Equity investing has certainly become familiar to many, but does housing investing seem a stranger topic? This post will dive into the differences between stock and housing investing and take over the facts!
Housing investing requires effort – true or false?
It is often heard to say that investing in stocks does not require much work, while investing in housing requires renovating and acquiring a tenant, etc. I counter this argument by saying that it is … absolutely true! Sure, nowadays almost all the hassle associated with housing investment can be outsourced, but in general, this is exactly the case.
Does the housing market have a lower return expectation than the stock market – true or false?
When comparing returns, investors often get confused by porridges, so come back to this paragraph in your mind when you hear the returns of a comparable housing and equity investor!
Over the last hundred years, the shares have returned an average of about 7% per year. According to the regional return forecast commissioned annually, the average total return on housing investment in, for example, growth center studios for the following years is approx. 5-7% / year. That is, in light of these figures, the expected return on the housing market is indeed lower than the stock market.
But the claim is a myth. Let me explain why apartments are usually a more lucrative investment:
Investment homes are mostly bought with debt, ie they use leverage, while shares or funds are usually bought with their own money. Because of this, the above returns cannot be compared!
Liisa has € 30,000 to buy shares. The return is 7% or € 2,100 per year.
Pekka also has € 30,000, but Pekka also applies for a loan from the bank and buys an investment apartment worth € 100,000. The return is 5% (after consideration), ie € 5,000. Pekka also pays interest on the loan, eg € 500.
Thus, Pekka Earns € 5,000 – € 500 = € 4,500 per year for the same 30,000 euros, while Liisa earns € 2,100 per year.
It is, therefore, more correct to talk about the return on equity, ie how much money Pekka and Liisa make with the initial 30,000 euros. In this example, Liisa does the above € 2,100 / € 30,000 = 7%, but Pekka does € 4,500 / € 30,000 = 15%. That’s why the hassle of investing in housing is worth it!
Only the rich can invest in housing – true or false?
Everyone can start investing in the stock exchange for only 15 euros a month, but unfortunately the same cannot be said for housing investment. Housing investment usually requires a lot more than 15 € / month, but not as much as is often imagined, ie the statement is partly a myth! I will address this topic in my next article.
In housing investment, the risks are higher – true or false?
The risks of investing in stocks are easy to understand – if the investment instruments are poorly chosen or the market falls, you can at most lose the money you have invested.
After selecting a property, the home investor is still able to manage the risk and influence the return. The apartment can be renovated yourself, the tenant can be chosen well, the board of the housing association can go to influence the renovations of the housing association, and for example, a triangle can be renovated from a large two-story building. The return on shares of a small investor, on the other hand, is almost impossible to influence himself.
But unlike equity investing, housing investing can cost you more than the money you invest – in that sense, the claim is true. This is rare but possible.
The good news, however, is that a home investor can influence the probabilities of risks and hedge against them, unlike on the stock exchange. If the crisis strikes and the market falls, an equity investor can do nothing but buying or sell.
The most common risks in housing investment are related to tenant selection (the tenant does not pay his rent or causes damage to the apartment), the location of the apartment (in loss-making municipalities there is a risk that the apartment cannot be rented or sold) and housing company renovations (e.g. expensive plumbing surprises). However, the landlord can influence all of these himself by studying the subject even a little in advance.
Because housing investments are made with debt money, the biggest risk is a possible rise in interest rates. Fortunately, interest rates can also be hedged by taking a fixed interest rate offered by the bank, which keeps the interest rate the same throughout the contract period, even if market interest rates rise. The bank also offers other options against interest rate risk.
The interest rate spring saw massive movements in the stock market. Such movements are rarely seen in the housing market. Thus, the housing market does not fluctuate as much as the stock market, making them a more stable investment target. However, people must always have an apartment, regardless of the market situation.
Equity investing gets a point for the interest rate effect. However, housing investment has the equivalent of this, as the rental income can be used to pay the loan installment and interest, and in the best case, there is still money left in the account that can be reinvested. Instead of the money coming into the account, your loan is shortened monthly and the so-called free collateral is released from the apartment, which you can use when buying the next apartment.
In summary, investing in housing requires more effort and more learning in the beginning, but also brings higher returns. There are more risks than investing in equities, but they can for the most part be minimized through our operations, while the equity investor has less opportunity to influence the materialization of risks. Investing in the stock exchange can start with a much smaller amount than in housing while investing in housing can be considered a more stable investment.
I am a committed investor in the apartment, but I invested in ETF funds monthly as long as the housing sector. So the other doesn’t rule out the other and investing in both even makes sense from a decentralization perspective!