Real Estate vs. Stock Investing

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.

Immobilienmakler Heidelberg

Makler Heidelberg

Source by James Leitz

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