This article is meant for beginner investors who’d like to keep their investment portfolio as diversified as possible. By “real estate investing” I refer to renting out residential real-estate and by “stock market investing” I refer to value investing.
During periods of economic growth, people who save regularly often find themselves thinking: should I spend the extra cash on a vacation, or should I invest it?
At least, this is the question I consider quite often. It’s best if you set aside a certain sum each month for traveling, and a separate sum for investment. This is easier said than done.
If you have some knowledge of investing, you’ll know that keeping your investment portfolio diversified is crucial to staying afloat during an economic downturn. Some assets (such as stocks) can hit rock bottom, where others can only lose a little of their value or even keep their value (such as property in a good location).
If you have no prior knowledge of investing, I’d encourage you to read my previous article on the topic – Investing 101 – The Stuff You’re Not Taught at School.
Real Estate Investing
In general, the amount of people in the world is growing, so, therefore, it’s logical to assume that most of them need a place to live. But looking at the statistics, the main areas of population growth are developing countries.
However, in the Western world, the number of people needing accommodation is rising, in parallel with rising housing prices forcing more people to start renting, instead of buying.
Therefore, it might be a good time to enter the real estate market. However, I would suggest you think thoroughly about whether you’ll really enjoy everything that comes with owning a rental property.
Is Real Estate Investing for You?
Do you often scroll local real estate listing websites? Are you ready to talk and negotiate with brokers when buying your first property? Do you have building/renovation skills which you could use? Do you trust people?
If the answer to these questions is no, I’d suggest you not go into the business of rental properties. Use crowdfunding real estate platforms instead. There you won’t have to worry about trusting the tenant or talking to brokers. You just need to make sure you invest into a trustworthy project.
However, if you answered yes to the questions I posed before, and you’ve realized that you love everything that comes with real estate, think next about your availability.
Managing real estate investments can be time-consuming. You need to search for a tenant (if you’re not using a broker), you need to fix (or pay to fix) broken or damaged utilities. B
The Barrier to Entering the Real Estate World
Simply put, the barrier is rather high when entering real estate investing. You need to have a good amount of money to get started.
Whether you buy a property in
A lot of the most well-known real estate investors inherited their first property. They then renovated and rented it out or sold it for profit and re-invested the money into a property in a better location.
Another method people use is buying a first apartment to live in (for example a 1-bedroom apartment) and then buying a larger apartment after they’ve had children. They then move out from the small apartment to the larger one and rent out the small one. In this case, if both apartments are funded by loans, you need to provide your bank with a very good reason for keeping your smaller apartment.
This also means that they often max out on their loan, which is a risky path to take. During an economic downturn, you may not be able to cash in as much money from your rental apartment as during a booming economy. And you can hit financial problems.
I wouldn’t recommend taking this path if your risk-tolerance is on the
How to Get Started with Real Estate Investing
After you’ve established that you like the slight hassle that real estate investing brings, you’ve found the right property, and you have the funds to get started, consider these questions:
- Can you rent out the chosen property at any time, regardless of season? Remember that it’s always easier to find tenants for smaller spaces, as there are far more people living alone or as couples, than massive families.
- Are you planning to do long-term rental or short term (such as Airbnb)? If you choose short-term, get ready to live in the same city as your rental property, or to hire someone who takes care of the bookings, keeping the apartment clean etc. This will obviously reduce the return on your investment.
- Are you ready to take care of the maintenance of the property? If something breaks down (for example a washing machine), it’s your duty to fix it.
After thoroughly answering these questions, calculate the yield of your investment. When doing the calculations, I’d suggest you always multiply the monthly rent sum by 11, and not 12. This is due to the simple reason that you’ll most likely spend a month’s rental money on small running costs.
It’s just inevitable that something breaks down at some point. Try thinking of the fixes you did in your own apartment in the last year. For example, we fixed our heater’s door, repaired our AC, had to call a plumber once, etc. It’s very likely that your tenant will experience similar problems, which all cost money.
Calculating Your Return on Real Estate Investment
To calculate the return on your real estate investment, do the following:
- Divide the 11-month return by the total investment amount. Let’s say I buy a fully renovated and furnished apartment for 100,000€. And I receive 550€ rent per month. So, my annual rent sum is 550€ x 11 = 6050€.
- This means my return on investment (ROI) = 6050€ divided by 100,000€ = 0.065 or 6.05 %
- Your ROI is 6.05% (which is pretty low for real estate investment)
In general, a good ROI in real estate investing should be around 10%. Anything above that is great. As real estate prices are currently pretty high, it’s hard to find deals which get you a 10% ROI.
However, if you have friends who are brokers, contact them and ask them for the latest real estate offers. The best deals aren’t usually found on listings websites, but via direct contact with a broker or property owner (as not everyone lists their apartment).
The Downsides of Real Estate Investing
- Diversification is hard to achieve
Diversifying real estate investments is much harder than diversifying stocks. You can enter the stock market with 100€, but you need tens of thousands of euros to enter the real estate investing market.
As mentioned earlier, keeping your investment portfolio diversified is important as it helps you stay safe financially during economic downturns. But buying several properties gets very expensive.
It’s easy to buy stocks from companies which all cover different fields of activity. During the crises, it’s usually specific fields that suffer most. If you have a diversified stock portfolio and you’ve invested in companies which are continuously growing their dividend payouts, you’ll most likely be safe even during bad times.
- It’s time-consuming
With real estate, it takes a lot of time to build your “real estate empire”. Therefore, you’ll likely own only 1 or 2 apartments as a beginner real estate investor. And it comes with some risk.
Think of the worst-case scenarios – such as the entire house or apartment complex burning down, or a natural disaster sweeping the house away. Yes, insurance will most likely help you out. But there’ll still be a time when you don’t receive any rental payments (but you still have to keep paying for your loan, for example). And you need to dedicate a lot of time to building everything up again.
- There’s liquidity risk
If you need to cash in your property fast, you can’t do it. Selling a property takes time and effort, and in some cases receiving the final payment can take months.
With stocks, it’s much easier. All it takes is a few clicks and you’ll receive the money shortly. Due to these reasons (the main reason being the high initial investment needed), I’ve been actively investing in the stock market.
Stock Market I
Stock market investing can seem a bit more complicated at first, when compared to real estate investing. In reality, it’s not. And it also has its pros and cons.
You don’t need an MBA or an advanced degree in finance to get started. You just need logical thinking and an ability to read. The main things you need to look for when investing into a long-term dividend growth company are:
- The market price of a share and the intrinsic (actual) price of the share.
- The history of dividend payouts and how they changed during crises.
- Financial sheets and dividend safety score.
Stock market investing won’t bring you the hassle of real estate investing. You simply buy the stocks online, they sit on your account, and you receive regular dividends (if you’ve bought a stock that pays out regular dividends).
It’s advisable to take a critical look at your portfolio each year, but you definitely never have to pay a plumber or fix the AC.
The Barrier of Entry into the Stock Market
The barrier of entry into the stock market is low. And I’d like to remind you that in this case I’m talking about long-term dividend-growth investing, not trading.
You don’t need tens of thousands of euros to get started. Most people get started with about 1000€, but I got started with 600€. You just need to find a good balance with the service fees that the banks or online brokers charge for your transactions.
If you invest less than 1000€, the service fee might make up too large of a portion of your overall sum. Usually, a rule applies that the more money you invest at a time, the cheaper it will turn out.
To clarify, let’s say you invest 1000€ in the stock market, and the service fee is about 15€. In this case, the service fee makes up 1.5% of your investment. If you
So, you see the difference – the more money you invest, the less the service fee impacts. (A side note: I use Lynx, a foreign broker, for my stock investments as their service fees are much lower, around 2€ per
It’s also important to spread out your investments in the stock market. It would not be a smart move to save up 10,000€ and invest it all into one stock on a certain date. That’s where dollar-cost-averaging comes in.
It’s wise to spread your investments, as stock prices can go up or down. It’s a strategy used to make sure that you’re not putting all your money into one stock during a market’s peak.
Here’s an example of how dollar-cost averaging works:
Therefore, set yourself a certain sum that you allocate for a stock over a period of time. And depending on the price, you’ll get more or
How to Get Started with Stock Market Investing
At first, I suggest you select a few companies and buy them ‘in your head’. Meaning that you won’t make any purchases, but you write down how much money you would spend on each stock.
You can even use this site to do your imaginary transactions. See how your stocks perform over a selected time period and assess whether you’ve received dividends as you expected, along with checking other details.
Noticing the Fees
Once you’re sure that you want to continue with stock market investing, you should open up an investing account at your bank (check their fees first). Or you can open an account with an online investment broker, such as Lynx or Interactive Brokers (IB) (they’re almost certainly much cheaper than your banks).
When opening an account at a broker, you’ll need to fill out some details about your financial literacy and income, but I haven’t seen anyone actually strictly force control over it.
After you’ve decided the stocks you want to buy for investment purposes, you need to transfer money to either your investing bank account, or to your online broker account.
Notice that if you want to buy a stock that trades in USD, you can send EUR to your account, but you need to convert it to USD before you can make the purchase. Doing currency conversions with banks is always very expensive, so beware.
Converting currency on Lynx or IB is much cheaper, as they use the real-market rate (the one you see on Google) and take a small flat fee. Low transaction fees and low currency conversion fees are the reason why I always use Lynx to buy US stocks. Estonian (and other European banks) just rip you off when you’re buying stocks from the States.
Cons of Stock Market Investing
In comparison to real estate, the stock market is much more volatile. As soon as a company releases some negative news,
But if you planned to sell your shares (which most long-term dividend investors try to do as little as possible), you may need to take a loss.
- Predicting income is difficult
Predicting your income from real estate investments is much easier than predicting your dividend income from public companies. Yes, most Dividend Kings and Aristocrats have a long history of growing dividend payouts, but you need to be prepared for dividend cuts as well.
That’s where I suggest using dividend safety score which predicts, surprisingly accurately, how likely the company is to pay out dividends.
- It’s time-consuming
Investing into the ‘right’ companies is a time-consuming process, as you need to do a lot of research beforehand. Buying a stock and selling it for profit in a few weeks is not dividend investing, it’s usually called speculating.
If you put your money somewhere, I suggest you delve into the financial data, learn as much as possible about the company, and only then devote your money to it.
Diversifying your streams of income is the key to financial stability. Investing
If you’re a fan of a fully passive income, I suggest you invest in the stock market
The barrier of entry is higher in real estate, as you need to put down a good amount of cash at first. With the stock market, anyone can start with lower sums, and if you have a larger sum available, make sure to use dollar-cost averaging when buying your stocks.
Which investment category do you prefer and why?
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