3 Disadvantages of Real Estate Investments vs. Stocks
Hauseit
2019-02-16
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What Are the Disadvantages of Buying Real Estate: https://www.hauseit.com/nyc-real-estate-vs-investing-in-stock-market/
Save Money with a Hauseit Buyer Closing Credit: https://www.hauseit.com/hauseit-buyer-closing-credit-nyc/
The primary disadvantages of buying real estate include high transaction costs, illiquidity and greater idiosyncratic risk compared to stock market investments.
The best strategy for growing your net worth over time is to defer as much consumption as possible so you can grow and invest your savings. In an ideal world, you should have a diversified portfolio which contains both real estate and stocks.
Here are three disadvantages of buying real estate versus stocks:
High Transaction Costs
Buying and real estate is very costly due to high buyer and seller closing costs, especially in New York City. Whereas with stocks you can make a five or low six figure investment and pay just a few dollars in fees, for real estate your buyer closing costs are at least 1% to 2% for a co-op or 4% or more for a condo or a house.
Because of the high closing costs, real estate is only a worthwhile investment if you plan on holding onto your property for an adequate amount of time. Buying and selling every few years will erode most if not all of the gains you’ve accumulated from owning real estate in the first place.
Illiquidity
Real estate is an illiquid asset which means it is both time consuming and costly to buy and sell. Whereas with stocks you can sell and receive the money in a matter of days, for real estate it can take six months or more to complete the sale process and receive your sale proceeds.
If you’re in the unfortunate situation of having to sell in a buyer’s market, the sale process could take a very long time and you might not be happy with the outcome in terms of the sale price. Stocks fall as much if not more than real estate during a recession, but at least you’re able to generate cash quickly if you need to sell.
The average time it takes to sell a co-op in NYC from start to finish can take six months or more. Once you’re in contract with a buyer, it still takes another two to three months on average to complete the board application process and receive the clear to close.
Idiosyncratic Risk
Owning real estate carries a great deal of idiosyncratic risk which you simply cannot hedge against. Another way to describe idiosyncratic risk is non-systemic risk. For example, you are completely out of luck if there’s a natural disaster or your tenant stops paying you and doesn’t move out.
Contrast this with stock market holdings, whereby you are so diversified such that there would never be a scenario where 100% of your investment is paralyzed or substantially impaired. The law of large numbers and diversification with a balanced stock portfolio means that the only risk you take is market-wide risk (also called market beta).
Looking to buy or sell a home in New York? Learn how you can save on commission and closing co
Save Money with a Hauseit Buyer Closing Credit: https://www.hauseit.com/hauseit-buyer-closing-credit-nyc/
The primary disadvantages of buying real estate include high transaction costs, illiquidity and greater idiosyncratic risk compared to stock market investments.
The best strategy for growing your net worth over time is to defer as much consumption as possible so you can grow and invest your savings. In an ideal world, you should have a diversified portfolio which contains both real estate and stocks.
Here are three disadvantages of buying real estate versus stocks:
High Transaction Costs
Buying and real estate is very costly due to high buyer and seller closing costs, especially in New York City. Whereas with stocks you can make a five or low six figure investment and pay just a few dollars in fees, for real estate your buyer closing costs are at least 1% to 2% for a co-op or 4% or more for a condo or a house.
Because of the high closing costs, real estate is only a worthwhile investment if you plan on holding onto your property for an adequate amount of time. Buying and selling every few years will erode most if not all of the gains you’ve accumulated from owning real estate in the first place.
Illiquidity
Real estate is an illiquid asset which means it is both time consuming and costly to buy and sell. Whereas with stocks you can sell and receive the money in a matter of days, for real estate it can take six months or more to complete the sale process and receive your sale proceeds.
If you’re in the unfortunate situation of having to sell in a buyer’s market, the sale process could take a very long time and you might not be happy with the outcome in terms of the sale price. Stocks fall as much if not more than real estate during a recession, but at least you’re able to generate cash quickly if you need to sell.
The average time it takes to sell a co-op in NYC from start to finish can take six months or more. Once you’re in contract with a buyer, it still takes another two to three months on average to complete the board application process and receive the clear to close.
Idiosyncratic Risk
Owning real estate carries a great deal of idiosyncratic risk which you simply cannot hedge against. Another way to describe idiosyncratic risk is non-systemic risk. For example, you are completely out of luck if there’s a natural disaster or your tenant stops paying you and doesn’t move out.
Contrast this with stock market holdings, whereby you are so diversified such that there would never be a scenario where 100% of your investment is paralyzed or substantially impaired. The law of large numbers and diversification with a balanced stock portfolio means that the only risk you take is market-wide risk (also called market beta).
Looking to buy or sell a home in New York? Learn how you can save on commission and closing co
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