Which is the Better Investment: Stocks or RE?, Ep #38
Many Americans dream about owning property they can rent for passive income. In this episode of the One for the Money podcast, I examine whether investing in real estate or the stock market is better. Listen to the end when I share tax-saving strategies associated with selling real estate.
In this episode...
All investments carry risks [02:22]
Advantages of investment properties [06:24]
Capital expenditures [11:04]
So which is better? [15:41]
The primary home exemption [17:13]
The dream of owning rental property
Owning a home is one of the more common American dreams. Many Americans also dream about owning an additional rental property to generate passive income. Many wonder which is the better investment: the stock market or real estate. Both stocks and real estate can be worthwhile investments, but all investments carry risk.
Investing in real estate is hugely appealing. Real estate is tangible and practical. You can use the property yourself if you need shelter again. A stock or a bond can’t do that for you. Even if you own 10% of a publicly traded company, they aren’t going to allow you to move into their headquarters! Another reason people like the idea of investing in real estate is that it’s simpler to understand than stocks and bonds.
Challenges in real estate investments
However, just because an investment on the surface seems easy to understand, that doesn’t make the investment any less risky. Income isn’t necessarily guaranteed. Additionally, squatters seem to have an insane amount of rights when they occupy a property, and evictions can be lengthy and costly. Even with a great tenant, there are still challenges. If you don’t have a big enough down payment, generating positive cash flow may take a long time. That means you will be funding losses each year.
Too many people oversimplify the math. They assume they’ll pocket the difference between the rent and the mortgage, failing to account for various fees, taxes, maintenance, and vacancies. You must have experience and intimate knowledge of home values to do well with real estate. Without the time to gain that knowledge, purchasing properties at a discount can be difficult when up against a large corporation with cash offers. Of course, the same could be said of individual investors competing against large investment firms.
Tax breaks on real estate
Homeowners can save money on taxes and make money from property by taking advantage of the primary home exemption. The principal residence exclusion is an IRS rule that allows people who meet specific criteria to exclude up to $250,000 for single filers or up to $500,000 for married filing jointly in capital gains tax from profit when they sell their primary residence. To qualify for this exclusion, you must have owned and lived in the property as your primary residence for two of the five years immediately preceding the sale. That means you could move out of your primary residence for a few years and then rent it for income while still enjoying the tax savings when you sell it.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
Resources & People Mentioned
35 Insightful Landlord Statistics – 2023 - Flex | Pay Rent On Your Own Schedule
Determining How Much You Should Charge for Rent - SmartAsset
Historical Average Stock Market Returns for S&P 500 (5-year to 150-year averages) - Trade That Swing
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