The month of November is nothing if not mildly boring.
The hype of Halloween and excuse to sexualize inanimate objects and mundane professions is over. “Pumpkin spice latte season” is in full swing and all the things that follow (i.e., scarfs, Taylor Swift songs, emotional moments looking out the window, “something about how autumn teaches us the beauty of letting things go”, other horrible cliches, etc.). Christmas is too far away to start the shopping frenzy and anyone who says otherwise is far too keen to be welcomed into my inner circle.
November, in other words, is a middling nightmare. However, a few years ago when starting this job, I discovered something special about this month. A certain exhilarating industry saw the opening and decided to claim November as its own. That’s right. I’d like to officially wish all of you a Happy Financial Literacy Month!!!
(Have you ever heard of anything more underwhelming?)
In honor of this thrilling occasion, I’ve decided to cover a topic that frequently bounces around my head anytime I get an email about a New York-inspired loft listing, because I’m the type of person who has subscribed to emails about New York-inspired loft listings (and here I was making fun of the cliché of Autumn) …
Should I buy a house or invest in the stock market?
This question, in my case, is entirely irrelevant seeing as I haven’t the funds to meaningfully invest in either. But I figure, what’s the harm in daydreaming? Seeing as I have no concrete background in real estate (or financial literacy for that matter) I have taken this information from a 2022 Forbes article because Forbes seems to know what they’re talking about most of the time…
Forbes Says…
- Investing in real estate and the stock market are both passive income sources
- Investing in the stock market can potentially yield better returns over time
- Both come with their own set of risks that all investors should consider
All very diplomatic.
In a stereotypically unpopular opinion that grandparents abound would hate, this article leans toward the camp of investing in the stock market being more lucrative than investing in real estate over the long term.
Put simply, an investment in real estate earns just 3 to 4 percent per year historically; on the contrary, investments in the stock market post about 10 percent annual returns. That can amount to an impressive return on investment (ROI).
What are the best ways to earn passive income?
You don’t have to join a pyramid scheme! Passive income has become one of those obnoxious business/entrepreneur man terms that people throw around all the time with no real meaning behind it.
I saw an Instagram reel the other day of a man at the gym explaining how filling out specific online surveys can earn you passive income. But if I must actively fill out a ridiculous fitness inspired survey, I can’t possibly be making a passiveincome, can I? I am, of course, at fault here. Universal rule #1 is to not listen to or watch videos of men at the gym.
With this said, truly passive income can be a simple reality through investing in real estate property and investing in the stock market. In other words, your money can make more money over time. The answer to which avenue is superior is a nuanced one.
- Real Estate
One of the most lucrative ways to make money in real estate is by buying up rental properties and renting them to others who foot the bills for you. This way, your tenants help pay off your mortgage and, ideally, you can earn a passive income on top of that.
If your mortgage is $1,000 per month (not in this economy but let’s pretend), you might charge $1,500 for rent. This means that you can pay off your mortgage bill and pocket the extra $500. While much of that money may go to covering utilities and repairs, the goal is to profit at least a little to put money away each month.
Plus, as your home hopefully appreciates in value over time (thanks to a whole host of factors from home repairs to possible gentrification of the neighborhood), you’ll be able to sell the property for even more down the line. Many people also choose to buy property, hold it and then sell it again when the market ticks up – without ever renting it.
This said, owning rental properties can require a whole lot of legwork—so it’s not totally passive.
- Stock Market
When you invest in the stock market with index funds, dividend stocks, ETFs, bonds, and other assets, you can be more hands off with a lot less upfront costs.
Plus, you can also choose to invest in real estate by investing in real estate trusts and securities. For example, a real estate investment trust (REIT) is a corporation or trust that uses investor funds to buy, rent and sell properties, and 90 percent of the profits are paid out to shareholders as dividends. Real estate mutual funds and real estate ETFs typically invest in REITs to provide broad market diversification.
I have $500,000 to invest. What should I do?
First things first, do a little dance and buy yourself a vintage designer purse because you deserve it. And if you don’t have half a million dollars (me neither), please don’t feel bad.
On average, the typical 20-something-year-old has just $10,711 invested, according to wealth-management platform, Personal Capital (via Business Insider).
Meanwhile, the average 60-something-year-old user has over $210,900 invested. Still, that’s well below $500,000.
With half a million dollars, you have more potential for serious returns, but investing in anything—investment properties and the stock market alike—also comes with bigger risks.
Because real estate sees annual returns of about 3 to 4 percent, you can get quite the bang for your buck. However, given the S&P 500’s average 10 percent annual return, dropping a cool $500,000 in an investment account can ultimately skyrocket well into the millions by the time you reach retirement, even if you never add another penny.
RISK
Real estate properties are often identified as either good investments or bad ones based on a gamut of fun factors like rent prices, property taxes, neighborhood vibes, the local job market, school accessibility, future development plans or lack thereof, natural disasters like flood zones, and more.
Putting your money in ETFs and mutual funds can help you to diversify your portfolio to mitigate the risks involved.
You might also be asking yourself; can I get a loan to buy real estate? And, yes, you may be eligible to apply for loans to cover the cost of your mortgage. But you will need to pay off your home loans over time, and interest can add up as you do…
It is also of note that the down payment you need for a property tends to be a lot more than what you need to get started investing—which can be as little as a few dollars, compared to an average of 12 percent, according to the National Association of Realtors.
Bottom Line
- Buying a house requires work and upfront costs when it comes to house hunting, screening tenants, and hiring property managers. Being a property owner is also work in and of itself, as you must take care of repairs and renovations and handle tenant questions and concerns. (Feels like a part-time job if you ask me, which nobody did).
- Buying stocks and other assets—intangible assets, unlike real estate property—requires far less work when you leverage the power of financial or robo advisors. You can invest at the click of a button, and you can even consider real estate-focused securities.
- It’s a lot more difficult to diversify with physical real estate properties than it is to diversify in the stock market, in general. A well-diversified portfolio tends to perform a lot better over time than one that’s pigeon-holed in one sector or type of asset.
Here’s to November and trudging through. Until the next.