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.
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.
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.
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