Real Estate and Comparison of Alternative Investments
Below are some real estate investment tips and others investment on the market.
Investment in Real Estate
Most of the specifics of this type of investment have been described in previous article (Definition of Real Estate); however there are certain characteristics of this investment which are important for the comparison. This investment is usually financed partially with a mortgage. This use of “other people’s money” can make a huge difference in investment returns and is much more difficult to achieve with other types of investments. Other advantages are low volatility and therefore slower changes in the market values of the properties; and tax implications. If an investment property is hold for certain amount of years, there is very low tax income liability, when the property is sold. Until that moment, the investor can use depreciation and expenses tax deductions to lower his income tax liability as well. This investment is usually providing the investor with monthly positive Cash Flow and also is appreciating over time. Disadvantages of the R.E. investment are definitely the minimum initial cost, which even with the help of mortgage are much higher than for other investments; very low liquidity, since it takes sometimes even months to sell a property; and the requirement of more complex management of the investment, either by investor himself or by a property management company.
Investments in stocks
The characteristic advantages of investments in stocks are the very high liquidity, when stocks are nowadays bought and sold in matter of seconds over the internet; low minimum initial investment and the right of the investor for dividends during the holding period. The volatility of stocks will not be considered as such a disadvantage in our case, because we will be comparing the investments only from a long term point of view. A disadvantage of the investment in stocks is the fact that the end companies and their profitability are influenced by the managers and not by the investor himself. The investor has low or almost no power over the situation of his stocks. Another disadvantage is the much more difficult use of leverage by using borrowed finances, compared to Real Estate.
Investment in precious metals (gold)
Precious metals and especially gold were always used as means of exchange in the past, because of its characteristic of value holding. That is the main advantage of gold and therefore it is a great hedge against inflation. In average, investments in gold do not provide such a great return yields, but especially during hard economic times, when other investments are falling, gold does opposite. When investor owns a piece of gold, for example in a form of golden coins, there is a considerable cost of security storage or insurance. In this case the liquidity is also quite low, because such an investor has to find a buyer for his coins or go to an auction to sell. Investment in gold does not provide an investor with any kind of dividends or cash flow during the holding period. Another option for investing in gold is the stocks of companies in the field of precious metals. Their stocks are influenced directly by the price of the actual commodity. This way an investor gets higher liquidity and lower minimum initial costs with the same returns. However he still will not be able to influence the development of the gold prices. Those are substantially influenced by the actions of governments.
Investment in savings accounts Savings accounts are the least risky, least volatile and most liquid type of investment. They are usually insured by the government and bring an annual interest to the investor. However the rates of interests are sometimes even lower than the rate of inflation and therefore the value of the money can actually lower over the time. Another disadvantage can be the penalties when certificates of deposit, a type of savings accounts, are cashed before their maturity date.
With the correct timing and suitable investment, it will helps to reduce financial problem.