If you’re looking to earn passive income – and many people are – then which is the best investment: property of equities?
Property is relatively straightforward: it’s defined as an investment in which you buy either a physical building or land. Ideally, you want that property to have some use value, either as a dwelling, a business or as a site where new buildings can be built. Property that can be used for something has the ability to generate rent.
Equities are a slippery concept for some, but the basic idea is straightforward. An equity is a promise to pay you a chunk of the profits of a business at some time in the future. By buying an equity, you own a share of the company’s current and future profits and can trade that promise with other people for a price. That’s the basis of the stock market.
Choosing between property and equities is a little bit like choosing between strawberries and cream, or your left shoe and your right shoe. Ideally, you’d have both together in your portfolio.
But if you could only have one, which would it be? Here are some of the pros and cons of investing in property and equities.
Pros Of Investing Equities
#1: Equities Are Highly Liquid
Let’s say that you buy a stock in a particular company on Monday and then decide on Thursday that you made the wrong decision. No problem. You just log onto your smartphone investing app or call your broker and tell them to sell the stock. Within a few seconds, it will sell, and you’ll get back the money you paid on the same day. In other words, equities are liquid, allowing you to manage your cash flow in a way that suits you. The same cannot be said of property. Selling a property can take weeks to months, and that’s assuming you don’t have any contractual obligations with your tenants.
#2: It’s Easier To Diversify With Equities
Diversification is a crucial principle of investing. At root, it means choosing shares that are different from each other, and whose prices don’t move together as the overall stock market moves up and down. It can be a tricky concept for some, but what it means is that you choose companies that are different enough from each other so that if one goes down, the others won’t.
People who want to diversify their portfolios might buy utility stocks and tech stocks. The utility industry is a different type of industry to the technology sector, and so prices rarely move together.
It is harder to diversify in property because the property market tends to be highly correlated. But thanks to sites like https://www.rumah.com/rumah-dijual/di-area-bandung-idjb01, it is becoming easier to invest in different property markets around the world. International markets are less correlated with each other than prices in domestic markets.
#3: Stock Market Investing Doesn’t Require A Lot Of Work
Do you want to go to work all day and then spend all evening working on your investment projects? Most likely you don’t. That’s what makes investing in the stock market such a good idea. Once you’ve made a decision to buy a company and have an exit strategy, you can sit back, relax and wait. For many equities, you’ll be waiting for years as the companies you’ve chosen attain their potential.
Pros Of Property Investing
#1: Property Is Tangible
The stock market can be a scary place. In 1929, the New York stock market crashed, wiping out 60 per cent of the wealth people thought that they had. In 2008 a similar thing happened when Lehman Brothers failed: the market plunged by more than 50 per cent. Some stocks went to zero.
The great thing about property is that these extreme falls in price almost never happen. It’s easy to imagine the value of a company going to zero: it can go bust and its assets sold at auction. But it’s much harder imagining the price of a house or a piece of land falling to zero. Property is tangible, and that means that no matter how bad the economy gets, it will still provide wealth because it will always be useful to somebody.
#2: Property Leverage Is Safer
People do borrow to buy stocks when they think they are onto a winner, but it’s risky. It’s something that only professionals do when they believe that they have an outsized opportunity to beat the market.
Borrowing to fund a property investment is a lot safer according to https://www.mashvisor.com/blog/real-estate-investing-safest-investment-option/. The reason for this is that the asset value will always be able to cover most of the loan, even when prices fall. Negative equity is a real concern, but it is small compared to the overall size of the investment in the property market because prices rarely fall by more than say, 10 per cent. The same is not true of stocks.
#3: There Is Less Chance Of Being The Victim Of Fraud
The process of buying a property is a long and difficult one. But there is an upshot: it’s much harder for somebody to con you into buying a sub-par property. Most savvy buyers go and view the property themselves, look at similar properties, and if they’re really interested in buying, hiring a surveyor to make sure that there are no problems that the seller is hiding. Because property is physical, quality is easy to verify.
The same cannot be said of equities. Consider Enron, for instance. From the outside, the company looked like it was making profits at an impressive rate. But that was only because of accounting shenanigans by the CEO and his team. They deliberately cooked the books to make the company look a lot better financially than it was. And that led many people to invest, believing that they could make a return.
Finding good stocks, therefore, is a challenge, because you have to rely on the honesty of the financial accounting team. If they’re not honest, you could be the victim of fraud.