock market does not provide monthly cash flow. Stocks only provide dividends, which represent a small percentage of its actual value. Stocks are thought to be a long-term investment. Thus, for investors to receive a return, they would have to sell their stocks once they appreciate.
You Can Hire Professionals to Manage Your Real Estate Property
One of the main advantages of real estate investment is the ability to outsource its management to trained professionals. Qualified property managers can help you earn a good return on investment by providing vital services such as property marketing, maintenance and tenant management.
These services are especially useful to new investors who may not be fully equipped to manage the property. If you hire a property management company they will step in on your behalf and represents your interests to the tenants.
Some companies may even provide financial reports to keep you informed on the performance of your property.
Stocks can be managed through a mutual fund. However, the management costs are much higher, with lower returns as compared to real estate.
Volatility in the Stock Market
Investing in stocks can sometimes expose you to extreme fluctuations in the market prices. While this may occasionally work in your favor, more often investors end up losing money when the share prices drop. This creates an undesirable element of unpredictability in the investment.
In contrast, real estate prices are relatively stable in the short term. They tend to appreciate in value over time thus providing a shield against inflation. This means that once you invest in real estate, the money you spend will not lose its purchasing power.
Real Estate Appreciates in Value
As previously mentioned, the value of real property tends to increase over time. This not only protects your purchasing power, but owning property in a good location can help you turn a great profit. Some of the reasons for value appreciation include changes in population and development projects in the area.
Though a drop in value can sometimes be expected, it is not considered to be a common occurrence. It is only on rare occasions when property decreases in value. An example of this being the 2008 housing bubble. Such occurrences are usually temporary, the prices will readjust to reflect the market conditions.
Real Estate Investments are Tax Deductible
Tax deductions are not a common feature in most investments. Owning stock in most cases does not qualify a person for deductions during tax season. Tax deductions are only granted in stock investments when they are linked to retirement account contributions or charitable donations.
On the other hand, real estate investors enjoy quite a number of tax deductions. This mainly applies to rental properties where deductions are granted for the operating expenses. Some of these expenses include property taxes, mortgage interest, property management fees as well as property maintenance fees.
Tax deductions can help to significantly reduce your overall expenses in a year. This, in turn, enables you to receive a better return on investment.
Investors Can Defer Capital Gains Tax in Real Estate
One of the unique features of real estate investments is the ability to defer capital tax gains through the 1031 exchange. This is a tool provided by the IRS under Section 1031 of the Internal Revenue Code. The legislation permits property investors to defer tax on capital gains for the exchange of a “like-kind” property.
The IRS defines “like-kind” properties as real properties of a similar nature which are held for the purposes of business or investment. Some examples of “like-kind” properties include:
- Exchanging an apartment building for an industrial property.
- Swapping a ranch for an office building.
- Exchanging a shopping center for bare land.
- Exchanging a farm for royalties in oil and gas.
When it comes to stock investments 1031 exchanges do not apply. This means that investors are expected to pay taxes on capital gains when they sell their stocks; even if they intend to exchange them with other assets.
Final Thoughts
Investing in real estate has plenty of benefits which the stock market doesn’t. Real estate is a stable asset that has the potential to provide a reliable cash flow, with appreciation in value over time. In contrast, the stock market is volatile in nature, making it an unstable investment.
Real estate also enjoys certain advantages such as tax deductions and eligibility for the 1031 exchange, which investors can utilize to grow their wealth.
Here at Income Realty Corporation, we can help you manage your real estate investment in Miami, FL. Our property management experts have immense experience in helping rental properties achieve their best potential. Get in touch with us today to learn how we can help you maximize your return on investment.
