I am often asked about the stock market vs. real estate investing in terms of which is the better investment. Both offer growth and income. Real estate investing has its advantages and so does the stock market. How about the best of both worlds?
Other than the often touted fact that real estate investing has an advantage because “they’re not making any more of it”, many people have felt more comfortable in the past owning real property because it’s tangible. The stock market is not. Real estate investing traditionally takes the form of buying a property, renting it out, and dealing with maintenance and tenants. The need for active management and the fact that real property is not liquid (easy to sell quickly without significant expense) are its disadvantages.
On the other hand real estate investing has traditionally had one giant advantage called FINANCIAL LEVERAGE. Making a small out-of-pocket investment and borrowing lots of money to buy a property is how many people got rich in the past. After all, if your investment goes up in value by $50,000 or $100,000 your rate of return depends on how much YOU actually had invested. The average person has not been allowed to use heavy financial leverage in the stock market since the early 1930′s.
Financial leverage is now a dirty word in finance since the recent financial crisis threatened the world economy. The rules have changed, but there are still opportunities for the average investor. Forget the past and forget comparing the stock market vs. real estate investing in conventional terms. There’s really no sense in comparing the two as they have traditionally existed, because buying property is like actively running a business. Average working people often don’t go there because they have other duties and obligations to attend to.
In the stock market you simply buy and sell. That’s the advantage: liquidity, with no active management. Today you can make a transaction for $10. You can invest in any stock you like and buy or sell in your brokerage account over the internet. If you want to get into real estate investing the easy way, even on a budget, you can do it IN THE STOCK MARKET. Now you can own a piece of the action in commercial properties for an admittance price of $10, and sell in a matter of seconds if things don’t go your way.
Equity real estate investment trusts (REITS) invest in apartment buildings, shopping centers, office buildings and so on… diversified across the country. They’ve been around a long time and for years were steady performers that offered investors both growth and higher than average dividend income. Their stocks are traded in the stock market. When real estate got cheap so did these stocks. Two big names here: Simon Property Group and Vornado Realty Trust. And then there’s something quite new.
To get the best of both worlds… real estate investing and the stock market… without having to pick which stock(s) to go with consider an ETF that invests in a multitude of stocks like the two mentioned above. Stock symbols IYR and VNQ are two such ETFs.
You can invest anywhere from a few hundred dollars to millions, get in or out in a matter of seconds and be a real estate investor by simply buying the right stocks. With today’s unpredictable economic environment and markets a basic truth has become obvious to even the most casual observer. All markets, even the market for real properties, are dynamic and subject to change. Why not put liquidity on your side?