Real Estate Vs. Da Stock Market - Part #2

23 February 2010 | talking about Real Estate, Stock Market

From my first post (Real Estate Vs. Da Stock Market - Part #1) many people contacted me and told me that they disagreed with me. The stock market and the Real Estate market were not the same. Many people expressed that they liked Real Estate, (and made it their "thing"), because they had far more control over the investment. You can pick your tenants, you can pick your lender, you can remodel, and so on. While in the stock market you have no control unless you have the capital to be a major share holder. All you have is the ability to cast your vote in a share holder meeting. While this is true, in fact you do not have much control over the direction of the company you own stock in, you have control over if you own the asset or not. In terms of personal wealth, this is way more powerful than than the direct control you have with Real Estate. Having the ability to liquidate your ownership in an asset within seconds is very powerful. When managing your assets their is two parts; growing your assets, and protecting your assets.

Wise investors can spot a downturn coming, such as the one in late 2007. No one really knows how bad a downturn is really going to be, but a wise investor should know when to shift from capital appreciation mode to capital protection mode. Below are the things you can do to protect your stock and real estate assets in a downturn.

Protecting Your Stock Portfolio

  • Sell your stock: If you think we are going to have a down turn, sell your stock holdings and return to cash until there is more clarity about what is happening in the economy.

  • Hedge you portfolio: Add some short positions to protect against declines.

  • Buy options: Unlike Real Estate it is very easy to purchase an insurance policy against a decline in your stock value. This is called a put option. For a small fee you can purchase a put option that will protect against a decline in your stock holdings.


Protecting Your Real Estate

  • Sell: First thing you can do is put your property on the market. You have to make sure you have enough equity to pay the selling costs and you have to make sure you can find a buyer. If you are scared enough to sell your property there most likely are not many buyers out there.

  • Lock In Your Tenants: Get rid of the risky tenants, and replace them with good tenants, (the ones with good stable jobs), on longer term leases.

  • Start Building A Reserve Fund: When owning Real Estate you need to be doing this anyway but you should start adding more to the reserves to help cover longer periods of loss rent.


When a downturn is coming, within seconds I can protect my stock assets, and within weeks (and maybe not at all) I can protect my Real Estate assets. One thing I am not mentioning here is a down turn in the stock market can be hard and fast, while a down turn in a real estate market will be slower giving you more time. What I am saying here, is use the different strengths to protect your net worth to the fullest.

I will close this posting off with a personal example. In late January 2007, I realized (through indicators in the stock market, not the Real Estate market), that the world was about ready to slow right down. I quickly moved my stock holdings to cash, and began some hedging. I also put much of my Real Estate on the market. Within seconds I protected my stock asset class, and began the process of protecting my Real Estate assets. The bad news was I was unable to sell my Real Estate. After sometime, my properties dropped in value below my loan amounts which meant I could not sell the property, without doing a short sale (where the bank agrees to take less to settle your loan). You might say you had tenants so who cares, and the tenants were paying the mortgage. While this was true in some cases but what really happened was it became increasingly harder to find tenants. My vacancy rates were raising and rents began to drop. Within 8 months of the economy going upside down, I was left with Real Estate I could not sell because the value dropped below my loan value, and they were not cash flow positive because rents had gone down and vacancy rates increased.

In this real example lets look at the positions my assets were in at the end of 2008. I had a Real Estate portfolio that had more debt than value, and it was cash flow negative (which means I was keeping the Real Estate bills paid with other income). Now, lets look at the stock portfolio. Since I sold all my stocks I was sitting on a pile of cash. While this cash did not increase in value throughout this time period it did not go down in value nor did it cost me anything to hold on to it. In my case I used some of the cash to keep my Real Estate afloat. Had I been 100% in Real Estate there would be a good chance I would have had to file bankruptcy because I did not have the cash from the stock sales to subsidize my Real Estate.

By paying attention to the stock market I was able to see early indicators of the economy going upside down, and I was able to protect my overall portfolio of assets far better than if I had been in all Real Estate. While the direct control of Real Estate has it clear advantages, do not discount the power of being able to liquidate your assets on a moments notice. Just having the simple ability to liquidate can outweigh the hands on nature of Real Estate.
 

tags: stockmarket, land lord, tenants, property management, investing, investment style

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