Stocks Or Real Estate in Crisis?

It is a pretty hard question if you are willing to invest your money, would you buy stocks or would you buy real estate. As an economist, I have always been told that one should diverse his portfolio and not push all assets in the same type of investment. What if it’s a crisis and you do not rely on usual profitable funds such as mutual funds and social insurance, life insurance, etc. They generally keep your money, finally you get a profit and a pretty good interest and then you become the age, when you get payments back, much more than you have paid. Unfortunately it’s hard to trust these in times when you never know whether some of the giants in this business might bankrupt. One thing is for sure for the Stocks Exchange. It has been there for a while, it suffered many crises and will stand this one too. Many companies might go, but the stock exchange will still continue its existence, with new stocks, new companies, etc. It is pretty much the same with real estate. This business is for hundreds of years, no one even remembers for how long and will always be there. People will always need a place to live and at the same time a place to invest.

What are the big advantages of stocks?

Stocks would require a much smaller investment. You can buy Eq for company like APPLE for like 160 USD, but also get Motorola for 7 USD. This way you can choose your amounts to invest and limit your loss. In case of a good choice, the stocks are much more volatile than Real estate. As an example, AIG EQ price has gone up 276% for just one month /01.08.2009 – 30.08.2009/. So if you are good in this, or your broker is good in this, you can get a real good profit for a short period of time. Even though if you wait to read this in the news /just like I did/, the trend will be over and you will go in at the time that everyone is already selling, so you will loose. Let me remind you that for one month in real estate, you will not even complete your sales purchase, not to mention a profit of it. This can only happen if you have inside information about a huge project in a very early phase and then buy something nearby, before anybody has heard of this. Then for one night when the project is announced, the price of your investment will rise extremely.

Let’s return to stocks. It’s pretty easy to make a proper portfolio out of stocks. You can read some articles, forums, consult your broker and finally you will make it with a limited investment amount. Basically you will buy as much as you can afford. It’s not quite the same with Real Estate. Can you afford to make a portfolio of houses, apartments, commercial properties, shops, land in order to diverse and minimize the risk. Of course not, as your investment is much limited. Not to mention that you can buy and sell stocks and other assets by a mouse click or a phone call. In order to buy a property you have to go with much more efforts – find a proper real estate agent, get an independent surveyor, legal appraiser, mortgage consultant, etc.

Let’s see what happens, imagining that one has a 100 000 EUR and wants to invest.

Real Estate

You need to find a good property, suitable for investment. It could either be land, a huge off plan apartment /which is pretty risky/ or a big house in prime location. You need to make sure about building standards and then go for the expenses:

3% /3000 EUR/ – broker fees up to 4% /4000 EUR/ Stamp duty and legal fees /This is of course if the deal goes to Notary with the Real price, like everywhere in the world/ then optionally you might need to repair/ furnish 
So your 100 000 EUR house will obviously cost like 107 000 EUR. And the profit expected will either be of rental Management or a resell. In first case like 5-7% a year, in second case 8-10% price increase per year. This is of course not on a crisis market.

It is more interesting if the upper example is through a bank loan:

So you have 50 000 EUR cash and then you need another 50 000 EUR for a mortgage. An interest of like 8-9% in Bulgaria would make you return like 80 000 EUR for 20 years, which on the total price is 60% on top. It doesn’t sound like this when you see bank adds on TV, but actually it is when you get your mortgage contract. You can calculate yourself how can you make a proper investment through a bank loan, and for what period you will have your investment profitable. I will tell you how.If you have the full amount of 100 000 EUR, but still take your 50 000 EUR bank loan. Then your 50 000 EUR should go to Stock Exchange and you should make sure that they are more profitable than your interest on the loan. It should be like this: you make 500EUR average out of stocks and pay 350EUR bank installment for a certain period. That’s what I would do.

In both we have the leverage – the margin in stocks trade and the mortgage in Real Estate which could make you keep part of your money aside, not put all your fortune straight. But they also have their minuses, as stocks margin could be extremely negative once your stocks fall down. At the same time a bad economic situation could make the banks make your mortgage conditions much worse and you can do nothing about it.

Both are pretty risky for the moment, but while public companies may bankrupt or leave the Stock Exchange, Real Estate properties will stay there and wait for the right moment to be sold.

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