If you’re lucky and have extra money to invest, here’s help for deciding if you should invest in real estate or the stock market. These tips for creating financial abundance are from Travis Freeman.
Before his tips, a quip:
“October: This is one of the peculiarly dangerous months to speculate in stocks,” said Mark Twain. “The others are July, January, September, April, November, May, March, June, December, August and February.”
The point? Any type of financial investment is risky business! To minimize the potential risk, read What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures. And, here are several things to consider when you’re decided where and how to invest your money…
Where Should I Invest Money – Real Estate or the Stock Market?
An investor might choose real estate over the stock market if her tolerance to risk does not allow her to ride the volatility of the stock market. Unlike stocks, real estate is not susceptible to daily fluctuation and volatility. Now, this is assuming you have a quality, investment-grade real estate property. An investor might also choose real estate over the stock market if you need regular income.
Some stocks pay decent dividends, but this dividend income may not be as high as rental income. Plus, stock investment income fluctuates, as compared to a 5 year lease on a building. For those that need greater growth of their investment, the stock market is probably where you want to park your dollars. The stock market overall has a greater ability for long-term growth.
For more info on long versus short-term growth, read The Benefits of Short-Term Versus Long-Term Investments.
Ideally, investors should invest in both the stock market and the real estate market. There are ways to invest in real estate without having to actually purchase the physical building. One way to gain exposure to real estate is through Commercial Real Estate Investment Trusts or REITs. You may invest in publically traded “stock REITs” as well as non-traded public REITs (no day-to-day trading or volatility).
If you’re a “moderate” investor, you should have at least 10% in REITs, 54% in stocks, and 36% in bonds and cash. This is assuming you would not own any other “alternative investments” such as real estate. For more info on investment diversification, read How to Diversify Your Investment Portfolio.
When investing in real estate of another country, there is additional financial risk. It’s much more difficult to manage and visit the property, but you also have to deal with that government’s tax and real estate laws. It is common for real estate owners in the US to have a Limited Liability Company (LLC) established. However, other countries may not have the same type of entities available and may not even honor an American LLC. Ideally, you want a management company to manage the property for you that is accustomed to the local rules and laws and one that can take care of the property while you are away. If the only reason for owning this real estate is for the investment, I recommend having something closer to home.
If you have any thoughts about investing in real estate versus the stock market, please comment below…
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Travis W. Freeman is the director of the Eastern Missouri Chapter of the Foundation for Personal Financial Education, a non-profit organization dedicated to financial awareness in the community.