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Not so long ago, investing in real estate was considered to be the goal for many working professionals in India. But this notion has changed drastically over the past decade.
On one hand, soaring property prices and inflation have made investors reluctant to commit to a long housing loan. On the other hand, significantly better alternatives to real estate have emerged.
One of these alternatives is stocks. On paper, stocks are known to be more liquid and generate lucrative returns compared to real estate. But is this actually true? We’ll put stocks to the test versus real estate.
When you buy a stock, you own a piece of a company. That’s why those who hold stocks are known as shareholders. You’ll need some amount of upfront capital to begin your stock investment journey.
But this would depend on the type of stock you want to buy, your financial situation, and investment goals. Either way, some stocks cost less than ₹10 while others can cost over ₹50,000.
Regardless of the price, stocks can be bought and sold almost instantaneously. Day traders rely on this principle to make a quick buck and keep the ball rolling on future trades. That’s not all.
Stocks are known to be lucrative, especially because of their (limitless) potential for growth. In fact, the average stock market return from 1984 to 2020 in India was 19.16%, significantly higher than traditional assets.
Even with the potential returns, the amount of maintenance and effort stocks require is relatively low. For some, this means initial research and revisiting their portfolio periodically to make minor adjustments.
You’ll notice that most of these factors are favourable for investors. That’s why stocks are becoming increasingly popular, especially among the youth. But there’s one thing we haven’t discussed yet. Volatility.
Most stocks are known to be volatile on a daily basis. This means that as a shareholder, you can expect low to high price swings. Dealing with this isn’t easy unless you’ve invested in solid stocks.
When you invest in real estate, you become an owner of a livable and tangible property or piece of land. You’ll go by many names - landlord, proprietor, lessor, or simply homeowner.
These fancy titles exist because buying a house is no easy task. It requires a significantly large chunk of upfront capital, sometimes ranging from 20-25% of the total house cost.
For context, a typical house in a city like Mumbai or Delhi ranges from ₹50 lakhs to upwards of ₹10 crores. This means that the average upfront capital can be ₹10 lakhs to ₹2 crores or even more.
Because of the exorbitant cost of real estate, most aspiring homeowners end up taking a home loan. Many view this as a lucrative tradeoff as they can earn passive income by renting out the property.
Homeowners who wish to live on the property instead of renting it out view the home loan as a necessary evil because it allows them to have a roof over their head.
Either way, investing in real estate is viewed as a long term commitment. But here’s the myth - investing in real estate is viewed as a lucrative long term commitment.
True, investing in some types of real estate can be lucrative. But a large chunk of real estate properties has been known to generate more or less the same returns as a bank FD over 30 years.
Real estate and stocks are both investments. But it’s like saying apples and oranges are fruits. The reason why people invest in either is vastly different, especially when you take real life into consideration.
A property investment puts a roof over your head. Stocks can’t. This is the primary reason why many Indians work tirelessly to buy a house or a piece of land - to call it their own home.
But from a pure investment perspective, we can level the playing field by judging real estate and stock investments through the lens of time and effort, liquidity, fees, diversification, and others.
Stocks require you to understand how markets, companies, and trends work. Once you’ve put in the initial work and invested, stocks operate on autopilot with the upside of being completely online.
Even if you are a 5% shareholder of a company, you don’t have to put in the legwork or run the company on a day to day basis. Investing in stocks thus becomes a challenge of patience and choices.
Real estate is a different beast altogether. Investing in land or property requires scouting, which basically means you’ll have to travel to various locations to check the property.
Of course, there are apps that make it easier. But if you want to live in a house or rent it out, you’d want to ensure that the locality is up and coming or already developed.
This factor will have a major impact on your potential property’s price in the future and the rent it can command in the present. Then comes the paperwork for the property which can confuse even the best.
The time and effort required may taper off after you buy the property and rent it out. But there will be the occasional seepage or other maintenance issues that will crop up. You can consult a Cube Wealth coach or download the Cube Wealth App.
Getting your money out of an investment takes time. The ease with which you can do this is known as liquidity. Stocks are known to be fairly liquid investments. The reason is simple.
It generally takes T+2 days for the money to get credited to your account once you sell a stock (T =the day you placed a sell order). Real estate investments are not so liquid.
In fact, they can even be classified as illiquid purely because you can’t sell a real estate property overnight given the amount of money, paperwork, and other factors involved.
Investing in stocks generally means paying a brokerage fee (unless you’re using a discount brokerage). That’s all. On the other hand, the cost of owning and managing real estate is incredibly high.
You may have to pay society bills, utility bills, maintenance fees, insurance, and more. Not to forget your EMI in case you took a home loan. Furthermore, you may have to periodically renovate your home.
This will carry a significant cost of its own. There are other worrying factors like the cost you might incur for not having a tenant, which is basically losing rent for every month your property is unoccupied.
Diversifying stocks is known to be much easier than real estate. You can buy stocks from different market caps, industries, sectors, or even countries like the USA.
But diversifying real estate can be an uphill task. An average working professional can, at most, buy a property or two given the soaring real estate prices. Beyond that, diversification is close to impossible.
Stocks can be helpful here as well. Certain types of stocks like REITs help you invest in companies that own diverse real estate properties across the country.
That said, they’re still stocks and not actually real estate. This is the major reason why you must put in thorough research, though, time, and effort when investing in land or real estate properties. You can consult a Cube Wealth coach or download the Cube Wealth App.
You don’t need a stack of cash to start investing in stocks. In fact, you can start investing in stocks for as little as ₹1 or $1 based on the brokerage app you choose.
As we’ve already discussed, investing in real estate would require you to commit a large sum of money. This typically falls in the range of ₹50 lakhs to ₹1 crore or more.
Ans. The better investment choice between real estate and stocks depends on your financial goals, risk tolerance, and investment horizon. Both options have their merits.
Ans. Real estate investments offer potential rental income, tax benefits, and the advantage of owning tangible assets that can appreciate over time.
Ans. Stocks provide liquidity, diversification options, and the potential for capital appreciation. They are relatively easier to buy and sell compared to real estate.
Ans. Real estate investments can carry risks related to property management, market fluctuations, and illiquidity. Additionally, maintenance and upkeep costs may impact returns
The choice between real estate and stock market investments depends on individual financial goals, risk tolerance, and investment horizon. Real estate offers tangible assets and potential rental income, while stocks provide liquidity and the opportunity for diversification. Each option has its advantages and disadvantages. Therefore, it's essential to weigh the pros and cons carefully and consider a diversified investment strategy that aligns with your unique financial objectives. Consulting with a financial advisor can also provide valuable insights when deciding between real estate and stock investments.
Note: Facts & figures are true as of 13-04-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others. You can consult a Cube Wealth coach or download the Cube Wealth App.
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