People tend to compare real estate investing vs. stock investing because these are the two primary roads to investment success. Both areas of investing have advantages and disadvantages. Savvy investors in both arenas can employ techniques and strategies to maximize profits or moderate risk in the years ahead.
Conventional real estate investing has traditionally focused on buying rental properties primarily with borrowed money. The basic formula for success has normally been to maintain a positive cash flow from rental income, while making physical improvements to the property that maximize return on investment. As the value of the property increases the potential for a profitable sale increases as well. In a successful venture a typical real estate investment offers the investor both income and growth in the value of the investment. We have many more Real Estate Investing Articles Now Available.
Over the years, well-selected and well managed properties have proven to be profitable investments as a rule, rather than as an exception, for most investors. Until recent times, the value of real estate was consistently on the rise with few notable exceptions. The primary advantage and source of potentially large profits in real estate investing is financial leverage, the use of borrowed money. After all, why pay cash for a property that can double in value over time when you can put only 10% down and buy 10 properties with your money by using financial leverage?
Stock investing also offers growth in investment value; and income in the form of dividends. Over the long term stock investors have earned 10% a year, on average, for the past 80 years or so. Liquidity is a big advantage here, as investors can buy or sell shares at market value on any business day, for a total cost of $10 for commissions. No active management is required on the investor’s part, and profit potential is limited only by the individual’s skill or lack of it in stock selection and market timing.
The primary disadvantage to stock investing is the lack of consistency in performance, as up and down cycles in stock prices are normal, not the exception. The new or average investor is vulnerable to significant loss on a reoccurring basis as a matter of normal routine. Real estate investing has the disadvantage of poor liquidity… plus, properties require active management and routine maintenance. If you need to sell in a hurry you’re in trouble, because the process can be both time consuming and costly.
The financial crisis of 2008 has increased risk in both real estate investing and in stock investing, while creating opportunities for the informed investor. The savvy real estate investor who knows the techniques for profiting from short sales and options to buy property has unlimited opportunities. Even the average stock investor can profit in the years ahead while moderating risk, with a balanced portfolio and a sound investment strategy. We have many more Stock Market Investing Articles Now Available.