The greatest investors in the world all understand one common theme when it comes to successful investing, “markets are volatile and they fluctuate.” Whether it is real estate investing or investing in stocks, there is an inherent risk. Therefore, new investors who are trying to decide whether to invest their available capital in real estate or stocks must learn to understand their own risk tolerance. To understand risk successfully, new investors must first learn some of the pros and cons of both real estate investing and stock market investing.
Pros of Real Estate Investing
1) As a real estate investor, you are in charge of the investment. Although you are at the mercy of the economy as a whole, you still have the power to refinance real
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estate into a lower interest rate, raise rents if you generate a passive income through rental properties or make improvements on your properties to increase the amount of available equity. By investing in stocks, you are at the mercy of money managers who dictate the markets. 2) Real estate investors put their money in real, tangible assets.
With stocks, investors buy a piece of paper stating they own a portion of a company. Therefore, you can actually reach out and touch your assets when you invest in real estate.
3) Leverage is one of the most important lessons new investors should learn. Using other people’s money to build your real estate portfolio is a powerful tool you cannot use when you buy stocks.
Pros of Stock Market Investing
1) Over the past 60 years, stocks outperformed real estate in terms of return on investment by 4 to 6 percent. One reason for this difference is your ability to fully diversify your portfolio. Instead of investing in one market, such as real estate, you can invest in multiple markets and many different companies by purchasing stocks.
2) Stocks are far more liquid than real estate. If you need immediate cash or do not like the stock of the company you bought, you can sell right away. With real estate, it could take months, or years before you sell the properties you own.
3) Stocks require very little work on your part, especially if you researched the company before you invested. All you really have to do is buy the stock and then watch the price. With real estate, the investment require constant attention, especially if you own rental
properties. All investments have some type of downside, and the list of cons attached to any investment is vast. Stocks are at the mercy of money managers and institutional investors, and real estate is at the mercy of the economy. Investors have little or no control over those market forces. However, by leveraging assets in real estate and making informed investments on stocks while assessing risk at the same time, history has shown that anyone can earn a profit from real estate investing or stock market investing.
There are many people who are unable to decide whether they should buy or rent a home. Both renting and buying a home have their benefits, therefore it is important that you compare the benefits and drawback of buying and renting a home.
Stock investment means you are purchasing a share of the company, therefore the company’s success determines the value of your investment. Buying stocks is not a difficult process; clarification of some important terminology and differentiation helps gives you the foundation to start investing.
The property or properties must provide a place for the investor to live in and garner profit in the future, or create cash flow in the form of monthly rent/lease payments to cover mortgage and potentially add to profits. The correct strategy, detailed budgets, quality products and workmanship along with the due diligence of the investor can turn a $150,000 dollar investment into a short term return of three times that amount or a long term yield of millions for the investor who is willing to put in the time effort and determination.
House of cards: Morningstar 's HelloWallet unit examines how buying a home vs. renting and investing affects wealth creation. (2014, Nov 11). PR NewswireRetrieved from
Each step of the appraisal process involves an unknown amount of estimation error. The combination of these errors is unlikely to produce a perfect, error-free estimate of value. Thus, appraisal error is virtually unavoidable. Investors need reasonable estimates of value when buying, selling, or retaining commercial property, so an unknown amount of appraisal error adds uncertainty to the decision-making process. Despite the uncertainty, investors have learned to make allowances for appraisal error in their decision-making processes. The way in which real estate investors interpret appraisal errors has a material effect upon the decisions that they make. In particular, the predominant belief among real estate professionals is that appraisal error is random. This belief materially influences investor attitudes toward portfolio management and the valuation process itself. Lack of understanding of the relative magnitudes of random and nonrandom components of total appraisal error has consequences for optimal portfolio strategies. For example, investors who deem the bulk of total appraisal error to be random may reasonably conclude that error in estimates is beyond their control or influence. To minimize total portfolio valuation error, such investors may assemble large, diverse portfolios even though the cost of owning an array of properties of various types and in various locations is expensive. On the other hand, if the bulk of total appraisal error is nonrandom, investors would do better to pay attention to improving value estimates on each property rather than hoping that the errors in values of a large pool of properties will offset one another. In particular, investors should institute valuation controls and procedures to minimize the errors in each valuation of individual portfolio assets. Such controls might include obtaining multiple simultaneous estimates, changing appraisers for each periodic revaluation, or increasing the frequency of valuations. This conclusion becomes particularly significant in light of studies like Miles that determine that the typical magnitude of total appraisal error is about ten percent of appraised value. Information in three recent empirical studies provides evidence that previous appraisal research has been mistaken in assuming most appraisal error to be random. The demonstration that most appraisal error is nonrandom should encourage real estate investors to focus additional attention on individual asset selection and valuation at the expense of portfolio assembly.
Well, the truth behind real estate investing is that it is a business and therefore, must be treated like one for it to prosper. Just like any other promising venture, investing in real estate requires a well-defined vision, a strategic plan, and an entrepreneurial mindset. Even with the overwhelming evidence revealing success, only a microscopic segment of the population is willing to take the risk, do the work and follow through. The rest simply watch and call those of us doing the work "Lucky".
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
In order to understand the concept of financialization and the housing market on the global and local level, one must know that there is a global pool of money that is simply the worlds savings bank. In 2000 the pool had $36 trillion and has since doubled in size (Blumberg 2008). Its most recent profit increase was a result of developing countries and cities such as India, Abu Dhabi, and China making money. This doubled the cash pool available for investments, but left fewer solid investments for the taking. The solution was residential mortgages and the US housing market. The investment managers thought the low-risk high-return investment in the housing market was a good, stable idea. The glo...
House & Lot. Villafuerte (2012) stated that there are many explanations of the term investment but for him an investment is a substance that has a potential to create money. Particularly, at any time they purchase something as an investment even before taking out a single centavo from their wallet they should know how that investment will give them profit. There are three basic ways to make money from real estate investment, first by influencing on the property’s equity, second by selling the property and lastly by having the property as rented out. If they are not planning to do any of that three then they did not acquire the property as an investment. In other words, if they will be living in a property then it is not an investment at best it will be a great proof of their hard work. Buying a property increases net worth. So an investment is something that makes them money. Investment gives them money while liability takes money from them.
With the ever-growing unemployment rates, people are afraid to buy real estate for fear they will lose their job and then their home. They aren't willing to take that much of a risk. Nearly every homeowner is feeling the pain from lack of qualified buyers. On the other hand, real estate investors are buying houses all across the nation. Many of them are purchasing properties with cash simply because traditional lending sources have dried up.
The term ‘Real estate’ includes land, including the air above it and the ground below it and any buildings or structures on it. Also referred to as realty, it covers residential apartments and housing, commercial office places and trade centres such as hotels and restaurants, retail complexes, theatres, industrial buildings such as factories and government buildings. Real estate involves buying selling and developing land, residential and non-residential buildings for various purposes. The activities encompass construction and hosuing, too.
In order for me to be successful with such investment capital and as an investor I would have to formulate goals I would like to accomplish, implement a plan (vehicle) to reach that goal, maximize profits, reduce risk, use creative financing, increase my exposure to opportunities and protect my asset(s). When I find property(s) that meet my investment objective, I tie it up and negotiate to win, take action and control it. If the property does not meet my objective, I wouldn’t buy, or alternatively withdraw from the transaction, or renegotiate to meet my objective. I would also develop an exit strategy that would complement my plan and goals, learn quickly from any errors and start all over again. Starting with One hundred fifty thousand dollars dollars, in deciding the best investment money can buy, I would have to limit myself to properties I have gained some experience in and that I can get help when needed in managing, holding or “flipping”.
As a child and an adult, it is good to learn patience and this game in many ways teaches us that. Every turn in this game takes a little time, especially as the properties have been bought because you can only add houses or hotels on your turn. We must also plan and not just buy everything up, if you buy without discipline when investing, you will just have to hope the market behaves in your favor. Investors don’t invest based on hope, they invest with a disciplined approach. Patience is a big part of that approach.
In a Business Week article, Mr. Ben Steverman discuses issues facing today’s youth. The article is titles “Advice for Young Investors.” The article discuses two individuals who are 22 years of age, both are just beginning their careers. One individual is attempting to pay off student loans quickly and then save money to travel. The other individual is attempting to purchase real estate and invest within the market. Mr. Steverman discusses ten important factors for which young investors need to consider when approaching the market.
Shun, 2005). However, for the purpose of this research and later analysis of the REITs performance and comparison to S&P 500 index, the classification of REITs based on the investment philosophy will be elaborated. According to this classification criterion, REITs can be classified into the following categories (Fabozzi, Anson and Jones,