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Should you invest in stocks or real estate?


Author: Kelley Treon, October 15, 2019


Spoiler Alert: The answer is BOTH.

As a certified public accountant, my tax clients often ask me questions about their investments. For many people, the bulk of their wealth is tied to an employer sponsored retirement plan. This is an excellent way to save for retirement, it usually results in an additional employee benefit in the form of an employer match and provides a current tax benefit because contributions are made on a pre-tax basis. I always advise to contribute at least the amount that qualifies for the maximum employer match.


But for those who can save and invest more, what’s the best choice? There are many factors that should be considered including the amount of funds available to invest, risk tolerance, investment goals and investment style. In my opinion, a portfolio built for the long term with adequate diversification should have both.


There are pros and cons to owning stock or real estate. Real estate is a tangible asset, so it acts as a hedge against inflation. Because of this, real estate holds value over the long term. Because you can see and touch it, it is harder to defraud a real estate investor. A real estate investor can use debt to increase the power of their invested dollars and to spread the cost of the investment over a long period of time. Income properties (for example commercial or residential rental properties) can provide tax efficient cash flow to the investor. However, direct ownership may require unpredictable cash outlays for operating expenses. And, in the case of direct, single ownership, there is work involved to manage the asset. Also, real estate is not liquid so investment in real estate should be considered a long-term asset. (The “flippers”out there will squawk at that last part. Real estate purchased for flipping is by definition short term and is inventory not a passive investment.)


Stocks are a liquid investment. A stock investment does not require a big initial cash outlay. It’s easier to diversify a stock portfolio, and once the heavy analytics of picking a stock are completed, there is no work necessary to generate returns. However, over the short term, stock prices can be volatile. An investment in stock carries market, economic, and inflation risk. Picking good stocks takes skill.


If you are someone who already has exposure to the stock market through your retirement plan or an investment account you’ve accumulated with your after-tax dollars, consider adding real estate to your portfolio. Many of the cons of investing in real estate can be mitigated by investing through a real estate investment fund. Many funds allow you to have direct ownership of a fractional share of the properties owned by the fund. Distributions to investors are not treated as dividends and therefore are not taxable. Rather, the investor is taxed on their share of the net rental income of the fund which has been reduced by depreciation deductions. Fund investors are passive with no management responsibilities. An investment in a real estate fund can strengthen your overall portfolio by adding diversification and reducing inflation risk.


Kelley Treon, CPA- Principal

Lonicera Management, LLC

ktreon@lonicerainvestments.com

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