Stock Investing Vs Real Estate Investing Profits

By James Leitz

Both stock investing and real estate investing have the same basic financial objectives. People invest money in both to make money from growth and/or income. Growth through price appreciation (increase in value or market price) is where you really make money, the big bucks. Here we compare the two investment options in terms of profitability and other factors.

Let's talk about a $20,000 out-of-pocket 10-year investment in both investment options investing by traditional standards ... like it has normally been done throughout the past 50 or so years. No unusual economic circumstances, no HEAVY leverage (borrowed money) involved. Now let's look at both investment options.

Stock investing: The stock investment is $20,000 invested in a no-load S&P 500 Index fund which tracks the performance of the stock market. Over the long term the stock market has returned 10% a year. This is our assumed return, plain and simple.

Real estate investing: Here you buy a house in Middle America USA for $100,000, putting down $20,000, the traditional 20%. You average 3% a year in price appreciation. You rent it out to maintain an even cash flow. In other words, your rental income covers your mortgage payments, all repairs and maintenance, fees, taxes and so on. Plus, to keep it simple we assume that what you have paid off on your mortgage is absorbed by other expenses over the 10 years. So, if you were to sell after 10 years we will say that you still owe the bank $80,000. Sorry, this investment option is not so plain and simple to describe.

Let's compare the profitability of these investment options.

Stock investing produced yearly average returns of 10%. Over 10 years $20,000 grows to $51,875 when compounded at 10%.

Real estate investing produced average yearly gains of 3% on $100,000. Growing at 3% a year the value of your house grows to $134,392 in 10 years. We are assuming that you still owe the bank $80,000, so the net value of your investment is $54,392. In reality you would owe less with a conventional mortgage. On the other hand this difference could easily be offset if extraordinary costs were incurred over the 10-year period.

You had $20,000 of your own money invested to make money. The score after 10 years: Stock investing grew your money to $51,875 and real estate got you to $54,392 under our traditional assumptions. In terms of profitability there wasn't much difference.

But you and I both know that when you invest money to make money your success really depends on how well you know and play the game ... no matter what arena you invest money in. For example, if you are good at selecting, improving, managing and financing real estate properties you can do much better than the above example.

You can also make over 10% a year in stock investing if you know how to invest in the stock market. The problem for most folks is that they don't know how to invest in stocks, they are uninformed. Hence, stock investing for most folks is risky business.

On the other hand, TRADITIONALLY (not so in 2007-2009) many people are comfortable with real estate investing because they are familiar with real estate (they see it every day and likely grew up in a house). Real estate properties have historically gone up in value without many violent downswings. The stock market usually experiences a downturn (bear market) every few years.

Other basic differences in our two investment options follow.

Real estate properties require active management, and lack good liquidity as an investment. Selling a property can be costly and time consuming. On the other hand, real estate investing has traditionally been a good way to invest money and make it grow without taking much risk. Various investing techniques can be employed to enhance profits ... financial leverage being among them.

Stocks offer high liquidity, meaning that you can sell a stock investment quickly and easily with low costs. No active management is involved; you just buy or sell over the phone or on your computer. On the other hand, you are inviting trouble if you try to make money here and haven't spent time learning how to invest in stocks. Risk is always a factor when investing in stocks, especially if you are uninformed.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com

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Real Estate Vs. Stocks - The Other Side Of The Story Every Real Estate Investor Needs To Know

By H. Scott Miller

The Wall Street or Main Street (real estate) debate is well covered territory by both the print and TV media outlets and perhaps was a topic of discussion at a recent cocktail party, wedding reception or real estate investment social event you attended.

Given the recent run up in the stock market (3Q07), the increase in interest rates, the limitations being put on non-owner occupied financing and the flattening or depreciating property value issue plaguing some of the country’s real estate markets, what is the better investment (from a return on investment standpoint) for both the short and long term, based upon today’s market?

If you are one to believe what you hear and or read (and it isn’t your fault if you do---a lot of money is spent to program your perception and belief systems) then you believe Wall Street is the better investment vehicle.

Discussions like these and comparisons of ROI (return on investment) between Wall Street and Main Street rarely account for and ignore the following:

1). The concept of leveraged capital: Up to recently, you could control a hard asset (real estate) with no money down---this can't be replicated on Wall Street...Even now, you can control a 100K real estate investment for between 5-10K---even if you were to use stock options, you still can't leverage yourself with OPM the way you can with real estate.

2) The benefits of tax deductibility: Real estate is the only investment that allows for a tax deduction when purchasing, owning/controlling and selling real estate---not so with Wall Street.

3) Differing ways to profit: Wall Street offers only two ways to profit from the stock market---capital appreciation and dividend payouts. On the other hand, investment real estate offers at least 8 ways to profit:

- Rent roll (rental income)

- Mortgage Payoff (thanks to your tenants)

- Property Improvement

- Purchase Profits (buying at a discount)

- Government Benefits (tax credits, tax deductions, rent vouchers, etc.)

- Strategic Property Management

- Property Appreciation

- Inflation

4) The concept of leveraged equity (profits): This is where the divide between Wall Street and Main Street widens. Let’s compare a $10,000 investment made by two investors (one invests in Wall Street and the other invests in Main Street) to better illustrate the profound profit differences: ·

Investor Y invests $10,000 into Wall Street for an annual return of 6%. ·

Investor X invests $10,000 (5,000 towards a down payment and 5,000 towards closing costs) to purchase a real estate investment worth $100,000 which appreciates 6% annually.

Here is how the two investment approaches differ:

a. In the 3rd year, Investor Y has a capital appreciation value of approx. $1,900---Investor X has an equity appreciation value that is more then 1000% higher (approx. $19,102).

b. In the 5th year, Investor Y has a capital appreciation value of $3,382---Investor X has an equity appreciation value has multiplied tenfold ($33,382).

c. At the end of 10 years, Investor Y has approx. $7,900 in profits---Investor X has more then $79,805.

d. At the end of 20 years, Investor Y has more then doubled his original investment (with profits exceeding $22,000)---so has Investor X, who has earned approximately 2200% on his original $10,000 investment (accumulating more then $220,714in equity).

Additional arguments could be made about the speculative nature of Wall Street or the volatility of the stock market & the differences between a hard asset and a paper one, but remember this:

- Everybody needs somewhere to live---you can't live in a mutual fund...Real estate will always be in demand regardless of the market circumstances...(This is the “demand” side of the law of supply and demand)

- God stop making land on the 7th day (unless you live near a volcano)---you can't build a house on top of your IRA...Real Estate will benefit from diminished availability (supply) as our population continues to expand due to natural reproduction and immigrant influx…(This is the “supply” side of the law of supply and demand)

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H. Scott Miller is a nationwide commercial and residential investment lending professional specializing in the creation, management and growth of real estate wealth from a mortgage prospective. He is also the author of "The Not So Funny Games That Lenders Play With Your Money That Can Cost You A Fortune Every Time You Get A Mortgage" which is freely distributed at The Mortgage Inner Circle.

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Real Estate Vs Stock Investing

By James Leitz

Investing for big gains is a game of buying low and selling high. You don't make the big bucks in real estate investing by collecting rents, or in stock investing by receiving dividends. Price appreciation, or rising prices, is the key to big profits in both arenas. The difference is that in one game the BUY decision is of greatest consequence, and in the other the SELL decision usually determines success or failure.

In real estate investing the BUY decision is the vital half of the equation, and in stock investing the SELL decision determines whether you win or lose. How to invest in real estate amounts to buying a property "right". How to invest in stocks profitably boils down to knowing when to sell. Let's take a look at these two distinctly different investments, starting with real estate.

In real estate you need to know what price to pay, where to buy, and how to best finance a property. This requires knowledge of local markets, as well as skill and experience in arranging deals and getting favorable terms when financing them. A bad decision in the buying process, which includes all of the above, can result in problems that have no good solution. This is especially true when a bad economy is accompanied by a bad real estate market.

Here's an example of why the buy decision is so important in real estate investing. Put another way, here's what can go wrong in real estate.

As real estate values are soaring in some parts of the country, Matt buys a property for $300,000 in a hot real estate market. He puts little down to maximize the effects of financial leverage. His goal is to sell the property a couple of years later for $400,000 or more. He plans to rent it out in the interim.

The economy falls into recession and the real estate market turns sour. Properties aren't moving and prices are falling. Two years after his purchase, properties comparable to Matt's can't find a buyer for $200,000, and he owes almost $300,000 on his mortgage. He also has a mortgage on the home in which he lives, and can no longer afford to make payments on both.

Matt is between a rock and a hard place, because he did not buy right. Financial leverage worked against him, and his real estate's lack of liquidity makes it impossible to sell without negative consequences. In the future, someone who knows the ropes will likely make a wise buy decision and take control of his property.

In stock investing you can not get heavy financial leverage, but you have high liquidity and can sell quickly and easily for as little as $10 in commissions. Knowing how to invest in stocks requires that you learn the stock market game. In this game, you must know when to sell.

If you buy a stock that turns sour, you can quickly sell and take a small loss. Unfortunately, most stock investors never learn the game. Here's an example of what can go wrong in a stock investment.

The stock market is hot, and Drew buys 1000 shares of JKL at $20. A year later it's at $30. Then, economic bad news starts to dominate the headlines and the stock market reacts by falling. Drew watches as his stock falls to $25...$20...$15 ... over the next six months. In that period of time the stock market was down about 15%, but JKL was down 50%.

Drew tells himself that when his stock returns to $20, where he bought it, he will sell. A year later JKL is at $5 and still falling. The stock is selling for pennies within weeks, and then stops trading. Drew just lost 100% of his $20,000 stock investment.

Knowing how to invest in stocks is mostly a matter of knowing when to sell. Drew did not make a bad buy decision when he bought his stock. It went up 50% the first year. His problem was that he did not know when to sell. While the rest of the market was sliding, JKL was falling out of bed, and Drew ignored it.

Drew should have sold as soon as he realized that his stock was performing worse than the stock market in general. He could have avoided a loss for only $10 in commissions.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com

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