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Why Real Estate Investment Makes Better Sense Than Investing in Stocks
Investing in real estate has clear advantages despite the millions of dollars investors have made in the stock market. In fact, real estate investing for profit is one of the most popular approaches to generating extra income in the US today.
In this article, we’ll look at just a few examples that illustrate why a careful and intelligent real estate investment can make more sense for an investor than stocks. But before we begin, it should be noted that investing in real estate is not without risk and involves several disadvantages that are worth understanding.
The downside of real estate investing
1. Liquidity – Real estate usually cannot be turned into cash overnight. While shares can be sold with a phone call, the process of cashing out equity in a real estate investment can take months.
2. Slow market response – Real estate has a slower response time than the stock market and therefore requires more patience on the part of investors. While the ups and downs of stocks are real-time, allowing you to measure your gains or losses minute by minute, this is not the case with real estate investing. You may have to wait months (probably years) before you discover the true value of your investment.
3. Less certainty about market value – The stock market is more efficient when it comes to market value than real estate investments. For example, when you buy or sell a stock, you can be sure that the price was indeed the “correct” price for that stock on that day and time, because the existing price for the stock includes and reflects all relevant available information about the company, such as earnings . This does not apply to the value of the property. The buyer and seller must determine the true value for themselves, whether it is too high or too low. This, of course, is why experienced investors research the local market and use real estate investment software to run and repeat the numbers.
The advantage of investing in real estate
1. Leverage – Real estate allows you to borrow money to buy; generally not something you can do when buying stocks. In addition, the stock market limits by law the amount of leverage (margin) you can use to buy stocks, while real estate has no such limits. You can buy an investment property with a small amount of your own money without any restrictions other than the lender’s willingness to finance the property.
2. You can buy below market value – In general, it’s hard to find “undervalued” stocks on a regular basis, while – especially in this troubled economy – you can buy properties at discounts well below market value if you dig deep enough.
3. You get the benefit of depreciation – One of the beauties of investment property is the tax benefit you get from deducting depreciation (or “cost recovery”). Depreciation, defined as the loss in property value over the time the property is in use, is a non-cash tax deduction entirely under the tax code in which the government allows you to assume that buildings (not land) wear out over time and become less valuable, which allows you to take a deduction for this alleged diminution in the value of your asset.
4. Market Conditions Are Localized – While a stock market downturn could affect everyone involved regardless of where they live, barring a national economic collapse, home values could fall in one city without affecting real estate values in other cities. This allows you to protect yourself with a “geographically diversified” portfolio of real estate investments to hedge against such events.
6. You can control the value of the property – Investment property is different from other investments because its value is mostly controlled by the investor. With some non-redundant capital increases and/or careful property management, investors regularly increase the value of their investment properties. Not so with stocks.
Okay, you get it. Investing in real estate is a smart and profitable alternative to the stock market. That being said, real estate investing is not a guarantee of wealth and certainly requires more insight and effort than the “gurus” would have you believe. Still, if done right, real estate can turn out to be one of the smartest investments you can make.
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