What are the differences between investing in real estate and stocks?

Posted: 02 Oct 2014 04:57 PM PDT

If you invest in real estate, you are actually purchasing a tangible, physical land or property. Investing in stocks is entirely different; if you purchase shares of a business, you are buying a claim to a piece of the company itself.

The risks associated with each investment type differ. When you own real estate, you incur maintenance costs, capital costs, taxes and maybe development costs each month. That said, the values of physical assets are less likely to become worthless than stocks.

Investing in Real Estate

Many investors are more comfortable with real estate investments because they are real. You can touch, feel and inspect the property that you own. Additionally, you as the property owner have more control over the value and use of your investment than the standard stockholder does.

Real estate investments fall into two broad categories: residential and commercial. Residential real estate includes all single-family units, buildings meant for one to four families, cooperative units and condominiums. Typical investing strategies include land development, home flipping or acting as landlords for rental purposes.

Commercial real estate investments focus on land or buildings that have profit-generating activity and generally have higher start-up costs than residential investments. Rental properties housing five or more family units are considered commercial as well. Most commercial real estate owners generate income through rent from office and retail space leases.

Investing in Stocks

Outside of preliminary research to determine which to purchase, investing in stocks does not require much work on your end. Stocks are really just pieces of legal title that operate as claims to company profits (and possibly dividends) as they are realized.

You are not an employee of the company, nor do you participate in nearly any management decisions. (Shareholders do participate in votes regarding management, such as electing members to the board of directors.) To this extent, stocks represent an easier investment, but they leave you at the mercy of others' business prowess.

Stocks are more liquid assets than real estate. It is easier to buy and sell shares than it is to list and sell property. Even though you can borrow against both investments, it is easier to borrow against stocks.

Real Estate Vs. Stocks

Generally, buying and holding stocks (and reinvesting dividends) is considered the best way to accumulate wealth over the long run. The average annual rate of return on the U.S. housing price index over the 113-year period between 1900 and 2012 was 7.2%. Over the same period, the Dow Jones Industrial Average realized an average annual rate of return of 9.2%.

That said, real estate tends to see less erratic swings than the stock market. You can also see more tax benefits from owning and depreciating real estate assets. Both investments, however, have a proven long-term track record of generating returns.

Perceptions of Real Estate Investing (that are wrong!) - Tycoon Real ...

Posted: 03 Oct 2014 06:00 AM PDT

Posted by Aaron McDaniel On October 3, 2014 In Real Estate- General

Misconception #1: Individual Investing Trumps Crowd Funding

In the past partnering up with others for group investing has posed some problems, however, with new intermediary regulations in place, crowdfunding is becoming more and more relevant. When done correctly, real estate syndication is one of the best ways to invest in real estate. Relatively low risk due to small principles being invested and high volumes of diversification since the investor can easily access a multitude of deals at a low investment cost.

Misconception #2: Residential Real Estate Might Crash Again Soon

This is false. Historically, after a market crash there is typically an initial recovery (which we are experiencing), which is then typically followed by a 7-15 year growth period after the initial boom phase. Considering most U.S. properties haven't even made it to the initial boom phase, the chance of there being another market crash in the near future is almost zero.

Misconception #3: Investing in Real Estate Equals Tax Benefits

Don't get confused, real estate investments can be great tax havens; however they are far from automatic. Unless an investor has some serious knowledge or experience involving tax code or IRA's, then maximizing those benefits are going to be a challenge. The common misconception is that if I own real estate then I automatically receive tax benefits, but as many discover (or never discover because they never realize they aren't maximizing their potential benefits) these benefits aren't just handed out. There needs to be strategic planning and calculations behind every real estate investment decision in order to reach the full potential of these tax havens. For example, if a property owner rents his/her property for 15 days or more AND lives in that home 15 days or more or more than 10% of the total rental days, that vacation home is considered a residence. In this situation, the tax treatment will likely not be quite as favorable. The investor should still be able to take the same deductions and follow the same allocations, but if you have a loss, you may not be able to deduct the loss from any other income you may have. You can only deduct any loss on your vacation rental against any profit from the vacation rental. So, if you're losing money on your vacation home, this is not the most favorable tax situation, which is why it's important to adhere to the guidelines for the number of personal use days.

Misconception #4: Direct Real Estate Investments vs. REITs

As passive income real estate investing has become more popular so have REITs, but their recent growing popularity has sometimes been confused with the notion that REITs and direct real estate investment are synonymous. However, in reality they are far from the same. A real estate investment trust (REIT), is essentially a corporation that owns and manages a portfolio of income-producing real estate properties. These properties can include hotels, malls, offices, apartments, stores, etc. But REITs act much like mutual funds, creating a portfolio and distancing you from the actual properties being invested in. While on the other hand a direct real estate investment is made directly into tangible commercial real estate.

Direct real estate investments allow the investor to utilize higher leverage and traditionally yield higher returns than REITs (historically around 80% vs. 50%). Additionally, there is a higher level of transparency and control when it comes to direct real estate investments, due to the fact that the investor is personally handling all facets of the investment. Conversely, with REITs there is a low level of transparency, but that comes with a tradeoff. One of the best benefits of REITs is that they are easily accessible, partly because they are publicly traded and partly because there is no need of an advisor or personal broker. Advisors or personal brokers are necessary when dealing with direct real estate investments.

Misconception #5: As Interest Rates Increase Real Estate Investments Become Less Profitable

As the media continuously warns investors of the harm that substantially rising interest rates can create on real estate investments, people are becoming more hesitant to invest due to their fear of another crash. Mortgage interest rates have increased since last year and historical cycles indicate that this trend will continue in the upcoming years. As a matter of fact, the best periods of real estate property value appreciation occur during times of increasing interest rates. So contradictory to popular belief, rising interest rates actually prove to be a positive factor in the big picture of analyzing real estate investment returns.

…and one last Misconception: Recent Recovery of U.S. Housing Market Will Lead to Less Profitable Returns

This claim is far from factual, as a matter of fact there is more money to be made in today's market due to the market's ability to increase liquidity in real estate. Mainly credited to the increased popularity of house-flipping and steady income rental properties. Contrary to common belief, foreclosures aren't necessarily great properties to target. Some investors fear that since the market is recovering and foreclosures are becoming less frequent, the ability to house flip will be more difficult. However, a majority of foreclosed homes are either in undesirable areas or are quite simply not worth the time, effort, and cash to renovate. All of this leads to the point that just because the market is recovering doesn't mean now isn't a good time to invest. The market is going to continue to flourish and with crowdfunding real estate emerging, investors can now easily and more cheaply become involved in growing market. Moreover, crowdfunding platforms like Tycoon allow you to invest in commercial properties where are not as directly affected by the residential housing market trends.

Real Estate Investing

Monday, 6 October 2014

What are the differences between investing in real estate and stocks? | Real Estate Investing

What are the differences between <b>investing</b> in <b>real estate</b> and stocks? | Real Estate Investing

No comments:

Post a Comment