The act of investing is something that cannot be separated from the investor himself. When you are weighing where to put your extra funds for a better return on investment, the answer lies in the type of risk profile one has and knowing what are potential investments pitfalls.
Here are three important factors to consider before you go into stock or real estate investment:
How much risk can you take?
The rule of thumb is that the greater the investment, the greater the risk associated with it, but it also means, the greater the returns. Whether you are keen on investing in stocks or on a piece of raw land, a condominium or a house and lot, all will all depend on how much of a risk taker you are. A risk profile is defined as “an evaluation of an individual willingness to take risks, as well as the threats to which one is exposed”. Your willingness to take risks (or the opposite, the aversion to taking risks) affects your overall investment strategy.
In stocks investment, you may have lesser control. Stocks require you to trust what the company reports to the Securities and Exchange Commission. There are no hard and fast rules that will help you predict whether a stock and its value is going up or not. In real estate investing, it is easier to quantify how much expenses will go into repairs and how much rental income you can have later. You can make draft of a budget after knowing what the banks’ interest rates are
Determining your Cash Flow
Ensuring cash flow is different for both as the skills needed to do so are distinct. You need to determine which skills you need to cultivate and spend time on. If you want to ensure you earn from your stocks, you would need to learn how to flip stocks, buy low and sell high. It entails learning to an extent the business and economic environment, being familiar with fundamental and technical analysis of stock investment. It means you will be spending time tracking the bourse.
On the other hand, as a real estate investor you buy a property assuming that the land value will rise, thereby forecast an equity component that builds wealth. At the same time, you will be earning cash from rental fees. As you rent out the property, you are guaranteed a cash flow only if you have a regular flow of renters. The skills needed to ensure your cash flow revolves around collecting payment, building a relationship with your renters and having a network to tap future renters.
Variables and Unforeseen forces
In both types of investments, real estate and stocks, the risks are as real as they get.
In a real estate investment, since they are physical, your inputs are physical too. You determine what improvements to make, when and how much rent to raise, when to cut costs, refinance a mortgage, etc. To an extent, there is a certain leeway for you to decide how to optimize your wealth. But there are unseen forces that are beyond your control which can spell a downgrade, like the economic cycles, the government-led developmental projects like infrastructure, natural and manmade disasters like floods and earthquakes. When your property takes a hit, so does its value.
When investing in a publicly traded company via its stocks, you gain through cash and or stock dividends apart from the trading of stocks. To a greater extent you are putting your faith in the company’s management. You are assuming that management is running the company towards profit (and a steady profit at that) to ensure growth. The unseen forces here are a commitment of fraud by the managers, shady deals by the company or company bankruptcy. Regardless of your trading know-how, you would need to wait out the bearish market or sell at a loss.
Hopefully, with this article, you have gained an insight into your investment strategy before going headlong without much thought into either stocks or real estate.
This article is contributed by Dimple, a Hoppler broker.
You can visit Dimple’s profile to know more about her, her clients, and the properties she can help you with.