Most people who want to establish a financially-secure future
choose to invest or trade in real estate. Indeed, if you take a look at the
list of names of the wealthiest people in any category, most of them have
allocated major portions of their assets in real estate. Donald Trump, who made
his fortune in real estate is very popular and his success story is an inspiration
to all of us.
Books like Rich Dad, Poor Dad , by Robert Kiyosaki and other
property investing books written in the last fifteen years, introduced the
average person to real estate investing. Thanks to these books, many people
have opened their minds to new possibilities which they can now envision for
themselves.
This article will not dispute the validity and the wisdom of
investing in real estate. However, it might not be the best option for
everybody. Each of us has different limitations and our circumstances vary. At
the start -- for most of us -- we have to choose which area to specialise in
since there is only so much money to go around. What I can do, is to at least
highlight a few aspects of trading and investing in both areas. I then leave it
to you to decide what you would like to focus on.
I should let you know that I have not yet invested in real estate
myself, but I have considered it and I have asked myself the same questions you
might be asking yourself now. I have read a lot on the subject matter and my
assessment is purely based from my readings. Individuals using real-estate as
their vehicle to create wealth may have different perspectives and I strongly
advise you to seek their counsel to gain a more balanced outlook on this issue.
PASSIVE INCOME OR CAPITAL GAINS
If you like the idea of buying property to receive rent revenue,
then the real estate market maybe better for you. You can structure your
properties and contractual agreements to maximise the passive income you get
from your tenants.
However, if you prefer to buy a property mainly because you think
you can resell it at a higher price later, then you want to make money mainly
from capital gains. If this is your philosophy, then forex could be a better
trading vehicle for you than real estate because exchange rates fluctuate
faster than real estate prices. Furthermore, transactions are easier and they
are instantaneous to complete.
CAPITAL
To buy real estate, you need have at least 10% of the acquisition
cost of the property, if your bank is willing to lend you the other 90%. If the
house costs $350,000, you will need to cough up $35,000. That is a year's gross
income for many people.
If you want to start trading forex, most brokers allow you to open
a trading account for just $200. With $50, you can trade 10,000 units of a
currency, if you have a margin ratio of 200:1.
LIQUIDITY
Whenever you want to buy or sell currencies, there is always
someone willing to buy from - or sell to - you at the most competitive price.
The forex market is the biggest market in the world and if you have hundreds of
thousands of dollars you want to exchange for another currency, you can do so
within a couple of seconds. To buy or sell a house or an apartment, you expect
to wait for weeks, if not months.
PRODUCT HOMOGENEITY
In the real estate market, one house is not the same as another.
Each property is unique. One might have a better foundation, a worse design or
a prettier garden than another. Knowledge of these strengths and weaknesses
become a significant factor if you are to make money from a transaction.
Therefore, if you enjoy or if you are good at selling, promoting, negotiating
and bargaining based on these differences, the real estate market is for you.
Further, your lawyers, accountants, advisers, real estate agents and
consultants play a significant role in your success.
If you want to trade currencies, there is no need to negotiate the
price with the other party. If you are a seller, there is no need to educate
potential buyers as to the benefits of your product. If you are buying, you
have piece of mind that you are getting the best possible price for the
currency from your broker at that particular point in time.
TRANSACTION COSTS
Buying and selling real estate is much more expensive than buying
and selling currencies.
'SHORTING' MARKETS
When you have a property and you suspect that its price will go
down in the future, your options are limited: hang on to the property or sell
it now. In forex, if you suspect that a particular currency will depreciate in
value, then you can exchange it for another currency. You buy it back again
after it has already reduced in value to realise your gain.
MEDIATED TRANSACTIONS
In real estate you are dealing directly with the other party,
taking on the other side of the transaction. This is why you need to go through
a lot of paperwork and consult your lawyers to ensure that you know about the
options available to you when the other party fails to fulfil his or her end of
the bargain.
In forex, you do not have to worry about whether a buyer or a
seller is going to fulfil his or her end of the bargain for whatever reason,
because you are not directly dealing with that particular person. You are
dealing with the broker who ensures that somebody will always take the other side
of your trade.
CONVENIENCE
The forex market is open 24 hours a day. You do not have to meet
the buyers or sellers in person. You do not have to conduct meetings with
lawyers, accountant, bank representatives and so on. You can buy and sell
currencies in your pyjamas at midnight
if you like and the transaction will be complete before you go back to bed.
CONCLUSION
All in all, if you are an investor looking to make money from a
combination of rent revenue and capital gains, you may want to invest in real estate
for the long-term. If you are a trader wanting to profit purely on capital
gains, then trading forex is probably better for you than trading real estate
because you can start with a small fund and your rate of return is limited only
by your ability to trade well. The transactions are mediated, it is more
convenient and transaction costs are a lot smaller. The market is also more
efficient due to product homogeneity and liquidity. Lastly, there are
opportunities to profit regardless if the prices are going up or down.
I believe that if done right, neither venture is more or less
riskier than the other. The risks are up to you to manage. With this article, I
hope I helped you make a decision appropriate to your circumstances.
