A dilemma that troubles several of us who wish to invest, is the choice between real estate or stock market. A very logical and rational explanation to this dilemma may help you make an intelligent choice.
Recently in the Forbes magazine, I came across, a delightful term, ‘accepted wisdom’. My interpretation is that accepted wisdom is something that is handed out, free of cost, and is irrational and illogical. But here, I will provide some insights that are based upon logic, not on accepted wisdom and certainly not my personal wisdom that are sure to help you tackle your dilemma about investing in real estate or stocks.
The problem with both the fields is that you cannot set an arithmetic equation which is 100% correct, to ascertain the rate of return on investment that you would receive. Hence the confusion and dilemma, as both options seem equally pleasing and at the same time uncertain. Well, every channel of investment has its own pros and cons.
Investing in Real Estate
When clearing the dilemma about where to invest – real estate or stock market, you must have a time frame in your mind. The time frame for any kind of real estate investment ranges from 7 to 30 years depending upon the size and the purchase cost of the real estate. The actual amount invested in it would amount to about 15% or so of the equity value of the real estate. To gain a good return on the total invested amount, you will have to look for a real estate which has a rising equity value, that is the market value of the real estate should be on the rise. So here’s how the usual mechanism works out:
- First off you will have to finalize the actual property or what kind of real estate you are looking for. It can be anything right from bare and barren land to a studio apartment.
- Now, when you try to find and finalize the type of real estate there are some very essential factors which you would have to consider. How safe is the neighborhood?, is a prominent factor of these. A safe neighborhood means a rise in the equity value of the investment in future. Similarly, a huge mall nearby, means a rise in the equity of the real estate. A New Mount Rushmore like site in construction near your property, can bring rise in the equity.
- Thirdly, you have to improve your credit score as the more is your credit score, the less would be the interest on the mortgage. The interest on mortgage plus charges such as closing costs and commissions are your only expenses in the total investment deal. Because the principal amount of the mortgage, which you would be borrowing and paying off in the mortgage loan, would be ultimately owned by you as the equity.
- The only problem with such an investment, is that the rate at which the equity would grow is unpredictable. It can be very fast or at the same time quite stagnant.
- This real estate can be used as money-maker in 3 ways. The first option is that you can rent it out to people. You can borrow loans and lines of credit by pledging the real estate and its equity as a collateral. Such loans are known as home equity loans and are personal loans. Lastly, you can sell off the property if the real estate prices in the locality sky rockets.
Let’s take a look at the probable pros and cons of this investment.
- Cons: There is always a chance of facing foreclosure, however you have the option of short sale. Secondly, you have the liability of the mortgage loan for quite a long time period. Thirdly, the investment is in bulk, you can lose everything in one go in case of any financial crisis which might result into real estate price drops.
- Pros: It’s a very secure investment and the chances of losing everything is very, very less. Secondly, if you have a well-paying secured job then getting and paying off the mortgage is not a big deal.
Best of all, if you are in your middle ages, 35+, with a well-paying job then this is a really, really good investment for you. Just make sure that you pay off the mortgage on time.
Investing in the Stock Market
The stock market is also another quite a good option, though there are a few disadvantages of this investment option. Again like the real estate, it’s impossible to figure out the rate of return on investment. A very nice word can be used to describe this investment, ‘dicey’ yet profitable. The thing that scares several people away from the stock market investments is that there is always a possibility that one might lose all the money invested. There are of course, several strategies and methods which are followed by the professional and institutional investors. The following are the basic mechanisms.
- Now, when you invest into any stock related investment, you will need to consider the total commission, loads, charges and minimum balances that you will have to pay the brokers. The amount though small, if not complied with can incur dire and mortifying actions from the United States Securities and Exchange Commission. Hence making appropriate and effective provisions for such charges is an absolute necessity. Again note, compliance is of negligible cost.
- Now, the basic trick of the trade, to make money though the stock market is to buy the stock at lower market price and sell it at a higher one. This shall always be your basic motive of trade, buy at the lowest possible and sell at the highest possible. Now, you would have to keep a watch on the stocks which you buy on a daily basis for this purpose.
- Secondly, you can also buy stocks which remain really stable yet, give a pretty good dividend.
- Lastly, it is also necessary to obtain a good overall yield. A yield is chiefly, the total of the dividends that you received from a said investment plus the total sales value of stock minus the price at which you bought the stock. Now, it goes without saying that the dividend plus sale price of the stock should exceed the purchase price substantially.
- The best way to attain the aforementioned objectives is to research continuously about the stocks, on company websites, stock exchange websites, economic news, etc. Being well aware would substantially help you purchase and sell at the right time and price.
Let’s take a look at the pros and cons of this investment option.
- Cons: There is a possibility that you may lose everything that you have invested as, prices rise and fall rather quickly in stock markets. Secondly, you have to keep on updating your knowledge non stop and round the clock.
- Pros: In comparison to the mortgage, you invest relatively low volumes in the stock markets. Yet you can have substantial rate of returns. Secondly, you do not have a prolonged liability on your balance sheet.
If you are in your twenties, then this is the best investment for you as you can take the risk of trading. In such a case, you can afford to take such a risk. If the investment fails you then you will still have ample time in your life to recover from it than an investor past his 50’s.
Before you invest, there are two things that you need to consider. Firstly, is the stock is worth investing in, and which one is better for me. Secondly, can I take up other options such as annuities or mutual funds and still get similar (equal) rate of return on investment.