Invest in Real Estate or Shares?
The pros and cons of shares are as follows:
Easy and accessible
You can easily buy a share of a company through a broker. Play a little, test, see what it does. And sell it again more easily. Buying shares is much quicker and easier to fix than real estate.
If you want to buy shares from companies, then you can delve into those companies quickly and easily. If a company is listed on the stock exchange, you will find annual reports online. Thanks to our modern media we can clearly see what a company is doing in terms of activities. You can see if you have faith in management and strategy. You can look up how the balance stands. You can assess the business philosophy based on market development. In other words: there is a lot of information available to assess whether you think a company is worth investing in.
There are companies that, regardless of what the economy does, always have work in my eyes. Every day, people have to eat and drink, transport themselves, wash, brush their teeth, etc. This means that with regard to equities, there are certainly sustainable investments.
A disadvantage can be volatility. Shares of companies can quickly rise and fall in value. This can be beneficial, but it can also turn out wrong. I personally believe that if you have a stock portfolio with an investment horizon of 10 years, you are in the right place. Prices will rise and fall, but the longer you have the time, the better because history shows that the rates always recover. Of course, if you buy profitable shares. If you want to speculate in emerging markets, economies and industries, then you have to: a) know it yourself and b) be aware of a lot of risks.
Investing in company shares can also be a big risk, depending on which companies you invest in. For example, TomTom was a fast-growing company years ago, but now the company is no longer growing and is being crushed by other large companies that develop the same services. Your euros go there.
If you want to buy shares, it is wise to do a good analysis. In addition to a fundamental analysis (how does the company develop, in which market does the company operate and what are the market developments, what is the future strategy, what does management look like, I believe in this company, etc.)
It is also wise to look at the price/earnings ratio (price divided by earnings per share, the lower the better), the estimated growth of the company, the dividend yield (the expected or last dividend divided by the price, the higher the better), and the price to book (the ratio between market value and equity, the lower the better). Based on this data you can assess whether this is an attractive share to buy.
Then the pros and cons of real estate. I hereby zoom in on real estate for private rental.
Real estate generally gives a good return. An annual return of around 10% is quite what you can expect *. Plus, a rental home creates a fast power-building flywheel, because you can use your return to pay off the debt. Your efficiency is rising, your debt getting lower, and with a number of years, your house so much worth that can provide collateral for a second e
Real estate is a solid investment with generally low volatility.
Effect on rental prices
House prices can rise and fall, and in the event of a fall, you will not be bothered immediately, because, with falling purchase prices, rents will not fall immediately. Your income stream, therefore, remains stable.
The income that you generate by renting out a house is net, but please note: owning a home falls under equity (box 3), so it is included in the annual tax return.
The risks, on the other hand, are that your money is ‘stuck’. You cannot just release the money that is in your house and use it for something else. That is possible, but then you have to start selling it first, and that is not arranged overnight.
You also pay a transfer tax when you purchase a home. This is currently 2%, which is 4000 euros in a 2-tonne house. In addition, you may have costs for the broker, the landlord, the notary, and the mortgage adviser. This is of course not necessary if you have the time and knowledge to fix this yourself.
Chance of vacancy. This is shit because then you pay for the costs yourself. A risk that you should be aware of. That is why it is important when you buy something for renting, to do so in an area where people like to live. And of course to ask for a correct rental price.
Equity: if you want to buy a house for rent, the bank wants you to contribute around 30% of the price. Plus: you may have to deal with the fact that the bank considers the house worthless because you are going to rent it out. This also often depends on the location. Just a calculation to indicate this: imagine you buy a house of 2 tons. In the center of a nice city.
The bank agrees that this does not decrease the value of the house, because landlords or not: the location is highly sought after. The bank agrees with the asking price of 2 tons. Because you are going to rent, the bank will lend you a maximum of 70%. 30%, so 60,000 euros you have to put in your own money. This is a lot of money. There are also tricks to get the entire 2 tons to be funded, but that is a not-for-purpose trick and I’m not going to discuss that either. Call me. Treat me to dinner.
Hassle with tenants
And whatever pain in the ass can be, are tenants. Or defects at the house. You can anticipate the latter. Maybe the first one too, a bit.
Please note: I hereby only focus on real estate where you buy a house/apartment that you then rent to a private individual. Of course, you can also invest in other forms of real estate, but they often require considerably more equity. In addition, you can also invest in real estate on the stock exchange by buying shares from, for example, Vastned or Wereldhave.