Are there any similarities between real estate investing and stock market investing?
I want to learn both, so I was wondering if there are any similarities that overlap so that I don't have to learn two completely different investment types. #finance #financial-services #investment-management #real-estate #real-estate-investing
Real estate investment is long term capital intensive investment where as stock market investments are relatively less capital intensive and more liquid investment.
Stock market investment returns are moreover depend on industry and company specific fundamentals where as real estate investment returns are depend on economic development cycle and local infrastructure development.
The fundamentals can be quite similar but the details will differ. From a fundamental level there are several ways to value both real estate and stocks. One way would be to estimate the future amount of cash the investments will bring in. For real estate, this can be the amount of rental income an apartment building or an office brings in. For a stock, it can be the amount of sales a company has, adjusted for its expenses. Another way would be to use comparable metrics. For real estate for example, you can look at how much similar houses have sold for in the past. For stocks, you can use other stocks in the same industry and compare things like price to earnings. With that said, attention to detail and knowing a specific market is what separates the good investors. Generally, a person is an expert in a particular market although there are certainly people who are good investors across many markets.
The initial similarities are that both require a good amount of analysis and financial knowledge.
They also require you feeling comfortable that you can lose money and depending on the investment a lot of money.
Illiquid and long-term oriented.
May or may not be less capital intensive than stock investing.
Will typically need to be able to borrow money. This has positive and negative benefits as it provides leverage.
More tax implications than a stock investment.
Management headaches. Even if you hire a property manager you should still be involved to some degree.
Location, location, location is critical.
Need to understand where you are buying from location (what could happen in the neighborhood both short term and especially long term).
What are the comps for similar properties and what condition were they in.
What is the condition of the target property. Will you need to improve it initially or down the road (which you will have to just from a maintenance perspective).
Harder to diversify.
Larger transaction costs.
What are the potential returns.
Typically liquid. Long and short term timeframes (but typically shorter than real estate).
Can use leverage but that can riskier since if you receive a margin call you may have to sell and won't be able to wait for a rebound (vs. real estate you can if there is sufficient cash flow).
Taxes are due until you sell (except for dividends).
Greater need to stay on top of what the company and stock are doing (which can diverge from each other).
Need to understand the company, its products, its competitors, its financials (income statement, balance sheet, cash flow statement), what non-company events could impact the stock (such as the Federal Reserve).
What valuation is it selling at and how does it compare to peers (which can be a trap if it just looks cheap compared to similar companies. They all may be overvalued).
Easier to diversify.
Much smaller transaction costs
Do you want to buy individual stocks or a fund.
What sector or sectors or geographies do you want to invest in.
What size of companies do you want to invest in.
Overall while there are some similarities there are major differences.