Real estate or stocks?

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Lee Shau Kee is a Hong Kong-based and is a real estate tycoon, who ranks on the 35th place on the world’s richest people list. His personal net worth is $ 19.6 billion, according to Forbes.com. Warren Buffet is a USA-based legendary stock investor, the top 4 richest man in the world. His personal net worth is $ 58.2 billion, according to Forbes.com.

Obviously, it is possible to make money by investing in real estate and in stocks. At this point, it’s worth to point out that there are no people ranking in the list of world’s richest people, who got rich by just saving their money or holding the bank deposits.

If you want to know which asset class is better for making money and keeping it and what could be the advantages and disadvantages, continue reading.

7 reasons, why real estate is better than stocks:

1. Investing in real estate will give you more control over your investment.

By investing in real estate, it is possible to make your investment decisions yourself and you can also directly affect the performance of your investment in the future. Of course, the real estate sector is also open to the effects of economic cycles, but in the context of a specific investment, control is in the hands of the investor. By investing in traded or non-traded stocks, you rely on your paid investment in raising your investment in the salary management team. However, in an investment property case, you have the right to speak and act on it, for example, how big is the rent amount, repair works or who’s the tenant, when investing in stocks, your rights are limited to raising your hand on the general meeting only.

 2. The use of leverage can increase the return on equity.

Under the conditions of rapid inflation, the use of leverage can significantly increase the return on invested equity. For example, with 20% self-financing and a 3% annual appreciation of fixed assets, the investor earns a return on equity of 15%. In less than six years, real estate investment thus linked could double the amount of its owner’s money. Of course, such investment is not risk-free – in a recession, the use of leverage can lead to rapid destruction.

3. Real estate is a real asset.

Real estate is such property that you can see, touch and use. Stocks, on the other hand, are just numbers and symbols on computer screens. In the most pessimistic scenario, when you arrive at the end of the world, you can hide in your real estate, with the electronic stock symbols you have nothing to do.

4. Real estate is easier to analyze and understand.

It is enough to make a good real estate investment if you are able to calculate the costs of owning real estate and to estimate the rental income received. In the case of long-term investment, you can take into account at least inflation with the same growth rate as real estate, plus the regular rental income. When investing in an equity you need to trust the information that the company decides to disclose to shareholders. But we all know that accounting is a creative activity, and companies have discovered innumerable ways to better reflect their financial standing (for example, valuation of claims, one-time revenue and expenditure calculations, different amortization measures, etc.).

5. Lower volatility.

The value of your property may increase or decrease without you understanding it – and there is no difference when it comes to the long-term investment. In spite of the decline in real estate prices experienced in the last economic crisis, people needed real estate – apartments and houses for housing, shopping malls, and hotels for travel. Lower volatility also helps to prevent the sale from “the bottom” of emotions.

6. Owning real assets gives you a good feeling.

Making money just for money is not fun at all. At the same time, passing a rented property owned by the owner can provide emotional satisfaction and a good sense of successful placement.

7. Real estate is local.

Having made a decision to invest in real estate located in an economically strong region, events in the international economic space can leave you completely unaffected. The economic crisis in Spain is unlikely to have any effect on how much you can rent for your apartment in the center of Tallinn.

7 reasons, why stocks are better than real estate:

1. Better yield.

Historically, stocks have provided better returns than real estate. Today’s knowledge can be taken into account that the average long-term return on equity investments could be about 7-8% per annum, while global real estate prices have risen by an average of 4% per year. Like real estate, equity investments can also be leveraged, but unlike real estate, your shareholder may immediately demand that you invest in cash when you drop your stock prices. In the event of a fall in real estate prices, no bank will require you to receive additional cash on condition that you have properly paid the existing loan.

2. Better liquidity.

In case you do not like a stock, or if you suddenly need money, you can quickly and painlessly realize your stock portfolio. Ownership of real estate will take time to sell, and taking an additional loan will not be on the spot.

3. Lower transaction costs.

The development of electronic trading systems and competition have created a situation in which the fees for share transactions have decreased. In most cases, a fixed transaction fee must be paid for the purchase or sale of stocks regardless of the number of stocks bought or sold. In the real estate market, the situation where the cost of all transactions is calculated as a percentage of the transaction value – whether it be brokerage, state fee or a notary fee – has survived. In conclusion, the purchase or sale of real estate can cost you 5% of the value of a transaction. In the case of stocks with the sole cost, the service fee is paid to the fund manager or financial institution.

4. Less hustle.

Investing in real estate is considerably more time consuming and labor-intensive than investing in stocks. In the case of real estate, care, repairs, public relations and the time spent searching for tenants should be taken into consideration. Stocks can be essentially forgotten after purchase.

5. More options.

As a general investor, you do not have access to the real estate market in the world’s major cities, and the likelihood that you own real estate at the same time in London, New York, Tokyo and Moscow is extremely small. With equity investments, you can invest heavily in other companies operating in the world. A well-distributed equity portfolio may have the same low volatility as a real estate portfolio.

6. Invest in to your favorites.

One of the most interesting aspects of investing in a stock is the opportunity to invest in affiliated companies. Let’s say you’re a great user of Apple products, and you’re fluttering with Coca-Cola. There is nothing easier than going and buying Apple and Coca-Cola shares. In addition to ownership, you can make money from these investments as well.

7. Easier to manage risks.

To hedge the risks associated with real estate, you can purchase an insurance policy, but in the event of a loss, the disputes relating to compensation with the insurance company are rare. We all remember the case of less than 10 years ago, where insurance companies did not want to compensate for the storm damage caused by the rise in sea water in Pärnu and Haapsalu. To hedge the risks associated with the stock, it’s easy to sell itself as “short”.

To sum it up

It is not easy to make the choice between stocks and real estate. In fact, both real estate and stocks have their place in the investment portfolio. The investment horizon of young people is long and the risk tolerance is high, therefore young people would prefer to invest in stocks. Age, however, leads to a decrease in risk tolerance, and preferences can often tend to reverse the real estate market.

The worst choice would be not to invest. Inflation will destroy the purchasing power of your savings, but at the same time, it increases the value of real assets.  It is worth to invest in the assets, which value will grow with inflation.

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