Sunday, February 17, 2008
Good investments - a house or stocks
When it comes time to invest your disposable income there are a couple of tempting alternative pulling at you for attention. You can put money in real estate – buy a house - or you could take that money and buy stocks. Actually you couldn’t take all of that money for stocks, since you still need a place to live (there's an advantage to buying a house before we even get started here).
Admittedly I have a bias towards the real estate investment; but, here are five reasons why you get more for your money with a house than the stock market:
1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house. Wouldn’t it be great if you could put a few % of it’s value down and buy a whole company. I suppose a few savvy investors cold find a way to do that, by using the cash that the company already has, but the “few %” in the case of a company is likely to be several hundred million dollars. A house may be several thousand dollars. In fact, it is tougher, but still possible, to buy a house for zero down. In some cases you can actually get the seller to contribute your down payment. What company is going to pay you to buy their stock?
2. Tax benefits. Uncle Sam knows that owning a house is a big part of the American dream and he wants to encourage you to participate in the dream; that's why you get tax incentives. What other investment let you put in 5-10 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That's right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple. And that's not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?
3. Control. When you buy stocks, you're paying some CEO and a whole bunch of "company men" that you don’t even know huge salaries for unknown company performance that may end up driving your company (your investment) into bankruptcy and you won’t even have a say in things. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders' meeting! If you're into the environmental movement, you can make your house "green". Getting the big oil company that you have stock in to go "green" may be more a mission for Don Quixoti.
4. Lifestyle. Do you want to look out at a asphalt parking lot with a bunch of car ports or at your children playing in your own back yard? With a home, you're purchasing a lifestyle for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs. If you want a pool in your back yard for the family, you can have that. If you want the best schools you can move to that area.
5. Value. Unlike some stocks, your house will seldom become worthless (a possibility that I am painfully aware of with 2-3 of my "holdings" and which I'm sure the shareholders of Enron can attest to with great pain). Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don't freak out about slight fluctuations in the value of your home in any given year. You'll make it up. Housing has lost value only a few years out of the last 35. It's more normal to beat inflation by 1 percent to 2 percent. It’s also an asset that you can insure against total loss, try that with your stock broker.
It’s all relative.
Try to keep things in perspective. You probably lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your car. And you sure lost more on your iPhone. Almost everything material that you can buy, except your house, starts losing value the moment the cash register finishes the sale to you. Your house is one of the few appreciating assets that you will own and likely the only appreciating physical asset (unless you collect art, coins, stamps, collectible cars or some other rare collectibles).
Your home is also likely to be an asset that is more readily able to be liquidated that many other assets. You ever try to sell a piece of art? The market may be slow right now, but it is still there and people are still out there buying houses.
But what about real estate as an investment vehicle?
So, should you sell all of your stocks and buy a bunch of houses? No, that’s not what I’m saying, although there are people who have put most of their investment savings into real estate investments and they’re doing quite well, thank you very much. Like many things in life, a balance and moderation are the keys to success here. However, there’s an old saying much favored by entrepreneurs – “You don’t get rich by working for someone else.” The same could be applied to investing. Putting your money into someone else’s hands, i.e. in a stock, is like working for someone else; the people who get rich doing that are the ones with the wherewithal to buy the entire company. About as close to that as most of us can get is to buy an entire house – invest in real estate.
I know several older real estate investors who have amassed impressive portfolios of properties and who, on paper at least, are worth several million dollars. I know a few younger investors who are planning to invest in as many properties as they can safely leverage while the market is down. Are they both at risk? Certainly, but if they proceed with caution and with due diligence in their real estate investments, they are likely at no more risk than the millions of people in the stock market and perhaps at much less risk that the folks who invested in the exotic, mortgage-backed derivatives that Wall Street was so up about a year or so back. At least the people who bought real estate have a physical asset. All those people who bought derivatives have is a few lines of bad news printed on a report from their broker.
Give me a call and we’ll help you get started by finding you a home for yourself to invest in as the first step. Then spend some time on my Web site http://www.themilfordteam.com/ and read what’s there about real estate investing (look in the FAQ section). A lot of the information is contained in articles with warnings and scary stuff, but it’s best to get that out in the open up front. Map out the mine fields of real estate investing before you go into it and maybe you can avoid stepping on a few of them. Also avoid all of those TV "get rich quick" real estate investing shows. They are mostly about higher risk strategies that should be reserved for the pros who can stand to lose on those risks. After you've studied the landscape of real estate investing, call me and we can go look at the foreclosure opportunities that are out there for the investor today.