In the last post I discussed some advantages of real estate as an investment over the stock market. Two more are market efficiency and control.
Market efficiency The stock market is a very efficient market. By this I mean if you and someone else buy a stock at the same point in time you will pay exactly the same price. The real estate market is different. Two identical houses on the same street can be bought at the same time for vastly different prices. The reason for this is twofold. First, the market is smaller. The number of people wanting to buy or sell a certain type of house in a certain location is much smaller than the the number of people that want to buy or sell IBM stock at a certain time. The second reason is that the motivation of the seller (or buyer) varies greatly. Someone who is moving out of state, for example, may be very motivated to sell and would be willing to let the house go for a lower price than someone who is not in a hurry. This inefficiency in the real estate market creates great opportunities to an educated investor.
Control. When you buy a stock, you have virtually no control in how well it does. There is nothing you can do to make it go up or down. When you buy real estate there is almost a limitless number of things you can do to increase its value or increase the rental income you can bring in. For example, you could convert a carport to a garage and both increase the value and the rents.
To illustrate these two advantages, lets look again at the first house I bought. When I bought the house, it was filthy. The previous owner had pets that left a mess everywhere. She needed to leave town and was having a hard time selling it because of the condition of the home. She was very motivated. I was able to buy it for $90,000, when the comparable homes in the neighborhood were going for $100,000. I paid someone $200 to clean it and for about $1000 got new paint and flooring. Because of the motivated seller and some cheap repairs, I immediatly gained $10,000 in equity. You can't do that with a stock.
Market efficiency The stock market is a very efficient market. By this I mean if you and someone else buy a stock at the same point in time you will pay exactly the same price. The real estate market is different. Two identical houses on the same street can be bought at the same time for vastly different prices. The reason for this is twofold. First, the market is smaller. The number of people wanting to buy or sell a certain type of house in a certain location is much smaller than the the number of people that want to buy or sell IBM stock at a certain time. The second reason is that the motivation of the seller (or buyer) varies greatly. Someone who is moving out of state, for example, may be very motivated to sell and would be willing to let the house go for a lower price than someone who is not in a hurry. This inefficiency in the real estate market creates great opportunities to an educated investor.
Control. When you buy a stock, you have virtually no control in how well it does. There is nothing you can do to make it go up or down. When you buy real estate there is almost a limitless number of things you can do to increase its value or increase the rental income you can bring in. For example, you could convert a carport to a garage and both increase the value and the rents.
To illustrate these two advantages, lets look again at the first house I bought. When I bought the house, it was filthy. The previous owner had pets that left a mess everywhere. She needed to leave town and was having a hard time selling it because of the condition of the home. She was very motivated. I was able to buy it for $90,000, when the comparable homes in the neighborhood were going for $100,000. I paid someone $200 to clean it and for about $1000 got new paint and flooring. Because of the motivated seller and some cheap repairs, I immediatly gained $10,000 in equity. You can't do that with a stock.
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