3 Reasons Why Real Estate is Superior to Stocks
Foreclosures
Phoenix,Gilbert,Goodyear,Avondale 60K-150K
Here are the top 3 reasons I believe real estate is a better investment than stocks:
1.) Real Estate is a Tangible Asset. It is a physical investment that you can see and touch. Shares in a company are nothing more than a piece of paper giving you an interest in the underlying company. Although a company’s shares can be valuable, because real estate is tangible it generally provides more value because people can use it in everyday life, and more importantly it is essential!
People must have homes to live in and businesses must have places to operate from. You can live in a house or an apartment, but you cannot live in a share of stock from Google. You can operate a business in a retail shopping center or an office building, but you cannot open and operate your business just because you own stock in Wal-Mart (unless of course you bought the stock way back when and your capital has increased 20X!).
2.) Real Estate allows for Leverage. Now leverage can be a double-edged sword, and over-leveraging a property can cause your asset to become a “money pit” faster than you can say “Bubble”. The over-leveraging of properties coupled with greed is the primary reason why we are experiencing the effects of the recent real estate market crash.
However, responsible leveraging can allow an investor to put up 20-30% of the purchase price of a property and borrow the remaining 70-80% of the purchase price. This leverage will generally allow the investor to realize gains much higher than that of the stock market. For example if you have $100,000 dollars to invest in real estate, you can generally leverage that into a $500,000 property. So your $100,000 will serve as a 20% down payment on a $500,000 property and you will get a mortgage for the remaining $400,000.
If the property appreciates at 5% ($25,000) over the course of a year, that is an unrealized gain of 25% on your invested capital of $100,000. In addition, if the property was generating a positive income, which is always advisable, then your returns would be greater.
Now just to be straight forward, this is the broad view of the investment. It doesn’t take into account closing costs, loan costs, illiquidity of the investment, etc. So there are more costs that would be associated with this investment that would take away from that 25% return and you would still have to sell or refinance the property to realize that 25% return, however, over the course of a few years with responsible leverage, real estate returns far outpace stock market returns. Feel free to contact me if you would like me to justify that claim in more detail. :-)
Stocks can generally only be leverage at a 50% – 100% ratio if you are trading on margin. So if you have $100,000 to invest, you can generally purchase $150,000 – $200,000 worth of stock. Assuming you purchased $200,000 worth of stock and it appreciated 5% ($10,000) over the course of a year, that is an unrealized gain of only 10% on your invested capital of $100,000. And similar with the real estate investment you still have additional fees that will take away from this gain, primarily brokerage fees and interest on the borrowed capital in your margin account.
3.) Real Estate allows for more Control. When you invest in real estate, you generally have control in how that investment is to perform. You can implement strategies to operate the investment more efficiently in order to maximize returns. Unfortunately, with stocks you really don’t have any control in how the company operates in order to maximize your returns on your investment. At best you can submit suggestions to the board of directors, and maybe they will implement some of your suggestions….MAYBE! Great article by Khary Reynolds
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