The Stock Market Versus Real Estate: Which Is the Best Investment Option For You?

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The stock market is traditionally the preferred choice for investors, as it offers flexibility, diversity, a low-barrier-to-entry, and high liquidity. However, any investor knows that it’s not wise to put all of your eggs in one basket, as diversifying your portfolio is crucial to success. When it comes to the stock market, there’s a lot of volatility involved, and while returns are quick, they’re not always substantial. What’s more, some investors like a more hands-on approach and want to see the impact of their investment every step of the process. That’s why many investors are looking to the real estate market for their next project. Real estate investments give you the opportunity to have a physical asset. One whose value will not go to zero, as some stocks have done, or disappear like EF Hutton, Barings Bank, or Leaman Brothers.

Let’s go through some of the differences between investing in the stock market and the real estate market, to give you an overview of what you should expect when diversifying your portfolio. If you’re already decided on investing in the real estate market, and are looking for a promising market with a lot of potential, then Park City should be at the top of your priority list. Reach out to LUXred to see how you can tap into this potential and reap the rewards. 

The stock market vs the real estate market

When you buy stock on the stock market, essentially you’re buying a piece of that particular company, and then profit from value appreciation or a rise in the company’s stock and dividends. Smart Investing in real estate means purchasing and developing land in an area that has a track record of steady growth and high demand.

Both investment options can bring solid returns and prove profitable in the short or long run. However, there are some important differences between these two investment strategies. Let’s go through the main pros and cons of each option. 

Pros of investing in the stock market

1. Low barrier to entry 

Investing in the stock market doesn’t require a huge amount of capital to get started. You can buy just a few shares of stock in a certain company and minimize your risks. This is an important deciding factor for inexperienced or rookie investors who are just getting started. 

2. Reduced involvement

Investing in stocks is a great option for busy investors who don’t have a lot of time to oversee their investment and who don’t want to be overly involved in the whole process. As an investor, you can also hire a broker and let them take care of everything, further minimizing your involvement. 

3. High liquidity

One of the most important advantages of the stock market is that it is highly liquid. The stock market allows investors to buy and sell public company shares in a matter of seconds, if they need to.

4. Instant portfolio diversification

Diversification is key to a successful investment strategy, and the stock market offers plenty of options in this regard. You can create a diversified portfolio by buying shares in companies operating in different industries, through purchase shares in mutual funds, exchange-traded funds, or index funds. These funds offer investors instant diversification by allowing them to purchase shares in a wide range of companies. 

5. Low transaction fees

Investing and trading on the stock market involves little to no transaction fees. As brokers compete against each other, investors can benefit and get major discounts on stock trading costs, as well as no-transaction-fee mutual funds, ETFs, and index funds.

Cons of investing in the stock market

1. High short-term volatility

The main disadvantage of the stock market in comparison to real estate is the fact that it’s highly volatile. Stock prices can rise and fall very swiftly, and they are affected by outside factors and events that investors have no control over. The most recent example would be gaming retailer GameStop, which saw its stock prices rise 1,500% over just two weeks in early 2021, due to a short squeeze orchestrated by members of a Reddit community focused on high-risk stock betting. 

2. High taxes

Investing in the right company or companies can be a profitable long-term venture; the trouble comes if you want to get out of that investment. If for whatever reason, you decide to sell your stocks, you may have to pay capital-gains taxes. What’s more, your dividends could also be taxed. The longer you hold your stock, the lower the taxes, but if you have to sell after just a few weeks or months, you’ll have to pay much higher taxes. 

3. Stagnation

When you’re investing in a promising startup or company that’s on the rise, then your stocks will also appreciate. However, if you invest in companies that don’t have a lot of room for growth, it might feel like your stocks’ value is not moving the needle. 

4. Emotional investing and panic-selling

The high volatility of the stock market can bring a lot of anxiety and cause investors to buy or sell for emotional, instead of rational, reasons. Dealing with the stock market also requires a lot of calm, discipline, and strategy, to make sure that selling or buying is the best option in the long run. It can be easy to go into panic mode and sell your stock when stock prices start to fluctuate, but it’s important to keep a long view of your entire investment portfolio, and not act short-term.

Pros of investing in real estate

1. An easy process to understand

Investing in real estate is a much less complicated process than investing in the stock market. You buy a piece of land, develop it, then sell it for more than you’ve invested in it. Real estate is a tangible asset, and as an investor, you have a direct and noticeable impact on its value, which makes you feel more in control of your investment.

2. Leverage

When investing in the real estate market, you can use leverage, or debt, in a much safer and less risky manner. You can invest in a piece of land, design a residence that is specifically to the neighborhood, leverage the land investment against a construction loan, build and sell the property at a premium. On the stock market, this is called ‘margin trading,’ and it’s a high-risk strategy only used by experienced traders. 

3. A hands-on investment approach

If you’re the type of investor who likes to get hands-on with your projects, then real estate is a great option for you. You get to witness the results of your investment every step of the way and can get as involved as you want in building a property. If you do not have the time, you can hire a one-stop-shop like LUXred to manage the entire investment. From land accusation to the sale of the project, we’ve got the time and the willingness to get involved. Luxury real estate can become more than just an investment, it can be a very rewarding personal experience, as well. 

4. A good inflation hedge

Inflation is essentially a decrease in one’s buying power, and real estate is traditionally a great hedge against inflation. Home values tend to rise with inflation, thus protecting you and your investment against loss. 

5. A great source of income

Taking on a design-build-sell real estate project in the right market can bring you handsome returns in just a couple of years. You can safely bet on a high-potential, luxury-focused market like Park City, for instance, and be sure that your project will bring you maximum returns with minimal effort on your part – that is, if you work with a team of experts like LUXred.

In a hot market like Park City, newly-built luxury homes are a lucrative business, especially as more and more affluent homebuyers flock to the market in the wake of the pandemic. With LUXred, you can tap into the opportunities presented by this market, by investing in a project that will bring above-average gains while protecting you against the downside. Home values and yields in the luxury segment in Park City have been on the rise in the past decade, so this is the perfect moment to bet on the success of the market. 

Cons of investing in real estate

1. Requires more work

Investing in the stock market doesn’t take a lot of time and effort, especially if you’re delegating all the hassle to a broker. Investing in real estate, on the other hand, can. That is why partnering with an experienced development team like LUXred, makes a lot of sense to many investors. By delegating the construction, design, marketing, and sales tasks to a professional team, you can take some of the pressure off, and only be as involved as you want in the project. On the other hand, if you don’t work with a team, you’ll have to handle and oversee the entire process yourself, which can take a lot of time and effort that many investors don’t have.

2. Days On Market

A potential downside of short-term real estate investing is the length of time it takes them to sell. The longer it takes to sell, the less profit there is. Our market is unusual in this respect. In March of 2021, 34 was the average Days On Market.

Build-design-sell real estate projects, like the ones LUXred specializes in, only cost the amount of the investment in the land. When the land is leveraged to pay for the construction, there will be the normal bank fees. Additionally, when the property is sold, the buyer might want you to help buy down the interest rate. Other than that, you are free and clear.

3. Low liquidity

The stock market, as we’ve already mentioned, is highly liquid, which means you can buy or sell stocks at a moment’s notice. With real estate properties, you can’t sell whenever you want. However, in a vacation / second home market, where demand is rising, and the marketing is thoughtfully done, the project is usually on the market a short time. Of course, the time on market is built into the budgeted for from the beginning of the project.

4. Appreciation is not guaranteed

While the real estate market is usually a safe short-term bet for investors, it is still subject to unforeseen events and fluctuation that might affect the value of your property. Take the 2008 financial crisis, for instance, or the 2020 pandemic, which has driven some markets into the ground and others through the roof. There’s no telling what global events will affect the outcome of your real estate investment and how, so that’s out of your control, unfortunately. 

However, there are certain markets in the U.S. that seem to lower that risk, and even thrive in times of crisis compared to other markets. Take Park City, for instance; this luxury residential market was one of the quickest to bounce back from the 2008 financial crisis. What’s more, the market is thriving even in the midst of a global pandemic, as buyers flock to the area attracted by its unmatched connection to the outdoors. To sum up, appreciation isn’t guaranteed when it comes to real estate investments, but you can eliminate some of that risk by investing in the right markets.

The best of both worlds

Choosing to invest in either stocks or short-term in luxury residences depends on a lot of factors, from economic uncertainty to personal preference. If you’re the type of investor who likes to get involved in every step of the process and like to see the results of your work, then real estate is a great option for you. If, on the other hand, you don’t have a professional team working with you, then the stock market might work better for you. However, there is another option.

If you’re looking to diversify your investment portfolio and are interested in dipping your toes in the real estate market, but are not ready to commit fully just yet, you might want to look into investing in REITs or be part of a group of investors that only contribute a percentage of the overall cost. This is a great option for investing in real estate without taking on the burden of overseeing the land investment, the pro forma and budget, the construction, and marketing and selling of the investment. It can be the first foray into the world of real estate, and a good way to diversify your portfolio without sacrificing too much time and effort. 

Ultimately, diversification is key to any investment strategy, so if you have the money, the time, and the willingness to work with a team, then your best bet would be to invest both in the stock market and real estate.

To learn more about investing in real estate, reach out to LUXred and let us find the best investment opportunity for your specific needs.

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