Real Estate Investing

Real estate investing in the modern world has a number of advantages over investing in equities and derivative contracts.

1. Real estate tends more often than not to go up, because governments cannot “print” land (they can print fiat currency like US dollars though), and companies cannot issue land like they issue stock or stock options. There tends over time to be more and more people wanting access to the central places for commerce and housing. This puts an upward pressure on prices in real estate. However, there are times when the real estate markets crash, normally when lots of people are heavily invested in real estate, interest rates are rising after being low and causing high debt levels and the economy is shaky. As of the time of writing (October 2006), I would stay away from investment in most residential property in the Western world, especially in the United States and in parts of Australia. Obviously in the late nineties and early years of this century a lot of money could be made. I myself made some money in this area, buying about 12 properties in the space of a year, most of which I sold for a great profit. There is a time for this kind of investment and a time to stay away. Perhaps more on this later.

2. Banks will lend more against property than shares. Banks will often lend up to 80% or 90% of the sworn valuation of a property’s value. This means if you borrow 80% of the value from the bank at a reasonable interest rate, and put a tenant in who covers most of your interest, you only need a 20% in the value of the property excluding stamp duties and agent fees to double your money in a year. Not bad at all. In a bull market you can do this several times a year. The flip side is that if the property drops by 20% or more which seems to happen every 10 years or so, and you are heavily leveraged, you can lose ALL you equity invested and maybe even end up with “negative equity”, meaning that your loan value is greater than the net realizable value of your property asset.

3. Barring severe disasters such as irreversible floods or nuclear contamination, your land will always be there and will generally go up in value over time.

4. With real estate you can search out the council records and check the house or unit/s out thoroughly and thereby know exactly WHAT you are buying. With stocks, a lot of what we are told is lies and company officers often know things about the company that we don’t know and can’t find out until its too late. Thus real estate provides more security. You can also improve the value of your real estate but you can’t do much to improve a company unless you own a controlling share in it.
5. Real estate is less volatile than stocks. Stocks can move 10 or 20% or even much more either way in a day, whereas property tends to move relatively slowly and if you are astute with your analysis of macroeconomic trends and market conditions you can see the corrections coming a long way off most of the time.

If you are called to make money in real estate, I recommend you be sure you are picking real estate which provides a rental return comparable to the prevailing rate of interest in your jursidiction. You don’t want to be too much out of pocket on a weekly basis. Try to buy into areas into which lots of people are migrating, which are adjacent to land areas which have recently boomed but have not boomed themselves yet. Be careful about investing in real estate when interest rates are near or over 10% – you could really regret it otherwise. Try to pick real estate where infrastructure is there or is going to be there soon. If you invest internationally make sure you know the local laws well and you do it in such a way that you cannot be ripped off. Get to know what is happening in the area you propose to invest in. Real estate investing is a bit like marriage – if you act in haste you may repent at leisure.

May God bless those who are called to this field and remember to use your profits to build treasure in heaven. Don’t hold and reinvest in them all again and again until God has enough of you and allows you to come down financially with a great crash.