Real Estate v Shares: Safe as houses?
Posted on 10. Jul, 2009 by Global in Options Trading, Stock Investing
Something this economic crisis has presented for those with a little cash to spare is the opportunity to pick up some great bargains. And I’m not just talking about the buyer’s advantage in our retail stores – the real estate and share markets are presenting us with some fantastic investment opportunities at the moment.
If you are one of those people looking to put your money to work for you, which investment vehicle would you prefer to use and how comfortable are you with risk?
If you tend to follow the crowd, you’d favour real estate, after all property allows us to benefit from leverage, using other people’s money (the bank) to achieve a greater return using a smaller amount of our own money upfront (deposit).
Another appeal of property is the ability we have to create a regular income by way of rent and after all, buying real estate is much less risky than buying shares….or is it?
Although shares don’t offer us leverage directly, the risk we face as a share investor is that we could lose the lot if the stock price fell to zero. This is the major reason most people shy away from the stock market and put their money into real estate instead.
However, consider this:
Let’s say you buy a house for $ 250,000
The bank would require a deposit from you of around $ 50,000
Assuming you’d borrow for costs, let’s say your loan amount would be $210,000 so all up your total outlay for the property would be $ 260,000
Scenario 1) In a year’s time the house is worth $ 300,000 you’ve made a profit of $ 40,000 using just $ 50,000 of your own money and letting the banks money do the rest for you. You can see how the leverage of property is appealing?
Scenario 2) In a year’s time the value of your house has dropped to $ 190,000 (not unrealistic for some areas during this economic climate)
You’re now facing a loss of $ 70,000 ($190,000 – $ 260,000)…. But hang on, you only put 
in $ 50,000 of your own money didn’t you?
So you’ve lost $ 20,000 of the bank’s money on top of your own and you still have to pay back that debt.
Hmmmm…now I’m definitely not saying don’t invest in Real Estate.
I’m simply showing you how it’s possible to lose more than your own money with property, however when you buy shares, the most you could lose is limited to what you pay to own the share. Despite this, most people continue to see shares as a risky alternative… Why?
Simply because of 3 scary words… Stock Market Crash
Let me ask you this:
If you could take out an insurance policy on your shares that meant you could sell them for what you paid, no loss, even in the event of a stock market crash, would you look at the stock market differently?
If you could lease your shares out every month and receive ‘rent’ as income in exactly the same way we can with real estate, would you look at the stock market differently?
If you could experience a leverage of 10:1 over shares, limit your potential losses, create a consistent income, profit even when share prices were falling and get started using just a small amount of your own money, would you look at the market differently?
We can do all of this using Stock Options. Options are one of the most powerful but misunderstood tools available to us as an investor and whether you have just a small amount of money available or a large sum to invest, there is an options trading strategy to suit almost any situation.
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