Here’s a fun exercise: Type “Superman versus Batman” into any search engine, and you will discover the kinds of answers people routinely look for. Apparently, searchers like to ask which superhero is older, smarter, more popular and all-around better. It’s only funny because we humans make it a habit to compare things (and evidently, superheroes). We like to weigh one thing against another to see which comes out on top.
As an investor, you may not be comparing superheroes, but you certainly can compare investment strategies. If you wonder whether stocks are a better investment than commercial real estate or if commercial real estate provides a better ROI than stocks, you’re not alone.
To take the guesswork out of which investment is a better fit for you, start by exploring the pros and cons of each investing strategy.
Stocks
Pros:
• Historically solid returns: On January 1, 1986, the S&P 500 Index stood at $208. Thirty years later, on January 1, 2016, the index hit $1,905, representing a 7.66% compounded rate of return.
• Captures growth in economies around the globe: By holding both U.S. and international stocks, you can benefit from what happens in both the U.S. and globally.
• Provides a regular stream of income: A great advantage of stocks is that some stocks pay dividends. For dividend-paying stocks, even during “down” years investors know that — based on the history of that stock — dividends are coming.
• Opportunity to diversify: With stocks, you can spread out the risks, investing in everything from low-risk/low-reward stocks to high-risk/high-reward stocks. If some of those stocks happen to have a bad year, you don’t have to worry because the others will lessen the blow.
• Liquidity: Simply put, it’s easier and faster to sell stocks than it is to sell a commercial property, meaning investors have faster access to cash.
Cons:
• Market volatility: Yes, the market did well for the majority of years between 1986 and 2016, but the bad years were quite difficult for many people, resulting in great losses.
• Analysis can be difficult: Picking just the right mix of stocks can be time-consuming and frustrating. After all, you don’t know the future and the factors that will impact a stock’s value.
• Not knowing when to sell: Just as you’re never going to be 100% sure about which stocks are the best picks, you can never know with certainty when a stock is peaking and should be sold. In addition, you have to factor in paying capital gains tax and almost immediately focus on reinvesting proceeds to continue making money.
Commercial Real Estate
Pros:
• A steady income: Investing in real estate offers endless options for fixed income. Each type of real estate (multifamily, office, industrial, retail etc.) offers different types of risk, as well as different rates of return. This allows investors to balance the types of returns they are looking for with the level of risk they are willing to accept.
• Non-correlation to stock ownership: Due to its low correlation to the stock market, real estate can also protect your portfolio when the market is down.
• Capitalize on a growing economy: A strong economy (which is historically more common than not) can cause your commercial properties to appreciate quickly. In the long run, this appreciation can balance out any losses taken during tough times.
• Creative diversification: The fact that there are so many different types of commercial real estate means that you can diversify your portfolio, further protecting you against economic downturns.
• A tangible asset: You know what you’re getting when you buy real estate because you can see it and touch it. You don’t have to visualize your investment because it’s right in front of you.
• Tax benefits. Owning real estate offers several important tax benefits, including depreciation, cash-out refinancing, 1031 exchange and one of the latest tax deferral programs, opportunity zone investing.
Cons:
• Lack of liquidity: While stocks can be quickly turned to cash, it takes time to sell real estate. If you need money quickly, commercial real estate can be a frustrating investment to hold. Like any real estate, you never want to be in the position of selling a property for less than it’s worth simply because you need the money.
• Diversification can be an issue: A number of factors can reduce demand by tenants for your property. Maybe a large employer in the area decides to shutter the business, or the neighborhood experiences an increase in crime. A recession will impact most businesses in some way, thus reducing demand for space. The single egg in your basket would appear less valuable immediately.
• Taking on too much property debt: Placing too much debt on a property that either matures at the wrong time or becomes too expensive during an economic downturn can cripple an investor’s cash flow.
• Property operating risks: Any tenant who fails to pay rent or destroys your property poses a risk to your investment. Also, you may encounter unforeseen expenses that eat away at profits.
Obviously, no one has a crystal ball and can determine with absolute certainty the success of any investment. What you ultimately decide to invest in depends, in part, on which set of pros and cons feels most comfortable. The best part of both investment vehicles? You don’t have to be Superman or Batman to make money.