Capital markets vs. Real estate investment

Capital markets vs. Real estate investment

One of the dilemmas facing an investor is choosing where to invest. In many cases, the typical investor will want to maximize his profits while risking as little as possible. Investors understand that there is an inverse relationship between the level of risk and gain. Investing in the high-risk capital market can generate extraordinary profits, but these profits may disappear as quickly as they come, once the market change its direction.

When we try to compare investment in the capital market with a real estate investment, it is important to understand the fundamental differences between these two channels – in order to pick the channel that is right for you.

Return on investment – Investment in real estate produces a more stable income flow than investing in the capital market. Most of the times, an asset acquired for investment generates a constant flow of income by rent, and a similar investment in the capital market may generate income when a dividend is distributed or when the investor realizes sells his holdings – but these profits are not generated on a regular basis. Are the capital market gains being higher than in real estate? It turns out that over time, the profitability of the capital market is similar to the profitability of real estate mainly because real estate investors tend to buy assets and hold them for a longer period of time.

Liquidity – There is no doubt that investment in the capital market is more liquid and easier to realize. You buy or sell with a touch of a button from a computer or phone and the ability to meet with cash is much easier in the capital market. Naturally, real estate investment is inherently more complex because the execution of a purchase and acquisition of assets is more complicated and requires more preliminary information, checks and financial preparations.

Taxation – Generally, the taxation of capital gains is uniform and permanent. An investor in the capital market can know with relatively high certainty the tax rate he will pay on dividends and profits on investments. In addition, the tax mechanism also allows for offsetting losses incurred during a calendar year. In contrast to the capital market, taxation on real estate is more complex and includes various components – state taxes, municipal taxes, real estate tax, etc. The manner in which real estate can be recognized for tax purposes is not simple and requires professional advice. When it comes to illiquid assets like real estate, the issue of taxation becomes significant for profitability.

The level of risk – Although the channels are exposed to different types of risk but to some extent, it can be said that the level of risk in real estate investment is lower than in the capital market. However, the real estate market is exposed to events that do not necessarily affect the capital market while the volatility of the capital market significantly increases the risk to the investor.

The various risk levels and the lack of correlation between these types of investment enable investors to diversify their total portfolio by diverting part of the money to the capital market and part of the real estate market, thus neutralizing the possible risks in both channels

Cost of investment – the level of expenses required for a real estate transaction is significantly higher. Costs of investing in real estate – expenses for legal support, assessors, professionals, brokers, designers, and various tax expenses are significantly higher than the purchase commissions of stocks or securities.

Protection from inflation – Since lease contracts of real estate assets usually linked to index or currency exchange rate, it can be said that investment in real estate offers some protection from inflationary erosion – as opposed to investment in the capital market which exposed to fluctuations and currency exchange rates without sufficient protection.

Concentration of investment – the ability to generate greater diversification is built into investment in the capital markets. Thus, it is possible to create a portfolio that distributes the investment not only over various industry sectors, but also on world markets, currency types and various financial instruments such as options and bonds. investment in REIT funds allows real estate investors to create a certain dispersion capacity and higher liquidity because buying units in a similar real estate fund as the funds invest in a variety of different assets, so that a certain degree of diversification is achieved.

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