Residential real-estate companies are piling into new businesses like mortgages and title insurance, aiming to generate additional income to offset tight margins

Which is a better investment idea? Real estate investment vs stock market

I’ll modify the question a bit to: What is a better investment: stocks or real estate?

..and the answer, as anyone who has taken a first year corporate finance class will tell you is: it depends.

  • It depends on your financial goals (how much, how fast)
  • Your appetite for risk
  • How much time do you want to spend managing your investments.

For example, by real estate investment, do you mean:

  • Buying and holding land for years
  • Buying rental property
  • Buying distressed properties and renovating them for resell or rent (Donald Trump did that successfully)

All three of those can be very time and capital intensive, with a higher barrier to entry than stocks.

If you’re buying land and plan to hold it for 20 years, then you’ll need cash. Just to hold off loses from inflation you’ll need to gain about 2% in value per year, with really no guarantees that you will see a payoff. You might get lucky if prices skyrocket, or someone really wants the land. Then again, you could find out later that the area was rezoned while you weren’t looking, or someone dumped toxic waste on the site while you were away and you have pay for the clean up.

Buying rental property is a path many choose, but as a former landlord it’s not all it’s cracked up to be. In short, you either buy a home outright or get a loan for a property and rent it out, hoping that the rental income can cover the mortgage, insurance, repairs, etc. Everyone overestimates the rental income and underestimates repairs and other costs. Lots of articles on Quora cover the ins and outs of this. I believe the consensus was that the real average rate of return is about 5% annually. Keep in mind the data below is gross income:

Renovating properties carries its own ranks, whether you are selling (flipping) or renting. This takes time and skill to do right. You have to be able to judge the market really well and hold down expenses for the repairs/renovations, transaction costs, etc. Some of the overinflated numbers you hear of people bragging about flipping houses doesn’t include all the labor costs that the investor did themselves. It’s literally a full time job. The average reported gross returns are about 30%. Net returns (what’s left after all the labor, materials, fees, commissions, etc are paid) are much smaller, likely single digits. I’ve seen lots of people go bankrupt doing this.

So what about stocks?

In your example, you mentioned dividend stocks which is a different investment strategy than trading stocks. Companies that pay a dividend are usually big, well established firms that don’t have a lot of growth like GE, Microsoft, Wal Mart, etc. So if you bought 10,000 shares of a company that paid a $1 annual dividend, you would get a check every quarter for 1/4 that amount.

But not all dividend stocks are equal. A stock offering a $1 annual dividend selling for $20 a share is a much different return than a company with a share price of $50. The actual return rate on your money is called a dividend yield:

And since stocks are traded on an open market, you have to be careful as the underlying price of the stock can change as well. This in turn, impacts the yield.

It pays to do a bit of homework here, but as you can see you can get pretty good returns with a little bit of homework.

For my money, I prefer stocks and bonds to grow wealth. You can enter or exit your investments in a few minutes for about $10 (real estate takes weeks, and sometimes months), no one calls me at 2am because a furnace went out, I don’t have to spend my weekends evicting a tenant or making repairs, and I get paid like clockwork.

Any good investor will diversify their portfolio and that includes some real estate. In my case, that the house I live in which is as much real estate as I want to own.

All types of investment carry some risks, so do your homework (5 Big Dividend Investing Mistakes (And How To Avoid Them), and follow a few basic rules (The 8 Rules of Dividend Investing). People often spend more time researching and negotiating the purchase of a car, but will buy a stock they know nothing about in 10 minutes. Never rush into an investment. If you take the same time and effort to learn dividend investing and understanding what you are buying as you would if you were investing in real estate, I think you’ll be much better off.

Hope this was helpful. If you’re looking for more answers like this one on Investing and Wealth, follow me on Quora.