Real Estate or Stocks: Which Is a Better Investment for You?

Investing your money could make it so you're able to grow a lot of wealth over time. And when we think about investing, we often imagine opening a brokerage account and loading it with stocks.

But you don't have to limit yourself to the stock market. If you want a safer investment, bonds may be worth a look. And if you want an investment that has the potential to be just as lucrative as stocks, you could explore real estate.

There are different ways to invest in physical real estate. You could buy homes in need of work, fix them up, and flip them at a profit. Or, you could buy properties you rent out. With the latter, your rental income might cover your costs so you can hold those properties until their value appreciates and then sell them at a profit.

Both stocks and real estate have the potential to generate a big payday. But if you're not sure which one is the better choice for you, you'll want to ask yourself how much work you're willing to put in.

When you want an easier way to make money

You might assume that assembling and maintaining a portfolio of stocks takes no work. But that's not true.

When you're investing in individual stocks, it's important to research each company you're buying shares of to gauge its financial health. That can take time. You'll then need to keep tabs on each company's performance to make sure holding those stocks continues to make sense.

But while building a stock portfolio does require some effort, the time you put in might pale in comparison to the amount of time you'll sink into your real estate holdings.

If you buy a home to flip, you'll either have to do the renovation and repair work yourself, or hire contractors and keep track of their progress. You'll also need to create a budget to make sure your repair costs don't wipe out your potential profits.

If you buy a home to rent out, you'll become a landlord. And there could be a ton of work involved there, from vetting tenants to overseeing maintenance to dealing with repair issues as they arise.

Granted, you could outsource some of that work to a property manager. But that'll eat away at your profits.

So basically, if you're not sure whether to invest in stocks versus real estate, ask yourself how much time you're willing to put in and how much work you're willing to do. If you'd rather put in less time, then stocks might be the better choice.

There's risk either way

You may be wondering whether stocks are a riskier investment than real estate, and the answer is that both are risky in their own right.

With stocks, your portfolio could lose value if the businesses you invest in perform poorly. However, you can minimize that risk by loading up on a variety of stocks across a wide range of market sectors.

In fact, the S&P 500 index has delivered an average annual return of 10% over the past 50 years. So if you load up on S&P 500 ETFs, your portfolio might see a similar return over time, even if there are some years when the index sorely underperforms.

Meanwhile, with real estate, there's always the chance that a property you own could lose value during a housing market crash. You might also struggle to find tenants, which could be a problem if you're reliant on rental income to cover your ownership costs.

Plus, when you buy a home, you risk having to sink $10,000 into a heating system repair or $5,000 into a plumbing system repair. With stocks, you don't pay to own them beyond the initial cost of your shares.

You should also know that flipping homes can be a particularly risky endeavor. If your repair costs end up coming in higher than expected, they could wipe out your profits completely and leave you with a loss on your hands.

Similarly, you're not guaranteed a buyer for your listing price when you flip a home. If you can't get your asking price, you might end up with a loss overall.

What's the right call?

If you don't have a ton of time to devote to your investments, then stocks might be a better choice for you than real estate. But there is a way to combine both worlds. If you invest in residential REITs, or real estate investment trusts, you get exposure to the real estate market without having to own actual properties.

Residential REITs are companies that maintain portfolios of residential properties. So if you want the benefit of earning rental income without having to be a landlord, you can get it indirectly by adding these REITs to your portfolio, since they make money on rent on a regular basis.