invest Archives | Page 37 of 180

Jul

2024

Should You Open a Joint Brokerage Account?

By Michael Flannelly | Family Finances, invest, Investing | No Comments

Determining whether to open a joint brokerage account with another person, whether a romantic partner, business associate, or relative, can be a difficult decision. Couples often use joint brokerage accounts to simplify household finances and build wealth together. However, this doesn’t mean they are suitable for everyone.

Two or more people may own and manage joint brokerage accounts. These accounts are used to combine investment activities with multiple people. But before investing together using a joint brokerage account with a spouse or partner, it’s essential to understand how joint ownership works and its potential impacts on your finances.

🛈 SoFi currently does not offer joint brokerage accounts.

Investing Together

The reason many couples decide to invest together is fairly simple: they live together, manage a household, and are planning a future together. It can make sense then, not just from a financial perspective but for a healthy relationship, to invest together to build wealth for future goals.

If you’re planning for these long-term financial goals together, like retirement or buying a house, then that might mean having a joint brokerage account in order to plan for your shared desires. But that doesn’t mean couples have to invest together; it could make sense for you to share some accounts as a couple and to keep some separate.

But opening a joint brokerage account to buy and sell stocks or other securities may also be practical in terms of financial returns. Combining your money to invest can potentially help your money grow faster than if investing individually, as you invest a larger initial pool of funds.

What Is a Joint Brokerage Account?

A joint brokerage account is a brokerage account shared by two or more people. Couples, relatives, and business partners typically use joint brokerage accounts to manage investments and finances together. However, any two adults can open a joint brokerage account.

Joint brokerage accounts typically allow anyone named on the account to access and manage its investments. There are multiple ways people can establish joint brokerage accounts, each with specific rules for how account owners can access funds or how the account contents are handled after one of the joint holders passes away.

In contrast, retirement accounts like 401(k)s or individual retirement accounts (IRAs) do not allow joint ownership, unlike many taxable brokerage accounts.

Advantages of Joint Brokerage Accounts for Couples

There are several advantages that couples may benefit from by establishing and using joint brokerage accounts.

Single Investment Manager

One person can be responsible for all of the investment decisions and transactions within the account. This can be useful when only one member of a couple has interest in managing financial affairs.

Recommended: Should I Hire a Money Manager?

Combined Resources

As mentioned above, combining resources can be beneficial as investment decisions are made with a larger pool of money that can be used to increase compounding returns. Additionally, combining resources into a single account may help reduce costs and investment fees, as opposed to managing multiple brokerage accounts.

Simplified Estate Planning

A joint brokerage account can also help simplify estate planning. With certain types of joint brokerage accounts, the surviving account owner will automatically receive the proceeds of the account if one account holder dies. This significantly simplifies estate planning and may allow the surviving account holder to avoid a costly legal battle to maintain ownership.

Challenges of Joint Brokerage Accounts for Couples

There are a few challenges that come with joint brokerage accounts for couples.

Transparency and Trust

Both parties who own a joint brokerage account need to be comfortable with the level of transparency that comes with shared ownership. This means that both partners need to be comfortable with sharing information about their investment objectives, financial goals, and risk tolerance.

Additionally, owners of a joint brokerage account must trust one another. Because the other account holder is an equal owner of the assets and can make changes to the account without your permission, they can make unadvised investment decisions or even empty out the account without the other’s consent.

Breaking Up

It’s important to remember that a joint brokerage account is a joint asset. This means that if the relationship between the account holders sours, the account will need to be divided between the two parties. This can be a complex and time-consuming process, so it’s important to be sure that both partners are prepared for this possibility.

Tax Issues

If you open a joint brokerage account with someone other than a spouse, any deposits you make into the joint account could be deemed a gift to the other account holder, which could trigger gift tax liabilities.

Recommended: A Guide to Tax-Efficient Investing

Things to Know About Joint Brokerage Accounts

Before opening a brokerage account with a partner, business associate, or relative, it’s important to understand the differences between the types of accounts.

There are several types of joint brokerage accounts, each with specific nuances regarding ownership. If you are planning on opening a joint brokerage account, pay close attention to these different types of ownership so you can open one that fits your particular circumstances.

Type of Account	Ownership	Death of Owner	Probate Treatment
Tenancy by Entirety	Only married couples can utilize this type of account. Each spouse has equal ownership rights to the account.	If one spouse dies, the other spouse gets full ownership of the account.	Avoids probate.
Joint Tenants With Rights of Survivorship	Each owner has equal rights to the account.	If one owner dies, the ownership interest is passed to surviving owners.	Avoids probate.
Tenancy in Common	Owners may have different ownership shares of account.	If one owner dies, the ownership share passes to their estate or a beneficiary.	May be subject to probate court.

Ownership

How the ownership of a joint brokerage account is divided up depends on the type of account a couple opens.

• Tenancy by Entirety: If the couple is married, they can benefit from opening an account with tenancy by the entirety. Each spouse has an equal and undivided interest in the account. It is not a 50/50 split; the spouses own 100% of the account.

• Joint Tenants with Rights of Survivorship: This type of joint account gives each owner an equal financial stake in the account.

• Tenancy in Common: A joint brokerage account with tenancy in common allows owners to have different ownership stakes in the account. For example, a couple may open a joint account with tenancy in common and establish a 70/30 ownership split of the account.

Death of Owner

When an owner of a joint brokerage account passes away, their share of the account may pass on to the surviving owners or a beneficiary, depending on the type of account.

• Tenancy by Entirety: If a spouse dies, their ownership stake passes on to the surviving spouse.

• Joint Tenants with Rights of Survivorship: If one owner dies, the ownership interest is passed onto surviving owners.

• Tenancy in Common: If one owner dies, the ownership share passes to their estate or a beneficiary.

Probate Court

In many financial dealings, it can be challenging to determine who owns what when someone passes away. These questions are often brought into the legal system, with probate courts often resolving issues of ownership for financial accounts and property. This can also occur with joint brokerage accounts, depending on the type of account a couple may open.

• Tenancy by Entirety: This type of account avoids the need for probate court, as ownership stays with one spouse if the other spouse passes away.

• Joint Tenants with Rights of Survivorship: This type of account avoids the need for probate court, as ownership interest is passed to the surviving owners when one owner dies.

• Tenancy in Common: In this type of account, if one owner passes away without a will or a state beneficiary, their ownership share will likely have to pass through probate court.

However, regardless of the type of joint brokerage account, if all owners of an account pass away at the same time, the assets in the account may still be subject to probate court if a will does not clearly state beneficiaries.

Tips for Opening a Joint Brokerage Account

Here are some tips that couples may consider before opening a joint brokerage account with a spouse or partner. These tips apply to almost everything; in the end, it’s all about communication and compromise.

• Decide on your investment goals for your joint brokerage account upfront. That means deciding what you want to build wealth for, like a house, vacation, or retirement. This can also mean determining how much money you may be willing to set aside for investing.

• Having goals for your joint brokerage accounts is advisable, but it’s also acceptable to have individual financial goals as long as you’re on the same page. You can set aside some of your discretionary income, like 1%, for each of you to spend as individual fun money. Some couples may also maintain smaller separate accounts in addition to your joint accounts.

• Take a long view of your joint financial goals. While you may disagree about buying a new couch or how to remodel a kitchen, you should agree on when you want to retire.

• Establish a system for resolving disputes before you get started investing. Even in the healthiest of relationships, there are bound to be disagreements. Before you open a joint brokerage account, decide how you will resolve disputes about whether to invest in one asset or rebalance your portfolio.

The Takeaway

Just because you’re in a relationship doesn’t mean you have to open a joint brokerage account with a partner. For some couples, combining finances to build wealth for shared goals makes sense, while other couples may benefit from keeping money issues separate from one another. What matters most is determining what’s best for you and your partner, whatever that may look like for your specific financial needs.

FAQ

Can couples open a joint brokerage account?

Yes, couples can open a joint brokerage account. However, couples are not the only people who can open a joint brokerage account. Any two people, like relatives or business partners, can open joint accounts.

What are the benefits for couples opening a joint brokerage account?

The benefits of opening a joint brokerage account for couples are that they can pool their money and resources to make investments, and they can also make joint decisions about how to manage the account.

How can you start a joint brokerage account?

There are a few ways to start a joint brokerage account. The most common way is to go to a broker and open an account together. Another way is to open an account online.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Jul

2024

What Are Penny Stocks & How Do They Work?

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Penny stocks are shares of companies that usually trade for less than $5 per share. They are highly speculative investments, meaning they carry a high degree of risk. Usually, traders looking for short-term gains use penny stocks, rather than long-term investors looking to build wealth.

But investors are often allured by penny stocks because they are relatively cheap and offer the prospect of high returns – but there are significant risks associated with penny stocks, too. Before trying to use penny stocks to make quick gains, investors must know how they work and the risks involved.

What Are Penny Stocks?

Penny stocks are low-priced financial securities that trade for less than $5 a share, though they often trade for less than $1.

Penny stocks are generally considered to be highly speculative, or relatively higher-risk investments. This is because most penny stocks are issued by small, unknown companies with little or no operating history. In addition, these companies often lack the financial resources to continue operating for very long and are susceptible to fraud.

Despite the risks, some investors are attracted to penny stocks because they offer the potential for significant returns over a short period of time. For example, if a penny stock’s price doubles from $0.30 per share to $0.60 per share, that’s a 100% return on investment on just a $0.30 price increase. Of course, the flip side is that you could possibly also lose all of your investment just as quickly.

Exploring Penny Stocks & How They Work

Although some penny stocks trade on major exchanges, such as the New York Stock Exchange or Nasdaq, most penny stocks trade on the over-the-counter (OTC) market, through the OTC Bulletin Board (OTCBB) or on the pink sheets.

Penny stocks that trade on the OTC market do not have the same regulatory requirements as companies listed on major exchanges. Companies that list their shares on the major exchanges are subject to a high degree of regulatory scrutiny; these publicly traded companies must meet minimum listing standards and provide regular financial reports to the Securities and Exchange Commission (SEC).

In contrast, over-the-counter stocks have fewer hoops to jump through, as they do not have to meet minimum listing requirements. However, penny stocks that trade on the OTCBB must file financial statements with the SEC, while penny stocks listed on the pink sheet are not required to do so.

Because many penny stocks do not have to report periodic financial statements to a regulatory agency, it can be difficult for investors to find adequate information to make informed investment decisions on these securities. This lack of knowledge is one of the reasons penny stocks tend to be higher-risk investments.

Penny Stocks Are Highly Speculative

As noted above, penny stocks are highly speculative investments often bought and sold by traders who want to make short-term gains. Because of this potential for significant, short-term gains, many people view penny stocks as a way to generate outsized returns quickly. However, this is far from the case; penny stocks tend to carry a high degree of risk and, as such, may be better investment options for investors with the time, money, and risk tolerance to dabble in this market.

Who Can Buy Penny Stocks?

Anyone can buy and sell penny stocks, though it is recommended that they have the appropriate risk tolerance before investing in these speculative securities.

To trade penny stocks, you’ll need to open an account with a brokerage that offers OTC trading. Many online brokers offer this service, but do your research before selecting one, including what kind of fees they charge. Once you have an account, you can start buying and selling penny stocks.

Pros of Penny Stocks

Penny stocks may be attractive to investors for a couple of key reasons.

High Reward Potential

There is a belief by some penny stock traders that these small securities have more room to grow than large stocks, thus resulting in significant, short-term price appreciation. The potential for short-term gains means that penny stocks may provide high rewards, despite their risks, especially if traders utilize buying on margin to make their trades.

Enjoyment

Just as some people like to gamble, others like to trade stocks and other securities for fun. Plenty of people would consider analyzing stock charts, reading up on unknown companies, and making bets as one of their hobbies. Traders like this might consider penny stocks as “fun spending,” not necessarily a part of a long-term investing strategy.

Cons of Penny Stocks

Penny stocks also have some drawbacks that investors should be aware of.

Small Likelihood of Success

Making money on a penny stock can be a rare occurrence. Investors should be aware of this, despite the tales of sudden wealth they may hear. Also, finding success trading penny stocks may often take longer than some investors expect or anticipate.

Possibility of Losing it All

A small likelihood of success means that there will inevitably be many failures. It is common for small, unestablished businesses to fold and go under, flounder, or have unsuccessful stock. When stocks become worthless, investors effectively lose all of their investment.

Lack of Liquidity

Penny stocks usually do not have a lot of liquidity, meaning it can be challenging to find buyers when you want to sell. This can make it hard to get out of a position if the stock price declines.

Volatility

Penny stocks tend to be highly volatile, which means that their prices can change a lot, rapidly. This can happen in either direction, making them a difficult tool for building long-term wealth.

Scammers

The penny stock segment of the market is often rife with scammers and fraudsters. Numerous penny stock newsletters promise big wins, and penny stock “investors” manipulate both the market and potential customers.

Researching Penny Stocks to Buy

It’s often difficult for investors to adequately research what penny stocks to buy and sell. Because many penny stock companies do not have to file reports to regulators, investors do not always have great information about the company’s finances, management, and operations.

One of the first things investors should do is check online resources like the OTC Markets website to search for company information on the penny stocks you’re interested in. Once you’ve done that, you can see if the companies have filed reports with the SEC through its EDGAR database. Using this company and financial information, you can develop a sense of the company’s finances and business practices.

Also, it may help to look at penny stocks that trade on exchanges such as the NYSE or NASDAQ. Because these stocks are required to file regular financial reports to the SEC, there is more easily accessible research investors can use to make investment decisions. Additionally, these companies are usually more stable and have more liquidity than penny stocks trading on the pink sheets or OTCBB.

Overall, you’d want to review as much public information as possible when researching penny stocks to buy and sell. When you make investment decisions with inadequate public information, you may open yourself up to relying on shady information that could come from paid promoters or fraudsters looking to pump and dump a stock.

The Takeaway

The allure of making significant, short-term gains by trading penny stocks draws many people into the market. But with the potential of high rewards comes the increased risk and a probability that gains will be hard to come by. Before diving into penny stock trading, assessing your risk tolerance is essential to see if this strategy is right for you.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Can you make money with penny stocks?

While making money with penny stocks is possible, it is also possible to lose money. Penny stocks are generally considered a high-risk investment, and as such, they may not be suitable for all investors.

Are penny stocks good for beginners?

Trading penny stocks is likely not advisable for beginners, as they are often very volatile, difficult to research, and can be challenging to trade. It may be best to consult with a financial professional before trading penny stocks.

Are penny stocks popular investments?

Penny stocks are sometimes popular investments for traders looking for high-risk, high-reward investments. These stocks are typically very volatile, which can lead to significant profits or losses.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q324-001

Jul

2024

Creating an Investment Plan for Your Child

By Austin Kilham | Family Finances, invest, Investing | No Comments

From saving for college to getting a leg up on retirement, creating an investment plan for your child just makes sense. Why? Because when your kids are young, time is on their side in a really big way and it’s only smart to take advantage of it.

In addition, there are several different avenues to consider when setting up an investment plan for your kids. Each one potentially can help set them up for a stronger financial future.

🛈 SoFi currently does not offer custodial banking or investment products.

Why Invest for Your Child?

There’s a reason for the cliché, “Time is money.” The power of time combined with money may help generate growth over time.

The technical name for the advantageous combination of time + money is known as compound interest or compound growth. That means: when money earns a bit of interest or investment gains over time, that additional money also grows and the investment can slowly snowball.

Example of Compounding

Here is a simple example: If you invest $1,000, and it earns 5% per year, that’s $50 ($1,000 x 0.05 = $50). So at the end of one year you’d have $1,050.

That’s when the snowball slowly starts to grow: Now that $1,050 also earns 5%, which means the following year you’d have $1,152.50 ($1,050 x 0.05 = $52.50 + $1,050).

And that $1,152.50 would earn 5% the following year… and so on. You get the idea. It’s money earning more money.

That said, there are no guarantees any investment will grow. It’s also possible an investment can lose money. But given enough time, an investment plan you make for your child has time to recover if there are any losses or volatility over the years.

Benefits of Investing for Your Child Early On

There are other benefits to investing for your kids when they’re young. In addition to the potential snowball effect of compounding, you have the ability to set up different types of investment plans for your child to capture that potential long-term growth.

Each type of investment plan or savings account can help provide resources your child may need down the road.

• You can fund a college or educational savings plan.

• You can open an IRA for your child (individual retirement account).

• You can set up a high-yield savings account, or certificate of deposit (CD).

Even small deposits in these accounts can benefit from potential growth over time, helping to secure your child’s financial future in more than one area. And what parent doesn’t want that?

Are Gifts to Children Taxed?

The IRS does have rules about how much money you can give away before you’re subject to something called the gift tax. But before you start worrying if you’ll have to pay a gift tax on the $100 bill you slipped into your niece’s graduation card, it’s important to know that the gift tax generally only affects large gifts.

This is because there is an “annual exclusion” for the gift tax, which means that gifts up to a certain amount are not subject to the gift tax. For 2024, it’s $18,000. If you and your spouse both give money to your child (or anyone), the annual exclusion is $36,000 in 2024.

That means if you’re married you can give financial gifts up to $36,000 in 2024, without needing to report that gift to the IRS and file a gift tax return.

Also, the recipient of the gift, in this case your child, will not owe any tax.

Are There Investment Plans for Children?

Yes, there are a number of investment plans parents can open for kids these days. Depending on your child’s age, you may want to open different accounts at different times. If you have a minor child or children, you would open custodial accounts that you hold in their name until they are legally able to take over the account.

Investing for Younger Kids

One way to seed your child’s investing plan is by opening a custodial brokerage account, established through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).

While the assets belong to the minor child until they come of age (18 to 21, depending on the state), they’re managed by a custodian, often the parent. But opening and funding a custodial account can be a way to teach your child the basics of investing and money management.

There are no limits on how much money parents or other relatives can deposit in a custodial account, though contributions over $18,000 per year ($36,000 for married couples) would exceed the gift tax exclusion, and need to be reported to the IRS.

UGMA and UTMA custodial accounts have different rules than, say, 529 plans. Be sure to understand how these accounts work before setting one up.

Investing for Teens

Teenagers who are interested in learning more about money management as well as investing have a couple of options.

• Some brokerages also offer accounts for minor teens. The money in the account is considered theirs, but these are custodial accounts and the teenager doesn’t take control of the account until they reach the age of majority in their state (either 18 or 21).

These accounts can be supervised by the custodian, who can help the child make trades and learn about investing in a hands-on environment.

• If your teenager has earned income, from babysitting or lawn mowing, you can also set up a custodial Roth IRA for your child. (If a younger child has earned income, say, from work as a performer, they can also fund a Roth IRA.)

Opening a Roth IRA offers a number of potential benefits for kids: top of the list is that the money they save and invest within the IRA has years to grow, and can provide a tax-free income stream in retirement.

Recommended: Paying for College: A Parents’ Guide

Starting a 529 Savings Plan

Saving for a child’s college education is often top of mind when parents think about planning for their kids’ futures.

A 529 plan is a tax-advantaged savings plan that encourages saving for education costs by offering a few key benefits. In some states you can deduct the amount you contribute to a 529 plan. But even if your state doesn’t allow the tax deduction, the money within a 529 plan grows tax free, and qualified withdrawals are also tax free.

That includes money used to pay for tuition, room and board, lab fees, textbooks, and more. Qualified withdrawals can be used to pay for elementary, secondary, and higher education expenses, as well as qualified loan repayments, and some apprenticeship expenses. (Withdrawals that are used for non-qualified expenses may be subject to taxes and a penalty.)

Though all 50 states sponsor 529 plans you’re not required to invest in the plan that’s offered in your home state — you can shop around to find the plan that’s the best fit for you. You and your child will be able to use the funds to pay for education-related expenses in whichever state they choose.

Other Ways to Invest for Education

Given the benefits of investing for your child’s education, there are additional options to consider.

Prepaid Tuition Plans

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices. Such plans are usually available only at public schools and for in-state students, but some can be converted for use at out-of-state or private colleges.

The main benefit of this plan is that you could save big on the price of college by prepaying before prices go up. One of the main disadvantages is that, with some exceptions, these funds only cover tuition costs (not room and board, for example).

Education Savings Plans

An education savings plan or ESA is similar to a 529 plan, in that the money saved grows tax free and can be withdrawn tax free to pay for qualified educational expenses for elementary, secondary, and higher education.

ESAs, however, come with income caps. Single filers with a modified adjusted gross income (MAGI) over $110,000, and married couples filing jointly who have a MAGI over $220,000 cannot contribute to an ESA.
ESAs also come with contribution limits: You can only contribute up to $2,000 per year, per child, and ESA contributions are only allowed up to the beneficiary’s 18th birthday, unless they’re a special needs student.

And while many states offer a tax deduction for contributing to a 529 plan, that’s not the case with ESA contributions; they are not tax deductible at the federal or the state level.

Investing Your Education Funds

Once you make contributions to an educational account, you can invest your funds. You will likely have a range of investment options to choose from, including mutual funds and exchange-traded funds (ETFs), which vary from state to state.

Many plans also offer the equivalent of age-based target-date funds, which start out with a more aggressive allocation (e.g. more in stocks), and gradually dial back to become more conservative as college approaches.

Depending on your child’s level of interest, this could be an opportunity to have them learn more about the investing process.

Thinking Ahead to Retirement Accounts

It’s worth knowing that as soon as your child is working, you are able to open a custodial Roth IRA, as discussed above. The assets inside the IRA belong to your child, but you have control over investing them until they become an adult.

While it’s possible to open a custodial account for a traditional IRA, most minor children won’t reap the tax benefits of this type of IRA. Most children don’t need tax-deductible contributions to lower their taxable income.

For that reason, it may make more sense to set up a custodial Roth IRA for your child, assuming the child has earned income. A Roth can offer tax-free income in retirement, assuming the withdrawals are qualified.

When to Choose a Savings Account for Your Child

Investing is a long-term proposition. Investing for long periods allows you to take advantage of compounding, and may help you ride out the volatility may occur in the stock market. But sometimes you want a safer place to keep some cash for your child — and that’s when opening a savings account is appropriate.

If you think you’ll need the money you’re saving for your child in the next three to five years, consider putting it in a high-yield savings account, which offers higher interest rates than traditional savings accounts.

You might also want to consider a certificate of deposit (CD), which also offers higher interest rates than traditional saving vehicles. The only catch with CDs is that in exchange for this higher interest rate, you essentially agree to keep your money in the CD for a set amount of time, from a few months to a few years.

While these savings vehicles don’t offer the same high rates of return you might find in the market, they are a less risky option and offer a steady rate of return.

The Takeaway

When considering your long-term goals for your child, having an investing plan might make sense. Whether you want to save for college, help your child get ahead on retirement, or just set up a savings account for your kids, now is the time to start. In fact, the sooner the better, as time can help money grow (just as it helps children grow!).

FAQ

Can a child have an investment account?

A parent or other adult can open a custodial brokerage account for a minor child or a teenager. While the custodian manages the account, the funds belong to the child, who gains control over the account when they reach the age of majority in their state (18 or 21).

What is the best way to invest money for a child?

The best way is to get started sooner rather than later. Perhaps start with one goal — i.e. saving for college — and open a 529 plan. Or, if your child has earned income from a side job, you can open a custodial Roth IRA for them.

What is a good age to start investing as a kid?

When your child shows an interest in investing, or when they have a specific goal, whether that’s at age 7 or 17, that’s when you’ll have a willing participant. Ideally you want to invest when they’re younger, so time can work in your favor.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q324-005

Jul

2024

Real Estate Crowdfunding: What Is It?

By Rebecca Lake | Growing Wealth, Home Ownership, invest | Comments Off

Real estate crowdfunding allows investors to pool funds together to invest in property. Crowdfunding has become a popular way to invest in real estate, and gain exposure to an alternative asset class without owning property directly.

Adding real estate to a portfolio can increase diversification while creating a potential buffer against inflation. Real estate crowdfunding platforms make it possible to invest in commercial and residential properties online, with potentially low barriers to entry. But accredited and nonaccredited investors (retail investors) are subject to different rules.

How Real Estate Crowdfunding Works

Real estate crowdfunding platforms seek out investment opportunities and vet them before making them available to investors. The platform then enables multiple investors to fund property investments at lower amounts than the actual property would cost. The minimum investment varies by platform, and might range from a few hundred dollars to upwards of $5,000.

Real estate investors then gain a proportional share of the profits. Depending on the nature of the investment, investors may see interest payments, rental income, or dividends. If a property is sold or assets are otherwise liquidated, investors could also see a profit.

Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

Real Estate Crowdfunding Examples

Investors can join a real estate crowdfunding marketplace and browse investment options, which may include:

• Individual residential properties

• Retail space

• Office buildings

• Warehouses and storage facilities

• Multifamily housing

• Real estate investment trusts (REITs)

• Real estate funds

Rather than concentrating capital in a single piece of property, real estate crowdfunding allows investors to distribute their capital among different types of properties. If you’re interested in how to invest in real estate in a hands-off way, crowdfunding can help you do it.

Crowdfunding Explained

What is crowdfunding? In simple terms, it’s the act of raising money from a crowd or pool of investors.

Crowdfunding is possible through Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. The Act’s purpose was to make it easier for small businesses to raise funds following the fallout of the 2008 financial crisis.

The Securities and Exchange Commission (SEC) subsequently adopted a series of rules allowing crowdfunding to be applied to real estate investments.1,2

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Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Today, accredited and nonaccredited (retail) investors can invest in crowdfunded real estate, but there are different rules for each.

Accredited Investors

An accredited investor, according to the SEC, is someone who:

• Has a net worth exceeding $1 million, not including the value of their primary residence, OR

• Had income exceeding $200,000 annually ($300,000 for married couples) in each of the two prior years and expects the same level of income going forward, OR

• Holds a Series 7, Series 65, or Series 82 securities license

Investors who meet the qualifications to be accredited in the eyes of the SEC may invest any amount in crowdfunded real estate.

Nonaccredited Investors

Retail investors who don’t meet the criteria for accredited investors may be limited in how much they can invest in any Regulation Crowdfunding offering in any 12-month period. If either your income or net worth is less than $124,000, during any 12-month period you can invest up to $2,500, or 5% of your income or net worth, whichever is greater.

If both your income and net worth are $124,000 or higher, during any 12-month period you can invest up to 10% of your annual income or net worth, whichever is greater (not more than $124,000 total).

Advantages and Disadvantages of Real Estate Crowdfunding

Here’s a closer look at how the potential benefits and drawbacks of this alternative strategy compare.

Pros

Holding crowdfunded real estate in a portfolio can offer potential advantages:

• Minimum investments may be as low as a few hundred dollars.

• Crowdfunded property investments may yield above-average returns for investors who are comfortable with a longer holding period and highly illiquid assets.

• Investors have flexibility in choosing which type of property investments they’d like to fund, based on their goals and risk tolerance.

• Direct ownership isn’t required, which means there’s no need for investors to get a mortgage, come up with down payment funds, or deal with the headaches of managing a rental property.

• Nonaccredited investors are not shut out of crowdfunding real estate, thanks to SEC rulemaking, but are subject to other restrictions.

Cons

While there are some attractive features associated with real estate crowdfunding, there are some things investors may want to be wary of:

• Real estate crowdfunding platforms may charge hefty fees, which can detract from overall investment earnings.

• Generally speaking, crowdfunded real estate is illiquid since you’re meant to leave your capital in the investment for the duration of the holding period.

• Taxes on real estate gains can be complicated, as the dividend portion is typically taxed differently than profit from sales of properties. You may want to consult a professional.

• Returns are not guaranteed, and properties may underperform as market or economic conditions change.

• Nonaccredited investors are limited in how much they can invest in crowdfunded real estate by SEC regulations (see above).

Real Estate Crowdfunding Platforms

Online platforms allow investors to crowdfund real estate with a relatively low minimum investment amount. A typical minimum investment is $10,000 though some platforms allow investors to get started with $500 or less.

When comparing platforms that crowdfund real estate, it’s helpful to consider:

• Minimum and maximum investment thresholds

• Range of investment options

• Investment holding periods

• Fees

• Investment performance

• Vetting and due diligence

It’s also important to look at whether a platform works with accredited or nonaccredited investors. The best real estate crowdfunding platforms thoroughly vet properties before making them available to investors, have low minimum investment thresholds, and charge minimal fees.

How to Get Started

If you’re interested in real estate crowdfunding you’ll first need to decide how much money you’re comfortable investing. How much of your portfolio you should allocate to real estate investments can depend on:

• Your age and time horizon for investing

• Investment goals

• Risk tolerance

• Risk capacity, meaning how much risk you need to take to reach your goals

There’s no magic number to aim for. Some investors may be comfortable allocating a larger portion of their portfolio to alternative investments like real estate while others may prefer to limit their allocation to 5% or 10% instead.

Once you’ve got an amount in mind you can move on to researching real estate crowdfunding platforms. Remember to look at whether platforms work with nonaccredited investors if you don’t yet qualify for accredited status.

The Takeaway

Real estate crowdfunding offers an exciting opportunity to expand your portfolio beyond traditional stocks and bonds. You might consider this option alongside REITs, real estate funds, or real estate stocks if you’d like to reap some of the benefits of property investing without having to purchase a rental unit or a fix-and-flip home.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

How would earnings from real estate crowdfunding be taxed?

Owing to the complexity of real estate-related tax rules, you may want to consult a professional. Crowdfunded real estate investments can produce income in the form of dividends or interest, both of which are taxable at the dividend rate. Generally, any profits you clear when exiting would be treated as capital gains, and the holding period determines whether the short- or long-term rate applies.

Would real estate crowdfunding be considered a high-risk investment?

Real estate crowdfunding is risky, as interest rate fluctuations or changing market and economic conditions can affect outcomes. If you’re weighing real estate vs. stocks, remember that the two have little correlation to one another. Holding real estate in a portfolio can help balance risk and provide some protection against market volatility.

What is the difference between an accredited and nonaccredited investor?

An accredited investor satisfies one of three requirements established by the SEC, based on net worth, income, or securities licenses they hold. A nonaccredited investor does not meet these requirements and is generally considered a retail investor. A nonaccredited investor is subject to limits on how they may invest in crowdfunding opportunities.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN-Q224-1901100-V1

Jul

2024

Real Estate vs. Stocks: Pros and Cons

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Stocks are typically a staple in many portfolios, but real estate can be a valuable addition as it offers the potential for diversification. Investing in real estate — through direct ownership or other means — can also be a hedge against inflation and market volatility.

When it comes to investing in real estate vs. stocks, it’s less of an either-or proposition and more a question of understanding the role that each asset class can play in your investment strategy, as well as the potential risks.

The Nature of Real Estate Investments

Real estate is considered an alternative asset class as it generally doesn’t move in tandem with traditional securities like stocks and bonds. As such, real estate can be attractive on several levels for investors who are interested in diversifying their portfolios to balance risk, and potentially generating income through dividends, interest payments, or rental income.

If you’re interested in learning how to invest in real estate, some options include:

• Owning one or more rental properties

• Buying shares in a real estate investment trust (REIT)

• Investing in real estate funds or real estate stocks

• Joining a real estate crowdfunding platform

• Buying mortgage notes

• Buying land

• Purchasing a fix-and-flip property

Some of these options require more investment capital than others — it depends whether you’re buying shares of a real estate investment like a REIT, or purchasing a property outright — and each type of asset has different risks and rewards. Investors setting up a portfolio have flexibility in choosing where to put their money, based on their goals and risk tolerance.

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The Nature of Stock Investments

When comparing real estate vs. stocks, keep in mind there are only a few similarities. Unlike property, a stock is a type of security, meaning it has value and can be bought and sold. Owning shares of stock is a way of owning part of a company.

While it’s possible to own shares of a real estate investment — say, through a REIT, real estate-focused mutual funds, or crowdfunding platforms — investing in property often involves physical ownership, which is not the case with stocks.

Stocks are sold on exchanges in the U.S. The two largest are the New York Stock Exchange (NYSE) and the Nasdaq.1 Again, there can be some overlap with certain real estate investments, like REITS, that may trade on an exchange.

When you buy a share of stock you’re buying an ownership stake in a company. The more shares you buy, the more of the company you own. Some stocks pay dividends to investors, which represent a share of the company’s profits. Stocks can be:

• Preferred, meaning shareholders lack voting rights but receive priority payment of dividends

• Common, meaning shareholders have voting rights but are last in line to receive dividend payments2

Stocks can be bought and sold in individual shares or collectively through mutual funds and exchange-traded funds (ETFs). When you buy a mutual fund or ETF you’re buying a basket of investments, which can include stocks from different companies.

Investors may actively trade stocks to try and leverage market trends from one day to the next, or they may use a buy-and-hold approach to benefit from capital appreciation over time. Which path you choose depends on whether you’re looking for short-term or long-term gains.

Comparing Returns of Real Estate and Stocks

In weighing the merits of real estate vs. stocks it’s important to consider return profiles. So, which tends to perform better over time: stocks or real estate?

Historically, the numbers show that stocks tend to perform better than real estate. If you look at 2023, for instance, the S&P 500 posted a 26.06% return. Real estate, by comparison, returned 6.29% to investors.

Stocks don’t always best real estate, of course. As recently as 2022, the S&P 500 posted a negative return of -18.04% while real estate returned 5.67%. However, when you compare the historical data year by year, stocks tend to outperform real estate more often than not.

Does that mean real estate is a poor investment? Given its low correlation to the stock market, real estate could bolster returns in years when stock prices drop due to increased volatility.

Liquidity and Accessibility Differences

Liquidity refers to how easily you can sell an investment that you own. When you compare stocks vs. real estate, stocks are typically the more liquid of the two because it’s relatively easy to sell one or more shares of stock on an exchange.

With real estate, however, there may be obstacles that could make liquidating your investment more difficult.

For example, if you’re investing in crowdfunded real estate you may have to wait until the holding period ends to withdraw your initial investment. It’s not uncommon to see holding periods that last five to 10 years with real estate crowdfunding.

Illiquidity is also typical with other categories of alternative investments.

REIT or real estate fund shares may be easier to unload if there’s demand for them in the market. However, trying to sell a rental property you own could take time if there’s a lack of eager buyers. Weighing the pros and cons of REIT investing against other real estate investments can make it easier to decide which ones align with your needs.

Risk and Diversification Considerations

Real estate and stocks have different risks to weigh, as well as different paths to diversification.

Real Estate Risks

With real estate, the biggest risks tend to be:

• Market risk. Changing economic conditions or shifts in supply and demand can negatively affect real estate investment returns or make it more difficult to exit an investment.

• Credit risk. Renting properties can provide a steady income but there’s always the risk that your renters won’t pay on time, or at all.

• Location risk. A once-favorable location might suffer from environmental impacts or regulatory changes.

• Interest rate risk. When interest rates fluctuate, that can impact the ability to get loans for new purchases or repairs. Interest rates can also impact cash flow from a property.

Equities Risks

With stocks, the biggest threats tend to be:

• Market risk. Also known as systematic risk, market risk is the tendency of the market as a whole to rise and fall, impacting stocks in different sectors.

• Volatility. Some stocks are more volatile than others, i.e., their share price tends to fluctuate versus other stocks that have fewer ups and downs, such as blue-chip stocks.

• Inflation. Inflation can have a big impact on stocks owing to the change in demand for goods and the diminished purchasing power of capital.

• Economic and political factors. Economic factors can play into stock market movements here and abroad, influencing political climates, and vice versa.

Diversification and Real Estate Investments

In terms of potential diversification benefits, real estate may counterbalance the volatility of stocks because property values tend not to fluctuate as dramatically within shorter periods.

Investing in real estate may offer some protection against inflation, since property prices tend to rise in tandem with increases in other consumer prices.

Diversification and Equities

Diversifying with stocks usually means choosing investments in companies that represent different sectors of the market. You might allocate some of your portfolio to defensive, lower-risk stocks in the utilities and healthcare sectors while also investing in some higher-risk stocks that may generate better returns.

It’s also possible to invest in mutual funds and ETFs, which are types of pooled investments that offer diversification owing to the number of securities each fund holds.

The Takeaway

Whether it makes sense to invest in stocks vs. real estate ultimately hinges on what you need your portfolio to do for you. There’s an argument for holding both positions. But it’s wise to consider the risk factors that may come into play with each type of asset.

Equities can help investors target growth in specific sectors, but can be subject to systematic risk as well as economic shocks, and other factors. As an alternative asset class, real estate may help provide some ballast in your portfolio if stocks turn volatile. Real estate may also hedge against inflation. But real estate is generally illiquid, and the risks of certain types of property investments, or crowdfunding platforms, may not be obvious.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the main types of real estate investments?

Rental properties and fix-and-flip properties are two of the most popular ways to get started with real estate investing, if you prefer a hands-on approach. If you’d rather invest in real estate for passive income, you might consider REITs, real estate funds, real estate stocks, or crowdfunded real estate investments instead.

How do the historical returns of real estate and stocks compare?

Historically, average stock market returns have more or less matched real estate returns. However, there have been years where real estate returns have significantly outpaced stocks. Economic conditions, geopolitical events, and the interest rate environment can all play a part in influencing whether stocks or real estate produce better returns.

Are stocks more volatile than real estate?

Stocks tend to be more volatile than real estate, which is one of the reasons to consider property investments. Real estate may help bring some stability to your portfolio when stock prices are fluctuating due to uncertain market conditions. That said, real estate investments are subject to other risk factors such as interest rate changes, which affect prices, as well as weather and/or climate changes; the rise and fall of a location’s popularity; local zoning rules, as well as other issues investors need to bear in mind.

Photo credit: iStock/andreswd

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

SOIN-Q224-1900928-V1

Should You Open a Joint Brokerage Account?

Investing Together

What Is a Joint Brokerage Account?

Advantages of Joint Brokerage Accounts for Couples

Single Investment Manager

Combined Resources

Simplified Estate Planning

Challenges of Joint Brokerage Accounts for Couples

Transparency and Trust

Breaking Up

Tax Issues

Things to Know About Joint Brokerage Accounts

Ownership

Death of Owner

Probate Court

Tips for Opening a Joint Brokerage Account

The Takeaway

FAQ

Can couples open a joint brokerage account?

What are the benefits for couples opening a joint brokerage account?

How can you start a joint brokerage account?

What Are Penny Stocks & How Do They Work?

What Are Penny Stocks?

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Exploring Penny Stocks & How They Work

Penny Stocks Are Highly Speculative

Who Can Buy Penny Stocks?

Pros of Penny Stocks

High Reward Potential

Enjoyment

Cons of Penny Stocks

Small Likelihood of Success

Possibility of Losing it All

Lack of Liquidity

Volatility

Scammers

Researching Penny Stocks to Buy

The Takeaway

FAQ

Can you make money with penny stocks?

Are penny stocks good for beginners?

Are penny stocks popular investments?

Creating an Investment Plan for Your Child

Why Invest for Your Child?

Example of Compounding

Benefits of Investing for Your Child Early On

Are Gifts to Children Taxed?

Are There Investment Plans for Children?

Investing for Younger Kids

Investing for Teens

Starting a 529 Savings Plan

Other Ways to Invest for Education

Prepaid Tuition Plans

Education Savings Plans

Investing Your Education Funds

Thinking Ahead to Retirement Accounts

When to Choose a Savings Account for Your Child

The Takeaway

FAQ

Can a child have an investment account?

What is the best way to invest money for a child?

What is a good age to start investing as a kid?

Real Estate Crowdfunding: What Is It?

How Real Estate Crowdfunding Works

Real Estate Crowdfunding Examples

Crowdfunding Explained

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Crowdfunded Real Estate for Accredited and Nonaccredited Investors

Accredited Investors

Nonaccredited Investors

Advantages and Disadvantages of Real Estate Crowdfunding

Pros

Cons

Real Estate Crowdfunding Platforms

How to Get Started

The Takeaway

FAQ

How would earnings from real estate crowdfunding be taxed?

Alternative investments,
now for the rest of us.

Alternative investments,
now for the rest of us.

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