Real estate or the stock market?
When we’re looking to invest, two options immediately spring to mind: the stock market and real estate. But it’s hard to know which one to go for – is it better to invest in a stock portfolio, buy property, or perhaps do both? Each option has its pros and cons, and you should be clued in before making a decision. That’s what we’re here to do!
| The stock market | Real estate | And the winner is... |
|---|---|---|
| THE FINANCIAL PERSPECTIVE | ||
| You don’t need to have a lot of capital or take out a loan – you can invest small amounts of money in stocks. | You need to have substantial capital, even for a small studio. In Luxembourg, even a garage can cost as much as EUR 40,000 on average. | From a financial point of view, stocks are clearly the more affordable option. |
| If you have EUR 15,000 to invest, EUR 15,000 worth of securities is all you can buy. | If you have capital of EUR 15,000 and a real estate loan, you could own a property worth EUR 100,000. | Provided you are entitled to take out a loan and are prepared to pay it off, real estate offers more immediate financial leverage than stocks. |
| The acquisition fees for a stock portfolio are generally quite low, and the holding costs amount to virtually nothing if you take care of everything on your own. | When buying or selling a property, you need to take into account notary fees, property taxes and maintenance or renovation costs. | Proportionally, stocks incur fewer fees; if there are fees, they are generally lower than those associated with managing property. |
| In Luxembourg, gains from shares are subject to tax, unless they have been held for more than 6 months and make up less than 10% of the company’s capital. | In Luxembourg, real estate is subject to a property tax, regardless of whether you live in the property or rent it out. In addition, remember that the sale of your main residence is tax-exempt. | Tax issues are always complex and require careful consideration. Although stocks may seem more appealing in this respect, under certain circumstances you can benefit from higher tax deductions with real estate capital. |
| WHAT IF I WANT TO SELL ? | ||
| Shares and other financial instruments traded on a financial market are generally quite easy to sell and the fees are low. | Selling a property can take longer and is associated with substantial fees. | Stocks are the best option in this respect as they are more liquid, i.e. they can be easily sold. |
| DIVERSIFICATION | ||
| Stocks and the financial markets in general allow you to diversify your investments in terms of share classes, sectors and regions, etc. | Unless you have a high net worth, investing in property ties up a huge amount of your investment capital. | Stocks are the best option here, as you avoid putting all of your eggs in one basket and can better diversify risks compared with a real estate investment. |
| PERFORMANCE OVER THE PAST 25 YEARS | ||
| Stocks were the best option between 1990 and 2000. However, the financial crises between 2000 and 2010 generated enormous losses for most investors. But the stock price isn’t everything – sometimes it’s worth considering the dividends paid. | Between 2000 and 2017, housing prices in Luxembourg have shot up by an average of 150%, making real estate the better option since 2000. But the selling price isn’t the only thing to consider – you also need to take rent (and taxes!) into account. | If one is doing well, it usually means the other is lagging behind. The real estate sector in Luxembourg has been strong for the past few years, but as we all know, “past performance is not an indication of future results”. |
| VOLATILITY | ||
| The value of properties can fluctuate just as much as stocks, but the change tends to be more gradual. Stocks are characterised by much higher volatility, and their value can plummet within just a few hours, or even minutes. | Value can be gained or lost in both of these categories, but while real estate is less vulnerable to market mood swings, it is more vulnerable to your tenants’! | |
| I'M NO EXPERT... | ||
| Investing in stocks is a complex process and there are many factors to consider. It’s important to get help from someone who knows what they’re doing, or otherwise take the time to do some research. It’s also vital that you follow the latest news to keep up with what’s going on in the economy, politics and finance. | Real estate investing is not that complex – once you’ve managed to learn the basics it’s easy to get by. | Stocks are still much more difficult to get the hang of than real estate and, as such, you need to be a real expert or enlist the help of someone who is. |
| ...BUT I WANT TO CONTRIBUTE | ||
| Investors are limited to tracking the performance of their assets and maybe adjusting portfolio composition. They can’t influence stock market prices. | Property owners can add value to their home by renovating or decorating it. | With real estate, investors have more scope to increase the value of their property. |
| THE BOTTOM LINE | ||
| Stock market = shares = financial asset | Real estate = home = tangible asset | This element is purely subjective – it’s up to you to decide what you value most! |
Now it’s time to declare our winner! The stock market is more affordable, but it also provides less financial leverage. Property is much harder to sell, but the market is also less susceptible to unpredictable shocks. How people weigh up these pros and cons will of course vary depending on their individual ideas and situations.
If we had to choose a winner, real estate would be our investment of choice for the novice investor. It’s easy to get to grips with and you can quickly get your foot in the door! This sector undoubtedly requires much less investment on a personal level, and doesn’t need to be constantly monitored. Finally, real estate is still considered a safe haven because it represents a tangible asset and is less volatile than stocks. Does that mean you should forget about the stock market? Absolutely not! But if you do invest in stocks, make sure that you have an expert on hand who can help you construct a portfolio of financial assets that is suited to your investor profile.
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