Have you ever wondered how other kinds of investments measure up to investing in real estate? What about the other way around? Maybe you’re already a real estate investor and you’re considering diversifying your portfolio—you’re not sure if real estate is still the answer. Or maybe you’re new to all of this investment business and you don’t know what variety is the best choice for building up your financial future.
It’s time to look at a few common things that people invest in: and how they measure up to real estate investment.
Side-by-Side Comparison: Single-Family Real Estate Investment VS Oil, Energy & Stocks
Passive Single-Family Real Estate
Pro: Predictability & Stability
One of the greatest advantages that real estate investment has over other options is the fact that it’s enormously predictable and stable. While some would argue otherwise based on market crashes, real estate still moves in very predictable cycles. Even the disastrous housing bubble of 07’-09’ found relatively quick recovery in most markets. The real estate market moves in cycles that can be largely studied, understood, and predicted. Because of that, real estate investors can anticipate and prepare accordingly—they aren’t caught by surprise by overnight market shifts unless they weren’t paying attention!
Pro: Self-Direction & Scalability
Where passive single-family real estate is concerned, the ability to scale and self-direct really sets this method apart from the rest. You call the shots regarding your own investments. There’s no one taking your money and deciding what to do with it: you alone call the shots. And with that, you can decide when and how you want to grow your investments by acquiring more properties.
Pro: Passivity & Leverage
It’s in the name: passive real estate investment. Some people look at real estate investment and think it’s too much work. While it can turn into a full-time job, partnering with a turnkey real estate provider like Memphis Invest allows investors to invest passively. With a focus on excellent customer service for both you and your tenants, a vested interest in your success lays a solid foundation for your financial future.
Not only that, but when it comes to investing in real estate, investors rarely have to deal in their own money. Leverage is a key benefit in real estate: often, you’re using money from lenders to finance your investments.
Con: Experience Needed to Handle Risk
Every investment comes with some level of risk. It’s no less true of real estate investment! The problem comes when you combine risk with a self-directed endeavor. It’s all in your hands, so if you aren’t diligent in building up a solid foundation of education and continuing to grow your knowledge base, you could be in trouble. There’s definitely a learning curve.
Oil & Gas Investments
Pro: Tax Incentives
For oil and gas, there are a lot of tax incentives at play for investors because the IRS seeks to encourage domestic investments. The costs associated with drilling and operational expenses are often deductible, and income from oil and gas UITs can be eligible for the depletion deduction. This allows for a good percentage of the income from oil and gas investments to be essentially tax-free.
Pro: Potentially High ROI
In the mid-2000s, the prices of crude oil shot up dramatically. Investors flocked to make a profit, and they were amply rewarded. It was a lucrative investment when the demand for oil and gas was at a high. Like any investment, when times are good, investors can jump in and take advantage of it and see good returns. However...
Con: Global Implications & Unpredictability
Unlike real estate, oil is a global commodity. We aren’t just affected by our own domestic wells and industry. Many things can affect the prices and investment returns on oil: geopolitical activity, global supply and demand, technological innovations in the energy sector, drilling activity and construction, and more. It costs different amounts to produce oil in different regions and countries. Politics are at play. Spills affect prices. Pipelines are a problem. Because so many factors are at play, it makes for an unpredictable investment with both short and long-term fluctuations to contend with.
Con: Slow Recovery Time
History has shown that every oil bust is followed by a boom, but 2014’s bust has been followed up by more of a whimper. Executives think it could be several years until we see oil prices return back to the $90-100 per barrel range. Prices currently sit at an average of under $50 a barrel. Experts expect prices to land anywhere between $40 and 70 by year’s end.
When you’re an investor relying on oil and gas for passive income, a dip in value like this seriously hinders your profit: and in this case, for years without a turnaround in sight.
Pro: Potentially good in a growing economy.
Stocks are a way for investors to participate and own a little piece of the pie in a growing economy. When times are good, stocks are good. If you have a good detector for what the “next big thing” is going to be, you’re probably going to be great at investing in stocks.
Pro: It’s easy.
You can invest in stocks in literal minutes. It doesn’t take a lot of time to actually buy thanks to the stock market. All you need is a broker, financial planner, or Internet access and you’re set. And for investors, stocks appeal to both the fast-paced day trading crowd as much as the buy-and-hold investors.
Con: No guaranteed returns.
Stocks can be tricky because there are no guaranteed returns. You can lose your investment in a flash. Shareholders are paid last if the company goes broke (so they might not get paid at all). When companies start to fare poorly, investors will jump ship and sell. That makes stocks prices drop, which just makes more investors sell, which means you lose your initial investment. It can get messy, especially if you couldn’t afford to lose that investment.
Con: Unpredictable fluctuations.
Stocks can change overnight. A bad PR move, sudden revelation, company buy-out, unexpected news...lots of things can affect stocks. They change quickly. Market corrections, crashes, and bear markets—things your company can’t control—can also hurt your investments.
Con: Requires a lot of time & knowledge to do well.
While buying stocks is easy, succeeding at it is not. In order to be good at investing in stocks, you really have to put a lot of time and energy into it. It takes due diligence—reading financial statements, researching companies, following their news, monitoring the market, and competing against investors who know more than you do. It’s not as easy as it looks.
Ultimately, you have to ask yourself what you want your investment future to look like. How do you want to invest? How much stress and risk are you willing to take on? How involved do you want to be?
Passive single-family real estate investment has proven itself to be stable and reliable where other investments have faltered.
So. How do you want to invest?