IN THIS POST
Investing in real estate vs stocks – which is the better strategy to grow your wealth in Pakistan?
Although buying property is largely considered a high-yielding investment, many financial experts recommend building a portfolio of stocks as a supreme strategy. Needless to say, if done right, both of these investments could be highly profitable.
However, if you are a beginner trying to choose between the two or want to double down on either form of investment, it is wise to learn the pros and cons of each approach.
Investing in Real Estate
Real estate investments in Pakistan can be divided into two distinct categories: residential and commercial. The former may encompass your home, rental properties, or house flipping, whereas the latter may include retail outlets, shopping malls, mixed-use buildings, and office complexes.
Advantages of Real Estate Investment
Here are some of the most noteworthy advantages of investing in real estate in Pakistan.
The Basics Are Simple
The prospect of buying a home can be overwhelming and stressful for some. However, its basics are rather straightforward: acquire funds, choose a property, close the deal, ensure maintenance, place tenants if you own additional properties, and try to resell for a higher value. Even if you have never purchased a home before, you can easily cross all these bridges with a trusted real estate agent by your side.
A Tangible Asset
The primary reason many top-tier investors prefer real estate investment is because of its tangibility. An immovable property is a tangible asset that can make the owner feel more secure about their investment since they physically own it. On the other hand, purchasing fractions of ownership in corporations through stocks may make one feel less in control of their investment.
A Hedge Against Inflation
Buying a property during inflation is largely considered a smart choice. Not only does it serve as a hedge against the increase in prices and the fall in the purchasing value of money, but it also ensures substantial profit as house prices and rents typically increase in such situations.
Although, if you are thinking of investing in real estate during inflation, please keep three things in mind: look for investment opportunities in low-demand areas instead of popular neighbourhoods, choose the right type of property, and look for fixer-uppers.
Passive Income
Property ownership creates a pathway to generate passive income. If you own multiple properties, you can rent the additional ones to earn a fixed sum of money on a monthly basis. Moreover, as per your rental agreement, you may be able to increase this amount annually by 5% to 10%. Alternatively, you can resell the property with a substantial profit whenever you need to liquify your funds.
Here are some more ways you can make extra money from your property in Pakistan.
Disadvantages of Real Estate Investment
Let’s look at the cons of investing in real estate.
Time-Consuming Process
Although the process of buying real estate is easy to understand, there is no denying that it requires a lot more work than investing in stocks. Of course, you can work alongside a realtor to maximise productivity but you will still be putting in a considerable amount of time to vet properties, learn about the neighbourhood, negotiate the buying price, and get all of your documents in the right order.
Large Upfront Investment
Real estate is an expensive investment. Whether you are interested in an apartment, house, or plot, it is important to understand that buying property requires a significant upfront investment. Even if you are applying for a bank home loan, you will still need to have a substantial sum at your disposal for down payments and closing costs. In addition, the transaction cost for real estate is higher as the buyer is expected to pay a certain percentage of their total investment to the realtor.
Diversification Could Be Difficult
While it may not be an outright disadvantage, it is indeed true that diversifying your real estate portfolio can be a little difficult for an average investor. It is generally recommended to buy property in multiple locations to ensure high returns because when sales decrease in one area, they can rise in another. However, if you want to add a mix of residential and commercial properties to your portfolio, you should have a hefty sum of money in your bank account and a manager to look after them.
Risky Returns
Almost every type of investment has its own set of risks. In the case of real estate, this risk pertains to the property selling for a lower price, which can put the seller at a certain loss. While the probability of an area suddenly losing its entire value is very low, the housing market can occasionally experience periods of slump that can be detrimental for those seeking to capitalise on their investments.
Before we move on to the next part of our real estate vs. stocks guide, don’t forget to check out our blogs on the basics of property investment in Pakistan and important questions to ask when buying a property.
Investing in Stocks
Companies issue stocks to generate funds for their operations. Hence, shares of stock are essentially a form of security that indicates the holder has certain ownership in the issuing company. They are primarily sold on stock exchanges and are rather easy to acquire. In addition, there are two primary types of stocks: common and preferred.
Advantages of Stocks Investment
These are some of the most prominent pros of investing in stocks in Pakistan.
A Highly Liquid Asset
Buying and selling stocks is easier and less time-consuming than any real estate transaction. This makes stocks a highly liquid asset that you can sell as required to free up the cash that would have otherwise been locked up for months or more in a property. Also, if you choose to invest in stocks, determining the value of your investment would take only a few moments and you likely won’t need to hire and pay a broker.
Easier to Diversify
Stocks are considerably easier to diversify and build an expansive portfolio. On the other hand, buying various types of properties in different locations will require a lot more cash, time, and maintenance. With stocks, you can acquire shares of several corporations within a matter of minutes and keep increasing your portfolio with a relatively smaller sum.
Lower Upfront Investment
Investing in stocks is less expensive than real estate. There are barely any transaction fees associated with buying shares of stocks and even if you hire a broker, they won’t charge nearly as much as a real estate agent.
Disadvantages of Stock Investment
Here are some of the major disadvantages of investing in stocks in Pakistan.
Volatile Market
The stock market is risky and volatile, which essentially means prices can rise and fall at the drop of the hat. In addition, the policies and operations of a company can largely affect the stock value, which could be a hindrance for individual investors with no influence over how things are run.
This erratic volatility can result in both high profits and total losses. It may also trigger an emotional response where the investor may end up selling their shares of stock once the prices begin to fall, even though the strategy to hold and sell them later could prove beneficial in the longer run.
Smaller Capital Gains
While the stock market has its ups and downs, the real estate market in Pakistan has performed much better in the past years. Although there are risks associated with every type of investment, it is important to note that investing in property may result in higher capital gains compared to buying stocks.
Less Leverage Over Money
When buying stocks, investors have less leverage over their money. On the other hand, those investing in real estate not only enjoy more leverage but can also use it to earn a secondary stream of income without worrying too much about the economic conditions. Moreover, shareholders or stockholders may own a fraction of the company on paper, but they do not own the company. Meanwhile, the person who buys the property in their name is the complete owner.
Real Estate vs. Stocks: A Comparison
Whether you are saving for retirement or seeking ways to earn passive income, investors require an investment plan that complements their needs and budget. Here is a real estate vs. stock comparison that might help put things in a better perspective.
| Real Estate | Stocks |
| Passive income | No passive income |
| Less liquid | Highly liquid |
| More leverage over money | Less leverage over money |
| Gradual price fluctuations | Volatile market |
| High upfront investment | Low upfront investment |
| Availability of loans to buy real estate | No specific loans to buy stocks |
| Expensive to diversify | Easier and less expensive to diversify |
To conclude, under the right conditions, buying property can be a better alternative to buying stocks. It offers lower risk, yields better returns, and provides secondary income. However, if you are seeking to increase your wealth, you may want to consider investing in both. You can also check out our comprehensive guide on the best investment opportunities in Pakistan for more information.
This brings us to the end of our real estate vs. stocks comparison. For more investment ideas, please stay connected to Zameen Blog – the top property blog in Pakistan. You can also write to us at blog@zameen.com and like our Facebook page to stay in touch.
