Whether you believe stocks help you build wealth faster or real estate can tell a lot about your friends circle. There’s no need to compare real estate vs stocks. Both these investment opportunities are great and can have lasting benefits for you in the long term.
However, given the cost of real estate, it is not easy to also invest in the stock market, if you have decided you want to get into real estate. So, what should you choose for your investments, real estate or stock market? From the get-go, only you would know real estate investments take a significant lump sum investment as well, and it takes time to work due to various government proceedings involved.
For the stock market, this is not the case; the investment process doesn’t rely on lump sum investments, and it is comparatively more streamlined. So, is it better to invest in real estate or stocks? Let’s answer this question with a detailed look into both these investment opportunities and see how they help build wealth over time.
Advantages of Real Estate Investments
Real estate is one of the most lucrative investment opportunities and one of the best tangible investments. One of the major drawbacks of stock market investments is that they are not tangible, and people like having something that they can touch and hold. Here are some of the top advantages of real estate investments that will help you understand how they can benefit your wealth creation journey.
- Long-Term Returns: Real estate investments can appreciate steadily over time. It may appreciate at a lower rate compared to your expectations, but real estate prices increase due to various factors. Development of the adjoining area, newer projects cropping up, improved connectivity and infrastructure. All these factors indirectly help real estate prices appreciate over time. You can also improve your real estate’s price by upgrading the property, which can help you earn a higher return on its sale. Given that the purchase value of real estate requires significant lump sum payments and the overall cost is also high, the overall returns are higher.
- Asset Ownership: Real estate is a tangible investment opportunity. Owning a residential or commercial property has an emotional aspect, making this type of investment very popular among Indians. Owning real estate is also absolute; you, the owner, have absolute control over what happens to your property; you can sell it, rent it, or upgrade it whenever you want. Owning a real estate asset can also be a source of emergency funds in your family, even though real estate may not be as liquid as the stock market.
- Control Over Asset: As mentioned previously, real estate owners have complete control over their assets. The price of the asset may vary based on underlying factors that the owner cannot control. However, the owner has the ability to upgrade their property to make it more desirable and increase its market value. This is something that’s not possible when you are investing in the stock market. Factors like market volatility can impact the price of your holdings, but you cannot do anything specifically to improve the share prices. This increased control over the asset also helps because a real estate investor can sell their property when it is profitable for them. A company whose shares an investor may be holding won’t necessarily work in favour of any individual investor.
- Risk of Ownership: Real estate investments are low-risk. Your holdings are tangible, and they’re not specifically affected by stock market volatility. In fact, if you are acquiring a new property in a growing economic region that has a demand for real estate, your investments will appreciate over time. The risk of ownership is lower for real estate as the build quality and artisanship are verified before purchase to make sure the property is built as per the government standards of safety.
- Taxation: Real estate investments require upfront down payments and even a bulk payment to the government in the form of stamp duty. However, these fees can be deducted from your taxable income as per Section 80(C) of the Income Tax Act. Apart from the fees incurred for the acquisition of the property, the home loan principal and interest payments both can be deducted from the owner’s taxable income for the duration of the loan. Lastly, at the time of sale, the fees and government taxes are borne by the buyer. This ensures your return on investment won’t be taken away by the government.
Also Read: Stocks vs. Bonds: What’s the Right Choice for You?
Advantages of Stock Market Investments
Stock market investments are one of the best ways to build wealth in today’s time. When you are comparing real estate vs stock market, it is important to consider, that the stock market has several benefits that the real estate market can’t offer. Here is an overview of the various advantages of stock market investments.
- Low Entry Barrier: The entry barrier for stock market investments is very low. Investors do not need to invest in lump sums, and even investors who are not very well aware of the stock market dynamics can get started investing in mutual funds. The low entry barrier is made easier with Systematic Investment Plans (SIPs), which allow investors to get started with as little as ₹100 per month.
- Flexibility: Buying real estate is a commitment. You can’t back out and change your mind or acquire other properties at the same time because of the lump sum investment requirements. The same is not true for stock market investments. You can invest directly into any company you want to and also its competing companies without any problems. The flexibility here is that investors are free to invest in any company they choose in any amount they choose and avail returns on their investment.
- Higher Returns: In the short term, the stock market can offer higher returns than real estate transactions. However, this is only true for experienced stock market investors who know when they should buy, hold, and sell their holdings. So, it also requires active monitoring and a lot of experience to avail of the higher returns, but it is possible.
- Better Liquidity: Improved liquidity is one of the best advantages of stock market investments. You can place an order to sell your shareholdings and have the order completed within two business days. The same timeline cannot be used to sell your real estate holdings. The stock market can also help you quickly readjust your portfolio by selling and reallocating your funds to other stocks.
- Taxation: The stock market returns you earn are taxed. There are long- and short-term capital gains taxes, which are deducted from your returns when you sell your shareholdings. The transactions of selling and buying stocks also attract Securities Transaction Tax (STT), which is deducted from each transaction when you are buying and selling shares.
Historical Look Into Real Estate & Stock Market Returns
Since the initial question was about which investment can help you grow faster, let’s review the historical return data of each investment type. It’ll help you decide: “should I invest in stocks or real estate?” The NIFTY 50 Total Return Index, which is an important stock market index, has shown a historical return of 14.2% CAGR since 1999. Similarly, the historical returns of the real estate sector have been around 8.4% CAGR for the last 20 years.
However, there’s another side to it too. Real estate investments have shown astronomical returns in certain parts of the country, which far surpass stock market investments. Stock market investments have seen major volatility in the face of global geopolitical tensions and other global problems like the pandemic. This has caused many investors to lose money due to stock market volatility.
Conclusion
Given the two sides of the returns described in the previous section, which one should you choose to build wealth? Comparing real estate vs stocks is difficult since they’re both profitable. The key is to diversify and invest in both as much as possible.
You can get started easily with stock market investments and save your money there to build the corpus required for real estate investments. Once your goal is reached you can use the real estate investments to earn passive rental income. So, make sure you understand your financial standing as well as the advantages of each investment type, before investing.
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