Stocks and Trading Thread - Channeling your inner Mono

[Camerus]

What do y'all think about investing in real estate generally, as opposed to stocks?

[MadImmortalMan]

Real estate is dead. Nothing moves. I would do it if it was a ten-year ownership plan or longer though.

[Monoriu]

What do y'all think about investing in real estate generally, as opposed to stocks?

The problems with real estate investment are -

Very large capital needed, compared to stock;
Much more illiquid.  You can easily sell stock in an exchange; it is far more difficult to sell a house;
Much higher transaction costs - the commission for trading a house is much higher;
Increased risks to the investment.  Your stock holdings are pretty safe.  Your house can be burned down, can be illegally occupied by gangsters, can be flooded, etc.
With stocks, you just sit there and get dividend income.  With a house you can rent it out, but you risk the tenant not paying or playing legal games with you;
It is far easier to diversify with stocks; whereas a lot of people only have enough money for one investment property - all the eggs in one basket.

In fact, there are ways to invest in the real estate market without buying a house.  You can own shares in real estate developers; you can buy REITs, etc. 

[Camerus]

What about the pros? 

[Admiral Yi]

What about the pros? 

There's a finite stock and people always need housing.

[Tamas]

I know that if I had enough money, I would have bought some houses in the States during this whole metldown thing. In case of careful selection, it has to be a very good long term investment.

[Tamas]

In other news, my slightly positive results are only thanks to my oil future calls. And stocks. I have been tanking on other commodities I have tried.

[Malthus]

What about the pros? 

For most people, the biggest real estate investment is one they live in. To my mind, that's a pro - you can't live inside a pile of stock certificates.

Also, this is an area of investment where a personal eye to an "up and comming" area can actually make a difference. Most people really know squat about the future potentials of various companies or commodities. It is easier for the average shlemiel to know about their own neighbourhood, which streets are "good" to live on and thus desireable, etc.

Downside is that most folks will not want to liquidate their own house if they need cash; often this is an extreme form of investment, one your kids will cash in on.

[The Minsky Moment]

One way to get some exposure to RE with a more modest sum and retain liquidity is to purchase REITs.  There is a passive REIT index which trades as an ETF under VNQ.  Note that this is not really the same as direct RE investment, more like a hybrid kind of investment, but it is a lot more convenient than investing directly in housing.

[DGuller]

For most people, the biggest real estate investment is one they live in. To my mind, that's a pro - you can't live inside a pile of stock certificates.

IMO, that's not really a valid difference.  Shelter is just a dividend of real estate, just like stocks have their dividends.  You use it up yourself or you can rent it out to others, it's an income stream just the same, and it's priced in.

Downside is that most folks will not want to liquidate their own house if they need cash; often this is an extreme form of investment, one your kids will cash in on.

And even if you want to liquidate, it's hardly simple or cost-less.  It's very illiquid, in other words.

[Fireblade]

I know that if I had enough money, I would have bought some houses in the States during this whole metldown thing. In case of careful selection, it has to be a very good long term investment.

Unfortunately, your nest egg of a couple hundred thousand forints is only worth about $50 in REAL money.

[Malthus]

IMO, that's not really a valid difference.  Shelter is just a dividend of real estate, just like stocks have their dividends.  You use it up yourself or you can rent it out to others, it's an income stream just the same, and it's priced in.

I dunno if the numbers work out on that. Renting to others comes with a whole host of management complications - it is hardly cost-free!

I dunno if you can find $500K in stocks which will, *without risk*, return sufficient amount in dividends to rent a house worth 500K (and appreciating), year after year.   

Rents in Toronto seem all over the map but a house worth $500K seems to rent for around $3000/month. That works out to around a 7% return, not counting capital appreciation. How many stocks *reliably* pay a 7% dividend? (I honestly don't know)

Of course I'm no economist so my math and knowledge of basic concepts may be screwy.

I'm not saying buying rental properties is a great investment, either, since as I said that 7% doesn't take into account a whole host of costs ... but if you live in the house some of those costs you'd have to pay anyway, if you (say) invested in stocks and rented a place with the dividends; some of those costs are unique to renting to other folks. 

And even if you want to liquidate, it's hardly simple or cost-less.  It's very illiquid, in other words.

Yup.

[DGuller]

I dunno if the numbers work out on that. Renting to others comes with a whole host of management complications - it is hardly cost-free!

I dunno if you can find $500K in stocks which will, *without risk*, return sufficient amount in dividends to rent a house worth 500K (and appreciating), year after year.   

Rents in Toronto seem all over the map but a house worth $500K seems to rent for around $3000/month. That works out to around a 7% return, not counting capital appreciation. How many stocks *reliably* pay a 7% dividend? (I honestly don't know)

The actual dividend should be the income, not the revenue.  That would be rent minus all of the various expenses and property taxes. 

Even then, I didn't mean to imply that houses and stocks are equivalent types of investment.  Houses are more divident-oriented, stocks are usually more appreciation-oriented.  The point was that the shelter that you get from your house is not a free thing, it's just a revenue stream priced in.

[Malthus]

I dunno if the numbers work out on that. Renting to others comes with a whole host of management complications - it is hardly cost-free!

I dunno if you can find $500K in stocks which will, *without risk*, return sufficient amount in dividends to rent a house worth 500K (and appreciating), year after year.   

Rents in Toronto seem all over the map but a house worth $500K seems to rent for around $3000/month. That works out to around a 7% return, not counting capital appreciation. How many stocks *reliably* pay a 7% dividend? (I honestly don't know)

The actual dividend should be the income, not the revenue.  That would be rent minus all of the various expenses and property taxes. 

Even then, I didn't mean to imply that houses and stocks are equivalent types of investment.  Houses are more divident-oriented, stocks are usually more appreciation-oriented.  The point was that the shelter that you get from your house is not a free thing, it's just a revenue stream priced in.

Way I was looking at it is this: fit I invest in stocks, can I earn enough to pay for my shelter, same as if I invest in real estate? That is, can I earn enough to pay the rent, on-going? Presumably the value of the stocks would increase over time, but then, so will the rent. Will the increase on stocks be sufficient to cover this, ongoing?

I guess my point is this: I agree that they are very different sorts of investments, but this difference is IMO an advantage in some ways. Houses are as you say illiquid, but they are very "safe" if you do not want to sell; you can always just live in them. Once you have bought a house, if you don't want to sell of move you really could not care less if the real estate market tanks tomorrow; you will still have your house. If your stocks tank, you have only bits of paper fit to wipe your bum with. 

To many, the "investment" component is really just icing on the cake. After you are through living in the house (in some cases, after you are through living, period) you have a valuable asset to give to your kids. 

[DGuller]

Way I was looking at it is this: fit I invest in stocks, can I earn enough to pay for my shelter, same as if I invest in real estate? That is, can I earn enough to pay the rent, on-going? Presumably the value of the stocks would increase over time, but then, so will the rent. Will the increase on stocks be sufficient to cover this, ongoing?

You can't buy as many stocks on the margin as you can a house, so that can be the advantage.  You won't be able to buy $500,000 in stocks on a $100,000 downpayment, and in any case it would be a highly dangerous thing to do.

I guess my point is this: I agree that they are very different sorts of investments, but this difference is IMO an advantage in some ways. Houses are as you say illiquid, but they are very "safe" if you do not want to sell; you can always just live in them. Once you have bought a house, if you don't want to sell of move you really could not care less if the real estate market tanks tomorrow; you will still have your house. If your stocks tank, you have only bits of paper fit to wipe your bum with. 

You're making a crucial, and potentially dangerous assumption, and that is that you will continue to have the income to service your debt.  Since houses are sold on a margin, you do indeed have a very real risk that at some point in the future you'll become unable to make payments.  Many people forget that they're going hugely in debt when buying a house, and leverage can always work both ways.