Investing In Real Estate

Both stock investing and real estate investing have the same basic fiscal objectives. People invest cash in both to earn income from growth and/or earnings. Expansion through price appreciation ( increase in value or market price ) is where you earn money, the big bucks. Here we compare the two investment options re profitability and other things.

Let’s chat about a $20,000 out-of-pocket 10-year investment in both investment options investing by normal standards … Like it has normally been done throughout the past fifty or so years. No weird economic circumstances, no HEAVY leverage ( borrowed money ) concerned. Now let’s take a look at both investment options.

Stock investing : The stock investment is $20,000 invested in a no-load S&P 500 Index fund which tracks the performance of the stock market. Over the long run the stock market has returned ten percent a year. This is our presumed return, plain and easy.

Property investing : Here you purchase a place in Middle America USA for $100,000, putting down $20,000, the normal twenty p.c.. You average three percent a year in price appreciation. You rent it out to maintain an even money flow. To explain, your rental earnings covers your home loan payments, all repairs and maintenance, costs, taxes and the like. And, to make it simple we assume that what you have paid off on your mortgage is absorbed by other expenses over the ten years. So, if you were to sell after ten years we are going to say that you still owe the bank $80,000. Sorry, this investment option isn’t so plain and simple to describe.

Let’s compare the profitability of these investment options.

Stock investing produced yearly average returns of 10%. Over ten years $20,000 grows to $51,875 when compounded at 10%.

Property investing produced average yearly gains of 3% on $100,000. Growing at three percent a year the value of your house grows to $134,392 in ten years. We are presuming that you continue to owe the bank $80,000, so the net value of your investment is $54,392. Actually you would owe less with a standard mortgage. On the other hand this difference could be offset if remarkable costs were sustained over the ten year period.

You had $20,000 of your own money invested to earn money. The score after 10 years : Stock investing grew your money to $51,875 and property got you to $54,392 under our traditional guesses. In terms of profitability there wasn’t much difference.

But you and I both know that when you invest cash to earn income your success really depends on how well you know and play the game … Irrespective of what arena you invest money in. For example, if you’re good at selecting, improving, handling and financing property properties you can do much better than the previous example.

You may also make over 10% a year in stock investing if you understand how to invest in the stock exchange. The difficulty for most folks is they don’t know how to invest in stocks, they are uninformed. Therefore, stock investing for most people is dangerous business.

On the other hand, historically ( not so in 2007-2010 ) many people are comfortable with real estate investing because they’re familiar with property ( they see it every day and likely grew up in a home ). Real estate properties have historically gone up in value without many violent downswings. The stock market often experiences a downturn ( bear market ) every few years.

Other basic differences in our two investment options follow.

Real estate properties require active management, and lack good liquidity as an investment. Selling a property can be pricey and time intensive. On the other hand, property investing has traditionally been a good way to commit money and make it grow without taking much risk. Various investing methods can be employed to improve profits … Money leverage being among them.

Stocks offer high liquidity, meaning that you can sell a stock investment quickly and easily with low costs. No active management is involved ; you simply sell or buy over the phonephone or on your computer. On the other hand, you are inviting difficulty if you try to earn income here and haven’t spent time learning the way to invest in stocks. Risk is always a factor when investing in stocks, particularly if you’re uninformed.

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