Real Estate vs the Stock Market as an Investment Strategy

Lets take a closer look at the benefits of investing in short and long term real estate strategies as a hedge and diversification against a volatile stock market.

When it comes to investing, two popular options that come to mind are stocks and real estate. For years stocks were the go-to investment strategy for many people. With the enormous growth of tech stocks and startups investors made great returns with the growth of these companies. However, the pandemic boom-and-bust with the stock market has left many wondering, is this the best way to invest my money? Many new and seasoned investors have come to find that real estate provides a number of advantages that the stock market does not provide. In this blog, we'll explore some of the benefits of investing in real estate and why it may be better investment strategy regardless of external circumstances, i.e. the pandemic.

One of the biggest advantages of investing in real estate is that it is a tangible asset. Unlike stocks, real estate is a physical property that you can see, touch, and use. This can provide a sense of security and stability for some investors, as they know that their investment is tied to a real, physical asset.

Real estate can provide consistent and reliable source of cash flow, especially if you're investing in rental properties. Unlike stocks, which pay dividends on an irregular basis, rental income can be collected on a monthly basis. In addition, rental income is often more stable than stock dividends, as renters are typically signed into long-term leases as well as short-term rentals.

Owning real estate can offer a number of tax benefits that can help you save money on your taxes. For example, you can deduct expenses related to the upkeep and maintenance of your properties, as well as any mortgage interest payments you make. In addition, real estate investments can be depreciated over time, which can help offset your taxable income.

4 Tax Benefits to owning a short-term rental

  1. Deductible Expenses: Property owners can deduct expenses associated with running their short-term rental, such as mortgage interest, property taxes, insurance, cleaning fees, maintenance costs, and utilities. These expenses can be significant, and they can help reduce the taxable income generated by the rental property.
  2. Depreciation: Property owners can also depreciate the value of their short-term rental over time, which can further reduce their taxable income. Depreciation allows owners to deduct a portion of the property's value each year as it wears out, becomes obsolete, or loses value due to factors such as wear and tear or age.
  3. Capital Gains Exclusion: If the owner of a short-term rental property lives in the property for at least two out of the five years preceding the sale, they may be eligible for a capital gains exclusion. This exclusion allows owners to exclude up to $250,000 ($500,000 for married couples) in capital gains from the sale of the property.
  4. Pass-Through Deduction: The 2017 Tax Cuts and Jobs Act created a new deduction for pass-through businesses, including short-term rental properties. This deduction allows owners to deduct up to 20% of their net rental income from their taxable income, reducing their tax liability.

While you can depreciate the value of your property, most real estate tends to appreciate over time. This can provide a significant return on investment over the long-term. In addition, real estate investments can be leveraged, meaning that you can use borrowed money to invest in properties. This can amplify your returns and allow you to grow your portfolio more quickly.

Investing in real estate can provide a valuable diversification strategy for investors who may have a heavy concentration in stocks. By investing in real estate, you can diversify your portfolio and reduce your overall risk. This can be especially valuable during times of market volatility, as real estate investments are often less sensitive to short-term market fluctuations.

It should be noted that investing in real estate comes with its own set of risks and challenges. It requires a significant amount of time and effort to manage, and there is always the risk that property values may decline. However, with careful research, and a sound investment strategy using data-driven insights, real estate can be a valuable addition to any investor's portfolio.

Both stocks and real estate offer unique benefits and risks – many investors would argue that real estate is a superior investment strategy. With its tangible nature, reliable cash flow, tax benefits, potential for appreciation, and diversification benefits, real estate can be advantageous for investors looking for a more stable and secure short and long-term investment strategy.

Written by
Chris Kite
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