But before people invest in property have to consider how else could spend their money. More specific have to consider if is better to invest in bonds or ordinary shares instead of property yields. But asking the questions, "which is a better investment, real estate or bonds or stocks?" there really isn't an answer because a lot of it comes down of individual's personality, preferences, and style. It also comes down to the specifics of the individual investment. Very few stocks would have beat buying beachfront property in California in the 1970's using a lot of debt, and then cashing in twenty years later. Virtually no real estate could have beat the returns you earned if you invested in shares of Microsoft, Johnson & Johnson, Wal-Mart, Berkshire Hathaway, Dell or Apple (Joshua Kennon, About.com Guide, 2001).
So the answer isn't as easy as it may see and we have to take in mind the influences on property yields. The wider investment market in which property competes for funds, the cost of borrowing, the prospects for rental growth, expectations for further price increase, the security and risk of the sector or specific property and the lease or letting terms all those are factors that have to be concerned before invest in real estate.
After the above we can now compare property yields relative to investments in bonds or in shares. Bonds and stocks are both securities that give dividend to the owners, but the major difference between the two is that stockholders have an equity stake in the company (they are owners of the companies), whereas bondholders have a creditor stake in the company (they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. As we can see bonds are more risk free than property yields or shares because are making the holder just a lender instead of property holders and stockholder who are owners. That's why people expects more returns when buying property or shares than when buying bonds. Furthermore reliable and stable companies such as Exxon Mobile, General Electric, et cetera, issue bonds, they may only pay 7% interest, while a much less stable start-up pays 10%. It is a general rule that when investing in bonds is "the higher the interest rate, the riskier the bond." ( Joshua Kennon, About.com Guide, 2001).
So if a person wants low risk and low return choose to buy bonds. If he wants high risk and high return he will buy property or shares. Those two I am going to contrast now.
First I will mention the advantages of investing in real estates. When someone invests in real estate, he is buying physical land or property. As a result some real estate is cash generating. An apartment building, rental houses, or a mall where the tenants are giving you money each month, you pay the expenses, and keep the difference as the profit. When someone invests in real estate, he invests in something tangible instead of investing in stocks where he just pays for a title. He can say that he owed that and for some people that's important psychologically.
What's next it's more difficult to be defrauded in real estate compared to stocks because you can physically show up, inspect your property, check your tenants, make sure that the real estate is actually there before you buy it, do repairs yourself in contrast with stocks that you have to trust the management and the auditors of the company that you buy the stocks from.
Furthermore using leverage (debt) in real estate can be structured far more safely than using debt to buy stocks by trading on margin.
What's more real estate investments have traditionally avoided inflation because prices of real estate rise against a loss in purchasing power of the money.
But there is also some disadvantages of investing in real estates.
Some real estate costs buyer money every month he holds it for taxes and maintenance.
Also compared to stocks, real estate takes a lot of hands-on work. Owners of properties have to deal with the tenants for any problems occur in the property (e.g. gas leaks in a rented apartment). Even if he hires a property manager to take care of his real estate investments, it's still going to require occasional meetings and oversight.
What's more real estate can cost him money every month if the property is unoccupied. He still have to pay taxes, maintenance, utilities, insurance, and more, meaning that if he finds himself with a higher-than-usual vacancy rate due to factors beyond his control, he could actually have to come up with money each month.
As I said before, the actual value of real estate hardly ever increases in inflation. This is made up for by the power of leverage. But in the case of borrowing money to invest in real estate an increasing in inflation makes his money worth less. So the increase in his real estate price is equalized by the decrease of his money power when he pays his installments.
At the other side when someone buys shares he is buying a piece of a company. If a company for example has 2,000,000 shares outstanding and you own 20,000 shares, you own 1% of the company. The company's board of directors, who are elected by stockholders, decides how much of the profit each year gets reinvested in expansion and how much gets paid out as dividends. There is also some advantages and disadvantages of investing in stocks.
First I will take a look at the advantages.
Unlike a small business you start and manage on your own, your ownership of partial businesses through shares of stock doesn't require any work on your part (other than researching each company to determine if it is right for you). There are professional managers at headquarters that run the company. You get to benefit from the company's results but don't have to show up to work every day.
High quality stocks not only increase their profits year after year, but they increase their cash dividends, as well. This means that every year that goes by, you will receive bigger earnings as the company's earnings grow.
It's much easier to diversify when you invest in stocks than when you invest in real estate. With some stocks you can invest too little money per month. Real estate requires substantially more money.
Stocks are far more liquid than real estate investments. During regular market hours, you can sell or buy many times, in a matter of seconds. You may have to list real estate for much more time or years in some extreme cases before finding a buyer.
Research have proven that despite all of the crashes, buying stocks, reinvesting the dividends, and holding them for long periods of time has been the greatest wealth creator in the history of the world.
And now I will talk about the disadvantages of investing in stocks.
Despite the fact that stocks have been proven conclusively to generate more wealth over the long run, most investors are too emotional, undisciplined, and fickle to benefit. They end up losing money because of psychological factors. During the most recent collapse, the credit crisis of 2007-2009, well-known financial advisors were telling people to sell their stocks after the market had tanked 50%, at the very moment they should have been buying.
The price of stocks can experience extreme fluctuations in the short-term. Your 40 pounds stock may go to 10 pounds in a small period of time. So there are times that you may lose a lot of money very quick instead of investing in real estate in which price changes are not so fast.
There are times when people reinvest the cash a company sends them for owning its stock to buy more shares and over time they just own far more shares, which may not give more cash dividends in the future.
As we can see by analysing property investments versus other investments we can't easily find which is the best way for someone to invest his money. It will need a right research so any investment we finally decide to choose will bring us the desirable results. Indeed property yields reflects the risk and reward of owning a property relative to the investments of bonds and shares.
