Real Estate Vs. Da Stock Market - Part 1

11 February 2010 | talking about Real Estate, Stock Market

One of the things that drives me nuts, is when I hear people say "Real Estate is my thing", or "Real Estate is what I am into". It is not a drug it is an investment! You buy Real Estate, (as an investment), for it to go up in value and maybe collect rent. Hmmm, that sounds just like buying a stock, and the rent would be the dividend (or even a stock buy back). Real Estate, (from an investment standpoint), is not a way of life. It is not something you are into. It is not "your thing". It is 100% an investment. So many people, particularly young people, don't get that. With this post I am kicking off a series of blog postings talking about the importance of understanding all markets not just the one "you are into".

First of all lets clear somethings up. When I say Real Estate investment I am not talking about your home, or a vacation home. Those have personal emotional aspects; you need a home to live in and you love staying at your ski condo on the weekends. I label these assets as personal property, there is a luxury element you may or may not be paying up for. I am talking about the rental property you purchase, to collect rent, or even flip.

Second thing I want to clear up, I am giving general statements and rough numbers in this blog series. With any investment there is always another side, another stat, another point of view. I get that. This is what makes markets if we all thought the same way no one would buy or sell anything. This is just one man's view. I hope you can share you view points in the comments below.

Lastly, I am not talk to the people that do this for a living. If you are a Real Estate Developer, or a hedge fund manager you have built a business around a particular asset class. While I think every point I am going to make applies 100% to you as well you can make a business case against some of my statements and I might agree with you.

Now, that we have that stuff out of the way lets look at what it takes to buy property.

  • You have to identify an area that you would like to invest in.

  • You have have to set some bounds, (I can afford X, and it must produce Y in rent....).

  • You have to start reviewing all the properties in the area. Might even hire a broker to show you around and give you his or her thoughts.

  • Then you find a property you like and you start diving deep into it. Doing way more homework on this particular property than any other one you reviewed.

  • If it passes all the tests, you buy it (often with a little help from your bank).

  • Now, you start working on your thesis. Fix it up, get tenants, collect rent, whatever else.

  • You keep it up until it is time to sell and take your profits. Investment over.

Now, lets take a look at what goes into a stock investment.

  • You identify the sector you would like to purchase (tech, banks, retail....).

  • You set your bounds (how much you want to spend, dividend, PE, and so on....).

  • You start reviewing all the companies in that sector. Might even hire a broker or pay an analyst to help you.

  • You pick the stock you think you might want to buy. You then go in and do tons more homework just to make sure.

  • If your stock passes the test you buy it, (you can even buy on margin like you would with a real estate loan).

  • Now, you watch your stock. Daily, weekly, monthly; You continue to review it to make sure your reason for buying it still holds true, and you are still collecting the dividend you purchased it for.

  • When the time comes you sell it and take your profits. Investment over.

Is it just me or are those two processes nearly the same? They both have about the same set of interactions. You really need the same skill sets to purchase either a stock or an investment property. You need to understand the markets, you need to understand financials, you need to understand risk, you need to have continued management over your investment. I am going to make the case in a later blog posting that I believe you are a fool if you purchase an investment property or a stock without fully understanding the other market. I am also going to make a case that you are a fool if you do not have exposure to both asset classes in your portfolio. I don't mean to be calling people fools but I have studied these differences to death and am an active investor in both asset classes and now I am preaching my thoughts smile. More to come soon!

tags: real estate, investing, investment style, asset classes

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