“Logic will get you from A to Z; imagination will get you everywhere.”
Albert Einstein
Yesterday someone asked me what I thought of Real Estate as an alternative to the current uncertain stock market.
I don’t view real estate as an alternative to the stock market. I see it as an addition, or a compliment. While each has its place, they are both very different.
You need to be well aware of the differences before you get into the game of real estate.
Let’s take a look at the pros and cons of each. First the stock market.
Stock Market Pros:
- You can become an investor with very little money.
- It is easy to buy a stock.
- It is generally easy to sell a stock.
- There are tax sheltered options (IRA’s, Roths, 401k’s etc.)
- You can use stocks as security for a loan.
- There are no recurring costs.
- Cost (fees) to buy a stock is low or zero.
- You can buy dividend paying stocks to generate income.
Stock Market Cons:
- There is nothing that most of us (except Elon Musk) can do personally to influence a stock’s price.
- You may have to pay tax on the dividend income.
- To realize profit you may have to sell the stock.
- Downturns happen. Have to manage downside risk and protect profit.
There are basically two types of investment real estate, residential and commercial. This discussion will be limited to traditional, residential rental ownership.
Real Estate Pros:
- You can negotiate the price.
- Once you own a property you can make changes and additions to increase the value of the property.
- Generates regular income.
- There are tax benefits associated with ownership of property.
- Over time you can raise rents.
- You can take advantage of “leverage”. With a small down payment, you can control a more expensive piece of property.
- Generally speaking, real estate increases in value over time. Therefore, it can be a hedge against inflation.
- You can borrow against the accrued value.
- You can lower rents to attract tenants.
- You can get an experienced company to manage the property at a cost, relieving you of that work.
- You can invest in real estate via REIT stocks.
- You can consider the new group buying systems.
Real Estate Cons:
- The process is much more complicated than buying stocks.
- To buy a property you generally assume debt.
- The debt must be repaid, even if the property is not generating any rent.
- There is work associated with being a landlord.
- Properties require repairs.
- Property values can decline.
- There is always the possibility of being sued. Accidents happen.
- On-going cost of insurance, maintenance, etc.
- If you decide to sell, it may or may not take time to execute a sale.
- You may or may not have to lower the price to sell.
Most people start out investing in the stock market based on the cost and ease of entry and exit.
Depending upon their success in the stock market and personal preference, they may decide to:
1) stay invested only in the stock market,
2) decide to add some real estate to their investment portfolio, or
3) move out of the stock market into real estate investing.
Having invested in both the stock market and real estate, there are pluses and minuses to each. Holding some of each is generally a good idea.
However, I would not recommend moving into real estate simply because the stock market is more volatile at this time.
Real estate is a much bigger commitment and it is one in which you should take the time to educate yourself before you start investing.
You only want to buy a property if it works financially. There could be a big difference between the list and final purchase price. Know the carrying costs!
As a homeowner, you can get over confident in your ability to succeed as a real estate investor, simply because you’ve already bought a house or two.
It is not difficult, but it will be new to you and more complicated than meets the eye to select a property that has good rental potential with both manageable costs and risk.
Today there are alternatives to buying individual properties, including REITs.
There is also a new real estate approach using crowdfunding. Because you could lose all of your investment if a crowdfunded project goes bankrupt, be sure to do your homework thoroughly!
In conclusion, I would not recommend pursuing real estate as an alternative to investing in stock market securities.
However, I do believe that the addition of real estate to your overall investment portfolio is a good idea. And you can take the profits earned from your real estate and invest that in the stock market until you are ready to buy your next investment property.
The only time in recent memory that real estate and the stock market imploded at the same time was in 2008, when they both plummeted.
In order to be better diversified after the 2000 dot com bubble burst, we invested in various types of real estate in addition to the stock market.
Typically, they counter balance one another which provides additional stability to your overall portfolio. Unfortunately, that was not the case in 2008.
In spite of that, we are big believers in both real estate and stock market investing. Take the time to get educated!
If you don’t want the work of directly owning investment property, there are many options such as Real Estate Investment Trusts (REITS).
Use the Detailed Search in Trending Stocks and select Real Estate to see what’s trending!
Here is an example:
DETAILED SEARCH SECTOR REAL ESTATE DAYS TRENDING
And just as in the stock market – remember to Ride Your Winners and Cut Your Losses!
Our reason for being is to help investors grow wealth and manage risk. To get the former, you must do that latter!
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