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Is the Smart Money in Stocks or Real Estate?

The world of investment offers many different options to the many different investors that are looking to grow wealth and security for themselves and their family. Traditionally the two most active investment niches have been the stock market and real estate. Because most folks aspire to have a home of their own real estate is most likely the first area people invest and then once that is secure they look elsewhere to acquire more assets and grow their portfolio.

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For many, once they do own a home and are secure with that particular investment, the question is which is a better investment , stocks or more real estate. Both have their pros and cons and both offer completely different returns and levels of risk.

Trying to decide which the better investment is can at times be similar to which do you prefer, hot dogs or hamburgers because so much is determined by personal preference and which way you want to go. If an investor had put their money into stocks in the 1970’s their returns would not have been nearly as great as if that same person had invested a similar amount of money in beach-front property in California. But if an investor had acquired shares in Microsoft when they were first being offered they would have profited tremendously, and the ROI (Return On Investment) on that would have surpassed investing in real estate during that same time frame.

Being able to forecast the future, invest wisely and profit is not easy. The one thing that can help is to have a good idea of what each asset class entails, what the risk are, what the past market has proven to be, and it all needs to be tempered with good timing; knowing when to get in, and when to get out.

What Is the Difference Between the Two Asset Classes?

  • Real Estate: When an investor purchases in real estate they are buying physical land or property. Some real estate, land in particular but dwellings and building also, will not generate a monthly income and they are purchased on the speculation of selling at a later date for a profit. While the property is in an investor’s portfolio they must continue to invest by paying the taxes and any maintenance that may be required until the property sells.

Another type of real estate is income generating property such as homes, apartments, condos and even industrial and business premises that are leased. There may be some expenses incurred, but a smart investor will know beforehand that those expenses will be offset by the monthly income in order to achieve a good ROI.

  • Stocks: Stocks represent a share in a company that is listed on an exchange as a public company. It does not matter what that company may make or what service they provide, when they profit the investor profits and when they do not the share value decreases.

    Share/stockholders elect a Board of Directors to oversee and manage the company, which is their investment. The board will then decide how much of any profit that is realized during the year will be reinvested into the company and how much will be returned to the investors as dividends.

The Pros and Cons of Real Estate vs. Stocks

Positive Aspects of Investing in Real Estate

  • Real estate is an investment that more people have in common than stocks and for the average American it is actually a way of life that they have grown up with. Individuals who were fortunate to grow up in a more affluent home may have had more exposure to other investments such as stocks, bonds and other financial securities that are available to investors. Americans for the most part do feel more comfortable investing in real estate.
  • A real estate investment is much more tangible too. It is a physical thing that can be seen and appreciated for what it is. Historically and psychologically it is an easier concept for most would be investors to embrace.

  • For the novice investor, as well as the sophisticated one, it is a lot more difficult for them to be defrauded when acquiring property than stocks. They are able to easily perform their due diligence because they can visit the prospective property, inspect it, and if it is a commercial or rental property they can run background checks on the tenants, be certain the property is what it is advertised to be before you buy it. When investing in stocks an investor must trust the management and the auditors of a company to be forthright and honest about the value and future of the company; investment.

  • Leveraging debt in real estate can be structured a lot more securely than using debt to buy stocks by trading on margins.

  • In a sound market real estate investments have historically more times than not been an excellent hedge against inflation to protect against a loss in purchasing power of the dollar.

One Downside of Investing in Real Estate:

  • Unlike stocks, investing in real estate can require a tremendous amount of effort and time on the part of the investor. If it is a rental property the investor will either need a management company to handle the day to day aspects or deal with them themselves. There is also the liabilities associated with owning and leasing property and even if a management company does handle much of the required issues, there will always come a time when the investor themselves will have to get involved.

    Investment properties that are occupied can also incur substantial costs that an investor will need to pay off, especially the mortgage. Real estate requires that taxes, maintenance, utilities, insurance, and many other things be paid for. If it is a multi-unit home, a block of stores, or possibly a small strip mall, and one or two of the units do not have a paying tenant, and the balance of the units do not cover the expenses and mortgage, the owner will have to pay these monthly costs or risk losing their investment.

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