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Both the stock market and the real estate market go up and down, so it’s hard to judge which investment is the better one. If you are considering cashing out some of your stock to buy real estate – either for your personal use or as an investment – you should consider these pros and cons before making your decision.
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Stocks have more liquidity than real estate
“When you buy stocks, you get the benefit of being liquid,” said Sean Burke, vice president and director of institutional money management for Stuart Estate Planning Wealth Advisors in Coconut Creek, Florida. “You can choose and adjust risk by diversifying, changing positions more defensively, or taking some of the profits off the table if you feel that the market or positions are too risky.”
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However, stocks also have disadvantages.
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“The disadvantages [are] that you don’t own a hard asset and rely on the markets and corporate governance to add value or generate income through dividends – which may fluctuate or disappear, ”said Burke.
Real estate is a hard asset that you cannot lose
“The advantage of owning a rental property is that you have a hard asset that no one can take away from you,” said Burke. “You can rent this property for a substantial passive income. This gives you the opportunity to be a disciplined investor and wait until the market conditions are right to sell the property for a profit or hold the property to keep generating the income. “
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But unlike stocks, real estate is an investment that you have to put money into all the time.
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“You are responsible for repairs and updates to the property,” said Burke. “You are laying a lot of eggs in one basket, which means you are betting on the property’s value and income potential (for most people who can’t afford multiple properties). If you have to take on debt to buy the property, you run the risk of having to make the payments without a tenant. In the current environment, many landlords have had to shoulder the burden of debt payments, property taxes and repairs without receiving a dime from their tenants, and there is nothing they can do to remove them from the property. “
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“A home to live and raise a family is less a financial investment than an investment in your family and the security of permanent residence,” said Burke. “The true return on a home after years of paying interest (if funded), property taxes, repairs and upgrades, and inflation / cost of living is controversial. What is positive for many people is that paying a mortgage and building capital are forced saving. “
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There is no one universal best investment, so you need to determine which investment is best for you based on the pros and cons that come with it. However, if you live in an area that has extended the eviction moratorium, this may not be the best time to invest in a rental home, according to Burke.
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“I could imagine that mAll people who are or are considering small or medium-sized landlords will reconsider the risks involved under the eviction moratorium policy, ”he said. “When this policy comes to an end, I think a lot of small landlords will sell their property because they haven’t been able to collect rent for so long [that] it has become more arduous than it is worth, and the risk is greater that their income can be taken away by the state at any time. The landlords who do not sell their property are likely to have to make major repairs that are costly and will take these properties off the market for some time. Real estate can make up a large part of a portfolio, but in my opinion it shouldn’t make up the majority of the portfolio for the average investor, especially if it’s just a property. “
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Allen Thuma, CFA, portfolio manager and research analyst at Buckingham Advisors in Ohio, also believes stocks are the better investment overall.
“While investing in stocks carries risk, we believe that it is better in the short and long term to invest in stocks rather than real estate,” he said. “First of all, stocks have proven to be better inflation protection in the past because they have higher returns than real estate. It is easier to diversify stock positions to limit individual investment risk compared to real estate positions which typically require large initial investments and / or debt to make a purchase. Because stocks are liquid, easier to diversify, better historical performance against inflation, and easier to acquire, we believe stocks offer better opportunities to the average investor than positions in real estate. “
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If you are unsure what is best for you and can afford it, investing in both stocks and real estate is a good idea.
“If the economy continues to recover and rates stay in check, both asset classes will do well,” said KC Mathews, executive vice president and chief investment officer of UMB Bank. “We currently own both asset classes.”
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Gabrielle joined GOBankingRates in 2017 and brings a decade of experience in the journalism industry. Before joining the team, she was a writer and reporter for People Magazine and People.com. Your work is also at E! Online, Us Weekly, Patch, Sweety High, and Discover Los Angeles, and she was featured as a celebrity news expert on Good Morning America.