As you begin to build up your savings, you might be wondering if it’s a good idea to invest in real estate. Whether you have friends who own rental properties to generate income, or you've been inspired by a little (or a lot) of HGTV and Instagram, you might be thinking real estate investing could work for you, too.

The truth is, there are several different ways to invest in the real estate market, and each comes with its own set of costs, risks, and potential returns. While real estate could add diversification to your portfolio, it’s important to start with a clear understanding of the potential upsides and downsides.

If you’re one of the many investors intrigued by the idea of investing in real estate, keep reading for a beginner’s primer on different ways you can get started, how real estate compares to investing in the stock market, and some other key things to think about before closing a deal.

How to invest in real estate

There are several ways to get involved with real estate investing. The one that is right for you may depend on your desired level of investment, liquidity, time, and risk.

Become a landlord

Becoming a landlord is one of the most common ways people get involved in real estate investing. You may decide to purchase one or more single-family homes, or you may even purchase a multi-unit development. Outside of residential, you could also purchase a mixed-use development or office building and rent it to commercial tenants. 

Regardless of which route you take, the end goal would be to purchase property and then lease it out to other people to occupy. You may decide to take on full ownership of the property, or you may have one or more partners contribute to the purchase price.

Being a landlord can take up a lot of your time, and to get started, you’ll need access to a large amount of capital (yours, a partner’s, or a lender’s). For many people, this is a desirable option if they’re looking for an additional revenue stream to supplement their living expenses.

Flip properties

If being a landlord doesn’t sound like your thing, you may decide to channel your inner Chip and Joanna Gaines and develop your own fixer-uppers. If done effectively, buying, renovating, and flipping properties can lead to significant returns.

That said, there’s a lot of time and risk involved, and it certainly requires some expertise — both in terms of real estate markets and home renovation projects. Much like becoming a landlord, to flip properties you need to have access to capital to cover the purchase price and upfront renovation costs, as well as a reliable contractor (unless you plan on doing 100% of the work yourself).

Vacation rentals

Another option for investing in real estate is offering up part or all of a property you own for short-term vacation rentals (think Airbnb or VRBO). This can be particularly lucrative or attractive if it doesn’t require you to make any significant cash investments to get started (i.e. converting a finished basement or guest house you already own into a vacation rental). Plus, it can help offset (or even fully cover!) your monthly mortgage payment.

Crowd-funding platforms

A relatively new way to invest in physical real estate assets is to use an established crowd-sourcing platform specifically designed for real estate investing. These involve pooled assets from many investors, ultimately reducing the amount of financial capital each individual investor needs to buy a stake in a physical property. These platforms let you invest in specific development projects or a portfolio of properties.

Depending on which platform you use, there are different qualifications you must meet. Some only accept SEC-accredited investors (high household income, plus a net worth greater than $1 million), while other platforms allow you to get started for as little as $10. The fees, however, can sometimes be quite high, and you may give up substantial liquidity as compared to investing in an index fund of real estate. Some examples include Fundrise, Groundfloor, and CrowdStreet.

Real estate investment trusts (REITs)

If you don’t want to be a landlord or don’t have the financial capital needed to purchase or invest in a specific property, you may want to consider investing in real estate investment trusts (REITs).

Essentially, REITs are companies that own real estate. These real estate assets are usually larger developments, like retail shopping centers, office buildings, hotels, and apartments. In terms of buying and selling shares, REITs are quite similar to traditional stocks and bonds. As an investor in a REIT, you may receive dividends based on the income the company generates. In fact, REITs are legally required to pay out 90% of their profits as dividends to investors.

Most REITs are publicly traded, just like stocks. If you’re interested in jumping into the real estate market, investing in a REIT mutual fund or ETF (a more diversified basket of REIT companies) could be a good compromise between purchasing a physical asset and focusing solely on traditional stocks and bonds. Investing in a REIT fund could bring strategic diversification to your portfolio without concentrating your risk in a specific property, requiring large amounts of cash, or forcing you to become a landlord. Plus, REITs have relatively low correlation with the overall stock market, further reducing overall portfolio volatility.

Investing in real estate vs. stocks

From an investor’s perspective, both stocks and real estate have their advantages and disadvantages. With most forms of real estate investing, you’re acquiring (in part or in whole) a physical piece of property. Your return on that investment will come in the form of monthly rental income and/or appreciated equity when you sell the property.

When you buy shares of traditional stock, you’re buying a piece of a company. If it’s a dividend-paying stock, you’ll generate some passive income, which is functionally similar to rent payments from real estate. For stocks, as the value of the company grows, your stock value will grow. You’ll realize these appreciated gains when you sell your shares of the stock.

Here are some key areas where stocks and real estate differ.

Income generation

When you purchase a property and rent it out, you’ll immediately begin generating monthly income. Assuming you can keep the property leased, you’ll continue producing income until you decide to sell the property. As macroeconomic conditions change (i.e. cost of living, inflation, etc.), you’ll also have full control over the amount of income you generate.

Stocks aren’t likely to provide the same level of sustained income generation or control. With dividend-paying stocks, you will generate some level of passive income - often around 1-3% of the stock’s value annually. In our experience, the key difference is that dividends from stocks are typically much lower than rental payments as a percentage of the asset’s value. 

Plus, dividend payments from stocks actually reduce the value of the company (and your stock’s value), as management is choosing to give a portion of its financial assets back to shareholders rather than retaining or reinvesting the money. With real estate, assets rarely depreciate over time (with the noteworthy exception of 2008-2012), so it’s unlikely your rental payments will negatively impact the underlying value of your property.

Bottom line: If managing investments on your own, and consistent, controllable income generation is important for you, then real estate investing may be more attractive than the traditional stock market. Although consistent income generation is achievable through a combination of interest, dividends, and capital appreciation, an optimal income distribution plan using a stock portfolio requires a greater level of sophistication.  

Hedge against inflation

Because real estate assets have appreciated over most historical periods, and being a landlord means you control the amount someone pays to lease your property, real estate often acts as an effective hedge against inflation.

Generally, inflation doesn’t directly affect the stock market. Over the past three decades, there’s no reliable correlation between rising inflation and market returns. Although stocks may go up during times of inflation, which usually coincide with a strong economy, there’s no clear evidence that inflation helps stock performance broadly. Certain types of stocks, such as consumer staples companies that produce goods people tend to buy in any economic environment, may have a stronger correlation with inflation.

Of course, there are certainly other circumstances related to inflation that could more directly affect stock prices broadly. For example, when inflation runs too hot, the Fed could hike interest rates and economic growth could slow.

Bottom line: Real estate has historically acted as a more reliable hedge against inflation than the overall stock and bond markets.

Ability to leverage “good debt”

If you don’t purchase real estate with all cash, then you must finance it through a mortgage, a bridge or hard money loan, or another type of debt. In most cases, mortgages are considered “good debt.” That means you can leverage someone else’s money at a reasonable rate of interest to invest in an appreciating asset. Instead of paying for the asset all at once, you can make more manageable monthly payments. This frees up more of your money to invest in additional assets. The risk here is that if you’re unable to make your monthly payments (i.e. loss of income or other financial hardship), you could lose the real estate asset to foreclosure.

Stocks, on the other hand, are not a good vehicle for leveraging good debt. While it is possible to borrow money to invest in stocks — known as investing on margin — this is an extremely risky approach, and not one we recommend. Leverage adds risk by amplifying returns, both positive and negative, and the vast majority of investors aren’t prepared to ride out the big up-and-down swings of a leveraged stock portfolio.

Bottom line: Real estate provides investors an opportunity to leverage good debt, freeing up some of their savings for additional investments.

Ease of investing

Technically speaking, getting started investing in the stock market is fairly easy to do. Most people can open an investment account in a matter of minutes and begin buying and selling stocks. While it does take some skill and time to implement an effective investment strategy, the technical aspects of buying and selling the investments are as simple as a few mouse clicks or screen taps.

Most forms of real estate investing, though, are pretty time intensive. With the exception of REITs and some crowdfunding platforms, you can’t just create an account online and start immediately buying into the real estate market. There’s a lot more required — from identifying properties to accessing capital to completing legal documents. 

Bottom line: Getting started in stock market investing is easier and more straightforward than investing in real estate — and requires less time in the long-term, too.

Upfront costs

You can invest in the stock market with as little or as much money as you’re willing to invest in a specific company, mutual fund, or exchange-traded fund.

If you want to buy a physical real estate asset, you’ll have much higher upfront costs. You’ll either need to have that money lying around or you’ll need to secure financing before you can close on a property purchase.

Bottom line: Stock market investing usually has lower upfront costs than real estate.

Ongoing maintenance

The act of buying and selling real estate takes plenty of time. But once you own a piece of real estate property, you have to continue to work to lease it and maintain it (or hire someone to do it for you, which eats into your returns). This sweat equity and property management will take up even more of your time — and on an ongoing basis. This can really add up and impact your quality of life.

Stocks, on the other hand, require little maintenance outside of routine rebalancing and making additional contributions (which can sometimes be automated). As an active investor, you’ll likely spend some time monitoring your accounts and the markets, too, but compared to real estate, it’s a lot less of your time and attention.

Bottom line: Compared to stocks, real estate requires a lot of time (and/or money) dedicated to ongoing maintenance and upkeep.


As an investor, you’ll want to consider the liquidity of your investments. That is, should you need to, how quickly can you convert your investable assets into cash?

In most cases, stocks are extremely liquid. At a moment’s notice, you can choose to sell shares of stock and convert that into cash pretty quickly. Depending on the account type, you may be subject to certain taxes or early withdrawal penalties; however, you’ll have the access to the money you want or need.

Real estate, obviously, is much different. To fully liquidate a real estate asset, you’ll have to sell the property. This means listing the property, finding a suitable buyer, going through due diligence, and processing all of the closing paperwork. Optimistically, this can take between 30-45 days. While you can borrow against the equity you have in your home (Home Equity Line of Credit or cash-out refinance), even this takes notably more time than selling stock.

Liquidity is important for a couple of reasons — not only in terms of being able to access cash when you need it, but also being able to limit your losses. Because real estate is illiquid, if there are huge market swings that significantly decrease property values and, simultaneously, you find yourself no longer able to afford mortgage payments or property taxes, you won’t be able to move quickly to limit your losses. That could really magnify your overall costs and even lead to foreclosure (i.e., the legal process whereby the bank takes possession of the property used as collateral for the mortgage).

Bottom line: If you prefer investments that can be quickly and easily liquidated into cash, stocks are significantly more attractive than real estate.

Transaction costs

When you buy or sell real estate, you pay for more than just the cost of the property. You’ll also have to pay commission for the real estate agent(s), plus other associated closing costs (attorney’s fees, paperwork processing, etc.). Depending on the value of the asset, this can really add up.

Stocks, on the other hand, have much lower transaction costs. Some large financial firms like Charles Schwab and Fidelity have recently eliminated trading fees completely for stocks and exchange-traded funds (ETFs), a concept that many would have considered unthinkable a decade or two ago.

Bottom line: The fees associated with buying and selling stocks are often much lower than when purchasing real estate.

Tax advantages

Real estate does come with some notable tax advantages. For example, in many cases you can lower your taxable income by writing off the depreciation of a commercial property. Qualified homeowners can also deduct their mortgage interest on the first $750,000 of mortgage debt. You can also sell property through a 1031 exchange and defer paying capital gains taxes, assuming you use the proceeds to buy a similar property or invest in an opportunity zone.

Stocks also offer tax advantages — specifically when it comes to qualified retirement accounts. Retirement accounts like 401(k)s and traditional IRAs offer immediate tax deductions, and investors will not pay taxes on the contribution or growth until the money is withdrawn in retirement.  On the other hand, Roth retirement accounts offer tax advantages in retirement. Roth contributions are post-tax (meaning you pay tax now, before investing in the money), but you won’t be subject to any taxes (even on the growth) when you withdraw the money in retirement.

For non-retirement accounts, however, investors will have to pay taxes on capital gains — that is, the growth of their investments — when they sell appreciated securities. These gains are taxed at a lower rate (between 0% and 20% for most taxpayers) than ordinary income.

Bottom line: Both real estate and stocks offer some notable tax advantages. Retirement-specific investment accounts offer the greatest long-term tax benefits.


Unless you plan on becoming a real estate mogul, investing in a small number of properties can create high levels of concentrated risk. Buying a piece of property isn’t cheap. And if a piece of real estate you own actually depreciates or you find yourself unable to afford financing payments, you have a lot to lose with few levers to pull to limit your losses.

Stocks, however, tend to offer a broad range of investment options. With the same amount of money required to buy the average real estate development, you can purchase a variety of stocks from different organizations and industries.

A notable exception are REITs and REIT funds. REITs remove some of the concentrated risk exposure that comes with owning a physical asset. Plus, by adding REIT shares into your investments, you are inherently bringing greater diversification to your portfolio.

Bottom line: As an investor, it’s much easier to diversify your portfolio through stocks and bonds than in individual real estate properties.


Overall, real estate markets tend to be less volatile (or at least seem less volatile) than the stock market. Unlike stock prices, most people don’t see daily updates in real price changes for the real estate property they own. Because we aren’t getting daily appraisals or offers from buyers, we don’t often notice the change in market value for real estate assets. In a way, this encourages most people to “buy and hold” for longer than they would if real-time price changes were readily available. 

With stocks, it’s easy to see the real-time and historic value of any share of stock. Because investors have quick access to information about stock price changes, they’re more aware of those changes and relative volatility. For emotionally driven investors, this perceived volatility (and the ease with which stocks can be sold) can lead to knee-jerk reactions that cost them thousands of dollars in the long run.

Bottom line: Real estate prices are seemingly much less volatile – especially on a day-to-day basis – than stocks, which can create a behavioral advantage for real estate investors.

Key considerations for real estate investors

If you’re interested in investing in real estate beyond REITs, we recommend having a deep understanding of your local real estate market dynamics to avoid overpaying for a property. For example, knowing the difference between a promising fixer upper in an up-and-coming neighborhood and a “good deal” that’s actually a potential money pit on a deteriorating street can make a substantial difference. This can require a lot of research and due diligence. You may also consider conservative estimates for mortgage payments, maintenance, unexpected expenses, and potential vacancy periods.

First things first, potential real estate investors really need to ask themselves if they want to be a landlord. Being a landlord changes real estate from passive to active income, as it requires a lot of hands-on work. If you plan on hiring a property manager to handle that work for you, you’ll need to factor that additional fee into your return projections.

You also need to ensure you actually have the ability to secure a down payment and cost-effective financing, while also maintaining cash reserves in case there are unexpected expenses (renovations going over budget, surprise repairs, furnishings, etc.) that pop up after closing.

When one of our clients asks for our advice about real estate investing, we walk them through this evaluation process. We start by reminding them that they already have some exposure to real estate in their portfolio with us, which typically include 5%-10% in REITs. 

We help them compare a realistic estimate of return with what a REIT or other stock market investment may return. You may think more deeply if you see that projected returns are similar between stocks or REITs and the specific house or rental property you’re evaluating — with the passive ownership structure requiring much less of your time and energy.

If the expected return of a real estate investment is not significantly better than what you would get by investing in the stock and bond markets, then it likely isn’t worth the greater risk, time, or energy.

As you evaluate expected return for real estate, we recommend a few key metrics:

  • Net operating income (NOI) = the price you’d charge for rent minus all reasonably necessary operating expenses, except for financing costs (mortgage payment) and taxes. NOI is a good first step in calculating an income-producing asset’s profitability and can help indicate whether renting a property is worth the expense of owning and maintaining it.
  • Capitalization rate = Net operating income divided by the property’s purchase price. Cap rate uses the potential income from a property  to calculate a simple percentage yield before accounting for financing decisions (cash purchase vs. some kind of loan) and potential appreciation in the property’s value. As a rule of thumb, you should aim for a high single digits cap rate and avoid anything less than 4%.
  • Cash-on-cash return = pre-tax annual cash flow (i.e. net operating income) divided by your total cash investment (i.e. down payment, closing costs, renovation expenses, completed mortgage payments). This helps measure your annual return in relation to the amount of money you’ve invested.
  • Internal rate of return (IRR) - The formula is somewhat complex and is best calculated via spreadsheet or calculator, but IRR is considered the gold standard of return metrics. Unlike cap rate and cash-on-cash return, it takes into account the time value of money, timing of cash flows in and out, and opportunity cost.

Common mistakes for real estate investors

Every investor and every real estate transaction is a bit different. Here are some of the most common mistakes we see investors make when purchasing real estate:

  • Overpaying for property (usually because of a lack of understanding of the local market). The return on an investment, whether in real estate or any other asset, is directly and inversely related to the price you pay for it.
  • Underestimating factors associated with tenant risk, such as having a tenant that damages the property, stops paying, or breaks the lease. Tenant risk can also refer to the time it takes to find a new suitable tenant. 
  • Failing to consider all expenses related to owning real estate (including the value of their time spent on upkeep). Being a landlord is a time commitment.
  • Failing to factor in liquidity. Before purchasing a property, you should be able to confidently answer the question, “What happens if I can’t sell this property when I want to sell it?”
  • Failing to consider opportunity cost. Before making any investment, ask yourself, “Is there an alternative way I could invest this money (and time) and earn similar or better returns while taking less risk and/or having easier exit options?”
  • Becoming emotionally attached to a property. This is most common when renovating or flipping a home. As you invest your time and energy, you may start making choices that don’t necessarily lead to the greatest financial return.

Conclusion: Should you invest in real estate or the stock market?

There’s money to be made in both real estate and the stock market. For real estate in particular, you can be extremely successful if you research and strategically select the right properties in the right markets. That said, you must be committed to becoming an expert in your local markets, accepting of significant and concentrated risk exposure, and be willing to invest a lot of time and money (both when buying and selling, plus for ongoing maintenance in your properties).

For the casual investor or near-retiree, we typically identify better ways to generate truly passive income, especially when quality of life and time are of the utmost importance. And depending on your financial situation, it might not make sense to take on the concentrated risk that comes with investing in real estate.

That said, real estate investing does offer some significant advantages, including:

  • Consistent, reliable, and controllable income
  • Better hedge against inflation
  • Ability to leverage good debt
  • Less short-term, visible volatility
  • Real-time tax benefits
  • A scarce, tangible asset that you can touch and feel

Compared to real estate, stocks require a much more disciplined and long-term view. Stocks don’t require as much time, money, or maintenance, so it’s easier to get started and maintain a portfolio of stocks and bonds than it is to purchase and maintain physical property. Some of the key advantages stocks offer include:

  • Much better liquidity than real estate (and greater ability to limit losses)
  • Lower barriers to entry and less work to maintain
  • Lower transaction costs
  • Greater opportunity for diversification

Overall, investing in real estate may be best for you if you don’t like seeing the value of your investments fluctuate from day to day, you value tangible assets, or you tend to make impulsive decisions when it comes to money.

On the flip side, stocks may be better for you if you prefer more hands-off investment strategies, have better discipline or tolerance for volatility, believe in a long-term approach to investing, or have a limited amount of capital to invest.

At the intersection of stocks and direct real estate ownership are several hybrid options mentioned above, including real estate investment trusts (REITs), REIT mutual funds and ETFs, and a growing list of crowdfunding platforms.

At the end of the day, the decision to invest in stocks or real estate (or both) is a personal one that depends largely on your specific financial situation, risk tolerance, time commitments, and goals. While real estate does provide more reliable, inflation-protected income, it’s not as liquid as stocks, usually requires more time and money, and it concentrates your risk exposure. Stocks, on the other hand, are more exposed to short-term market volatility, but they don’t require a big cash investment and can be bought and sold relatively quickly and easily.

If you’re looking for a trusted financial advisor to help you evaluate these types of financial decisions and take care of your investments, our team of fee-only fiduciaries is here to help. Book a no-cost discovery call today to learn more.