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Stock market versus real estate

by Bruno Deshayes on 23 Mar 2016 permalink
You can't live in a portfolio of shares and you can't sell just your bathroom to raise some extra cash. What are the pros and cons of those two forms of investment?

You never know the price of a property until someone is willing to buy it and someone else is willing to sell it at the same price. Equities are very liquid because there is a market quoting current prices for each trading day.

Borrowing to buy shares is risky while borrowing to buy property is virtually the norm.

Real estate is very much an all or nothing proposition. You buy a house and you sell the whole of it. Besides capital gain you can rent the property and it ties you to the duration of the lease. Some clever operators had the idea of getting people to invest in a pool of properties by holding a number of units while others have a time-share arrangement in a holiday condominium. Those arrangements end up having the drawbacks of both investment types and none of the advantages.

Shares allow you to build up a position over time taking a small risk at first because your holding is only a few shares (the broker's commission compounds but then you could use CFDs instead). Shares that you hold over time generate income by way of dividends.

People who are skilled as a tradesperson look for properties they can repair and maintain in order to add value. In real estate the location is crucial. Proximity to schools, public transport, shopping centers is built into the price. What maybe a good family home for you may turn out to be a disaster as a rental property.

You would think a farmer close to a urban centre has the option to subdivide his land into residential blocks and make a huge profit. That's the theory but in practice it is a 10 or 20 years plan and will require going around corrupt local authorities.

If you plan to buy land, build a house on it, sell it and repeat the process as an investment strategy this is a full time occupation - not a dabbling investing past-time. The building trade is notorious to attract unsavoury operators and local authorities are sure to change the rules with more and more regulations - not less!

Two big assumptions maybe falling apart with property: ongoing capital gain and cheap credit through a competitive banking sector. The recent crash has shown that like everything else inflated house prices will have to come down to earth while the few banking institutions left will tighten their credit assessment.

Property transaction costs are huge (conveyancing, local council duties, agent's fees) but online brokers have brought commissions to a bare minimum.

It seems people are either comfortable playing the property game or researching stocks with good growth potential but rarely do you find folks who have the mindset to actually do both.


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