Many people ponder whether it's better to invest in stocks or mutual funds versus investing in real estate. As it is with so many things in life, it depends on the individual investment. Had you invested in Southern California beachfront property in the 1970s, you'd probably be set for life today. Had you bought Microsoft's initial public offering you'd be set for life also. However, few investments work out as well as either of those.
There are several things to consider when deciding which you want to invest in. Buying stocks or mutual funds typically involves less long term work. You do need to study the market (or blindly take the advice of a stockbroker). However, once a decision is made, you're a part owner of the company with no responsibility for the day-to-day operations. On the other hand, when you invest in real estate, you become a landlord or flipper and unless your cash flow is high enough to hire a property manager, you're fully responsible for day to day operations.
But let's look at leverage. When investing in stocks, there are a few options allowing you to leverage your investment portfolio. One is a margin account where you borrow short term from your stockbroker. Others include buying short or buying puts. Although, if you know what you are doing and with a little luck, you can make a decent profit with this leverage, this is short term leverage that has to be paid off in a few months or less with cold hard cash.
Real estate investing typically involves long term leverage. It can be a traditional mortgage, seller financing, a private loan, or another form of financing. What makes this appealing is that tenants cover the cost of repaying the loan and the investor earns the equity. In the end, the investor owns a valuable asset that was paid for by someone else.
As an investor, you have more control over real estate than stocks. Buying stocks gives you an extremely limited ability to control the direction the company goes in. When you own 100 shares, you can vote who sits on the board of directors in proportion to the number of shares you own. Publicly traded companies all have 10s or 100s of millions of shares issued. Your 100 shares don't count much against pension funds and hedge fund managers owning 100s of thousands or more shares. The result is that many others have much more say over whether your investment increases or decreases in value.
When you own real estate, you may have a partner or two but many investors are sole owners of their property. With a partner or two, you have much more influence how the property is managed. As a sole owner, you don't need anyone else's agreement. You decide what maintenance is needed, who your tenants are, if you want to make improvements that increase cash flow, and what those improvements are. Again, even when you make improvements that improve cash flow, in the long run tenants pay for the improvements that increase your profit margin and the value of your property.
In the end, being a landlord is more work but the two big advantages are having tenants pay for your investment and having full control of how your investment is managed.
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