In modern asset building, real estate investment and stock investment are the representative investment instruments of choice for many people. Both investment methods have their own unique characteristics, and understanding them determines the success or failure of asset building. This paper objectively examines the essential differences between real estate investment and stock investment, and compares the advantages and disadvantages of each.
1. essential differences between real estate investment and stock investment
1-1. characteristics of investment targets
Real estate investment is an investment in physical, real assets. Since it invests in "visible assets" such as land and buildings, it is characterized by the fact that one can confirm the investment target with one's own eyes. On the other hand, equity investment is an investment in the ownership (shareholder rights) of a company, and one invests in the business model, management status, and future potential of the target company.
While real estate investment focuses on "physical value" and "profitability," such as the location of the property, the condition of the building, and the surrounding environment, equity investment focuses on "corporate value," such as the sustainability and growth potential of the business model and the quality of the management team.
1-2. Profit Structure: Income Gains and Capital Gains
The two main sources of income for real estate investment are as follows
- Income gain: monthly rental income
- Capital gain: Profit from the sale of properties
A major characteristic of real estate investment is that income gains, stable rental income, are the main source of income. As long as you own the property, you can earn a continuous income.
On the other hand, the sources of income from equity investments are:
- Income gain: dividends
- Capital gain: gain on sale of property due to stock price appreciation
In general, capital gains tend to be the main source of income for stock investments. However, a long-term strategy of investing in high-dividend stocks and reinvesting dividends is also effective.
1-3. leveraging leverage effect
One of the most important characteristics of real estate investment is the "leverage effect. The leverage effect is a mechanism to purchase a large asset with a small amount of one's own capital and earn a larger profit.
In real estate investment, if you have a personal capital of about 20% of the property price, you can start investing by procuring the rest of the capital with loans from financial institutions. For example, if a 50 million yen property is purchased with 10 million yen in personal funds and 40 million yen in loans, if the property value increases by 10%, the property value becomes 55 million yen, and the return on personal funds is 50% (5 million yen divided by 10 million yen).
On the other hand, stock investments generally do not allow for leverage, but rather provide a direct return on the amount invested.
Merits and demerits of real estate investment and stock investment
2-1. Advantages of Real Estate Investment
- Stable profitability: If the right property is selected, relatively stable rental income can be expected.
- Leverage effect: It is possible to purchase large assets with small personal funds and aim for high returns.
- Inflation hedge function: Real estate values and rents also tend to rise when prices rise, providing a defense against inflation.
- Tax-saving effect: Tax benefits can be obtained by recording depreciation and various other expenses.
- Physical presence: Since it is a visible asset, there is a sense of psychological security.
2-2. Disadvantages of Real Estate Investment
- Low liquidity: It is difficult to quickly convert to cash when needed.
- Large initial investment: Compared to stocks, the minimum required investment is larger, and the barrier to entry is higher.
- Management effort: Ongoing management is required to deal with tenants, make repairs, etc.
- Vacancy risk: During the period when there are no tenants, no income is earned and only the burden of loan repayment remains.
- Disaster risk: There is a risk of property damage or decline in value due to natural disasters.
2-3. Advantages of Equity Investment
- High liquidity: You can sell your property for cash at any time when the stock market is open.
- Small investment: You can start with a small amount and easily adjust the amount.
- Ease of diversification: You can diversify your risk by investing in stocks of various industries, companies, and countries.
- Less management: Unlike real assets, there are no daily management tasks.
- High growth potential: By investing in growing companies, you can aim for high returns.
2-4. Disadvantages of Equity Investment
- Price volatility risk: Stock prices can change significantly in a short period of time, and you need to deal with high volatility.
- Corporate risk: There is a risk of deterioration in the performance or bankruptcy of the company in which you invest.
- Need for specialized knowledge: A certain level of specialized knowledge, such as corporate analysis and understanding of market trends, is required.
- Psychological burden: Because of the visibility of price fluctuations, it is easy to become emotionally involved in investment decisions and feel psychological stress.
- Dividend uncertainty: Dividends fluctuate according to corporate performance and are not necessarily stable.
3. building an effective asset-building strategy
3-1. investment selection tailored to individual circumstances
The most important aspect of investment selection is to make choices that suit one's own situation and goals.
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Financial capacity: Select investment instruments based on the amount of initial investment available. If you have limited financial resources, a phased approach may be effective, starting with equity investments and gradually considering real estate investments.
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Time availability: The time available for management is another factor to consider. For busy people, real estate investments that can be outsourced to a management company or stock investments such as ETFs and mutual funds are suitable.
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Risk tolerance: It is important to choose investments that match your risk tolerance. Real estate investments are suitable for those seeking stable income, while stock investments are suitable for those who value growth potential.
3-2. Improved investment efficiency through technology
Today, the development of technology has made both investment methods more efficient.
In real estate investment, traditional issues can now be resolved through the power of technology, such as property information websites, AI-based profitability prediction, and more efficient property management using the IoT.
In stock investment, technology-based investment methods are becoming more common, such as the spread of online securities, robo-advisors, and automated savings accounts. The hurdles to investment have been greatly reduced, as people are less constrained by time and expertise. 3-3.
3-3. building an optimal portfolio through diversified investments
Ideally, a diversified portfolio combining real estate and stock investments is effective. By taking advantage of the characteristics of both, and balancing stability and growth while diversifying risk, you can build a portfolio that is resilient to changes in the market environment.
For example, a combination of real estate investments to secure stable cash flow and equity investments to pursue growth potential can be considered. In addition, within real estate investment, area risk and vacancy risk can be reduced by diversifying investments in multiple properties.
Conclusion: Asset Building and Investment Options
Real estate investment and stock investment are both asset building instruments with different characteristics. There is no simple answer as to which is better than the other, and it is important to make the best choice according to the investor's own goals, situation, and time horizon.
Taking a long-term view of asset building is important, and one should always consider not only immediate gains but also future value and sustainability in investment decisions.
In addition, investments should provide "life enrichment" beyond mere financial returns. Investment choices that are consistent with one's own values and goals will lead to truly sustainable asset building.
