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Are there similarities between investment in Stocks and Real Estate?
The answer is yes, both types of investments can produce a lot of profit and both potentially can ruin your finances. If you look at the past decades, these investments are both more than doubling their values every decade. So when it comes to return of investment both investments produce comparable profits.
There are two things that make real estate, investment of choice for everybody. The first advantages of Real Estate over stocks, is the financing. Try to go to any Bank and say I have a good Credit Score and decent income, please give me one million I need to purchase stocks. They will turn you down, that is most probably. With same scenario if you want to purchase a house, they might seriously consider to give you the money. I do not claim that Real Estate is always safer investment than stocks, but at least from point of financing institutions it is. That makes using leverage buying Real Estate much easier than Stocks.
The questions then if it is so easy to finance real estate and most likely it is a safer investment, why all investors just quit buying stocks and put their money in Real Estate.
There are a few limitations with Real Estate. The fist limitation is mobility. You can transfer your stocks from one brokerage to another brokerage or even take it with you in small portfolio. The second issue is liquidity. You can convert your stocks to cash in a few hours with current electronic exchange programs. To convert Real Estate to cash it takes a few months even in a good market conditions. The last issue with real estate investments, the final consumers of Real Estate are families and companies that want a place to live or work. If the prices goes up to certain level because of speculation, these companies and families will move to new developments a few miles way and settle down there. These elasticity between renting market, new construction and existing Buildings, makes bubbles of real estate to deflate at maybe 30-40% above market value, while stocks as examples in dot com bubble can potentially be sold hundreds times over its value. That's maybe one reason that, return of investments in Real Estate, is more predictable and considered to be safer.
Despite Real Estate shortcomings compared to stocks, it is the best mean to get reach for average Joe. Nothing in the world has produced more millionaires than real estate, because it is accessible to anybody who has a decent job and pays his bills. Buying a house requires less knowledge about investment than buying stocks. When you buy stocks, you have to even listen to rumors to make your decision. You buy a promise from the management of the company that everything is fine and the company you buy its stock is in great shape. Examples like Enron, shows clearly that you cannot trust what you hear from management. When you buy a house, a piece of land or a building, it is there for you too look at. You can see what you are purchasing. If it is bad neighborhood, you will see from the type of cars and how people take care of their properties.
Buying a home also can replace the most retirement savings, even if you live in the house you invest in for your retirement. At retirement age you most likely need smaller place with less hassle for you. You want maybe an apartment or smaller home away from inner city crowded living. Even if you want to purchase a home little bit further out at that time, it might cost you half of what you get for your home. The rest of the money you get from selling your home will be a additional income for your retirement.
One last thing, in my opinion everybody should own a home. The sense of belonging that comes with homeownership makes it easier for the parents to feel part of a family and for a child to grow roots in a community and feel secure. So although buying a home can be as profitable as buying stocks, buying a home for speculation is a wrong reason to purchase.
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