Real estate investment

Why Real Estate is Less Volatile than the Stock Market

A single source of income was a dream come true for many people in former times. Now the landscape has evolved – people tend to juggle multiple investments for steady returns and to meet ends. Whether it’s devising for retirement, saving for a wedding, or earning extra income, you need the best investment in Pakistan that fits your budget, preference, lifestyle, and comfort. In Pakistan, the majority of people prefer stocks to put in their investing rupees. That makes sense since the Karachi Stock Exchange 100 index gave a 38.5% return on investment as foreign capital rolled into the market. While the stock is a great investment opportunity, real estate offers lower risks, better returns, and great diversification.  In 2017 real estate and construction industry increased by 9% which proves its strength and potential for investments. Also, under the right circumstances, gold can be lucrative. 

although many investors place a heavy emphasis on the stock market, real estate has been the most favoured long-term investment for the investors. It’s clear that even though real estate gets less attention from a typical investor on a daily basis, it’s consistently a popular investment choice.

Understanding Real Estate, Gold, And Stocks Investment 

Stocks

Stocks refer to buying a small piece of a company. There are two ways to make money in the stock market – dividends and value appreciation. According to the Pakistan stock exchange’s website, you need to open a Brokerage account, followed by a CDC sub-account and CDC investor account. You can trade shares via the CDC sub-account. You will also be initiated a Unique Identity Number(UIN) through which all of your transactions will be recorded.

Pros

Cons

Dividends Requires unemotional personality traits 
Liquidity Short-term volatility
Portfolio diversification Stagnation

stocks

Real Estate

Investing in real estate refers to the process of leasing, selling, and buying a real estate asset with the intention to generate capital. It is the best investment in Pakistan because it is a tangible asset. Generally, you generate revenue through rents and appreciation. The prices appreciate at a smooth pace, eliminating chances to suffer any loss.

real estate

Pros Cons
High popularity Time-consuming to find a buyer or tenant
Monthly income in form of rent highly illiquid
Easy to spot frauds in real estate Taxes and maintenance charges
High return on investment Broker fee, if involved

Gold 

Investing in Gold is the most common type, among household and institutional individuals. As soon as the price of the shimmery metal rises, investors sell it to yield good money. There are three ways to add gold to your investment portfolio – bullion coins, bars, and jewelry. According to bullion dealers, people prefer gold bars of 10, 20, 50, and 100 grams to one, two, five, 10 tolas over gold jewelry. Gold serves as a hedge against inflation, risks, and offers portfolio diversification.

gold

Pros Cons
Easy to buy and sell Prone to theft
Value security Taxes
Inflation hedge Not a passive income product

To compare apples to apples, here is a detailed description, comprising similar factors that differ across the three investment choices. 

Capital Requirement

Gold

As of Saturday, 19th September 2020, 24k gold price is Rs 121500 per tola, while 21k gold price is Rs 106313 per tola. This shows that to invest in gold you need to have a moderate amount in hand.  

Real Estate

Real estate investment demands high funding. New malls in Islamabad like the Aquatic mall are the best investment opportunity in Pakistan whose investment starts from just 25% down payment. It will not be wrong to say that a crock of gold brings a windfall of cash.

Stocks

To begin, you need a brokerage account. Thankfully, there are no charges to open it. But, to purchase stocks you need money equal to the amount of cost of each share. Please note that each share price differs from one another. 

Inflation

Gold

With high production costs, inflation is likely to rise and is an everlasting problem. But, the good part is whenever it goes up, the price of gold relishes a healthy gain. In tough economic times, investors pay cash for gold in order to store value and protect their wealth.

Stocks

As inflation strikes, buying power declines, resulting in a crippled stock market.

Real Estate

Same as gold, real estate is a lucrative asset. As inflation lifts off, so does real estate worth.

Volatility

Volatility is defined as the rate of price fluctuations due to evolving market trends. To figure 0ut future trends, investors calculate the standard deviation ( depreciation in a set) of returns over some time. The assets whose value climbs gradually as per market trends are considered to lack volatility.   

Real Estate

Real estate follows a stable market trend and lacks volatility.

Gold

Gold is a good asset to hold. It has less volatility than stocks and serves as a good investment in the long-haul.

Stocks

Experts say that a high volatility stock is an extremely anxiety-tackling option. Whereas, a stock that has a steady price is considered to be less volatile, which means more profit. On average, stock prices witness extreme fluctuations in the short run. Your Rs5000 share can go to Rs2000 or Rs 10000 in no time.

Risks

Let’s assume someone performed a successful induced saving all your life. He saved as much as he could to invest money. On schedule, he invested in some XYZ asset, confident of the profits pouring in. But, he got scammed. Unfortunately, many investment opportunities are not spared by scammers. Let’s have a look at where real estate, gold, and stocks stand in this regard.

Gold

Beyond a shadow, gold is an eye-catching ornament. Its innate beauty conquers hearts, as well as scammers. They fraudulently pretend as legitimate gold sellers and try to rob people via counterfeited assets. Always remember to pick a seller with a good reputation and track record. As a general rule of thumb, the longer a lender is in business, the more he is trustworthy.

Real Estate

Real estate is a lucrative investment. Unfortunately, scammers also capitalize on the surge. Remember to contact a reliable real estate agency that offers transparent transactions. Most fraud occurs in buying used houses. Sellers hide home defects for top-money or a rapid sale such as leak issues, damp problems, rotten wood, pest threats, etc. We recommend investing in the new malls of Islamabad which offer luxurious lifestyles. 

Stocks

According to Dawn’s website, SZ Securities(Pvt) Limited was found guilty of looting Rs 151.18m invested by the citizens in the stock market. Also, PSX broker looted 1200 investors by issuing counterfeit shares to them, according to the news. Therefore, if you want to invest in stocks ensure your broker is registered with SECP. You must also verify the legitimacy of trade confirmation documents, ledger reports, payment receipts, and CDC balance reports. 

Is Real Estate A Good Investment?

real estate investment

According to research entitled “The Rate of Return on Everything, 1870 – 2015, real estate has been the best investment, over a span of 145 years.” The paper compared 16 advanced economies to identify the best investment that delivers high returns. It evaluated each investment type across inflation, appreciation, dividend/ rental income, and returns. This proves that real estate yields great and consistent returns. Especially new malls in Islamabad like The Aquatic mall gives 40-60% annual returns. Moreover, the malls finance these investments with a significantly low down payment, starting from  25%.  

The Best Investment in Pakistan – Conclusion

Best Investment in Pakistan

Although, all three have their perks and cons. But, it’s safe to say that real estate investment leads to the charge in price appreciation, volatility, rental income, and long-term returns. However, when picking out the best investment opportunity for you, the best way to hedge against risk is to know how to avoid them. Find out common real estate scams in Pakistan in our previous article.

To grow your wealth, which is the better strategy: Investing in real estate or building a portfolio of stocks?

Many Americans do a bit of both: 65% of U.S. households are owner-occupied, according to the U.S. Census Bureau, and the Bureau of Labor Statistics says 55% of American workers participate in an employer retirement plan. If you’re among them, you likely have some exposure to the stock market.

But if you’re looking to double-down on either type of investment — or you’re new to investing and trying to pick between the two —  it’s wise to know the advantages and disadvantages of each strategy.

It’s also important to know that you don’t have to choose. You can purchase shares in real estate investments without the headaches of actually buying, managing and selling properties.

Investing in real estate

Traditional real estate investments can be broken down into two broad categories: residential properties —  like your home, rental properties, or flipping homes to buy, then resell for a profit — and commercial properties, such as apartment complexes, office buildings, and strip malls.

investing in real estate

The pros

  • Investing in real estate is easy to understand. While the homebuying journey can be complicated, the basics are simple: Purchase a property, manage upkeep (and tenants, if you own additional properties beyond your residence), and attempt to resell for a higher value. Also, owning a tangible asset can make you feel more in control of your investment than buying slivers of ownership in companies through shares of stocks.
  • Investing with debt is safer with real estate. Also known as your “mortgage,” you can invest in a new property with a 20% down payment or less and finance the rest of the property’s cost. Investing in stocks with debt, known as margin trading, is extremely risky and strictly for experienced traders.
  • Real estate investments can serve as a hedge against inflation. Real estate ownership is generally considered a hedge against inflation, as home values and rents typically increase with inflation.
  • There can be tax advantages to property ownership. Homeowners may qualify for a tax deduction for mortgage interest paid on up to the first $1 million in mortgage debt. There also are tax breaks when you sell a principal residence, such as an exclusion that may allow you to avoid capital gains taxes on net proceeds of $250,000 if you’re single (or $500,000 if you’re married and filing jointly). If you own and sell commercial property, you may be able to avoid capital gains through a 1031 exchange (if you reinvest proceeds in a similar type of property). And Investments properties can earn tax breaks through depreciation, or writing off wear and tear on the property. Learn more about tax breaks related to homeownership in this tax guide.

» Ready to start investing? Check out the best real estate crowdfunding platforms

The cons

  • Real estate investments can be more work than stocks. While purchasing property is easy to understand, that doesn’t mean the work of maintaining properties, especially rental properties, is easy. Owning properties requires much more sweat equity than purchasing stock or stock investments like mutual funds.
  • Real estate is expensive and highly illiquid. Investing in real estate, even when borrowing cash, requires a large upfront investment. Getting your money out of a real estate investment through resale is much more difficult than the point-and-click ease of buying and selling stocks.
  • Real estate has high transaction costs. A seller can expect to pay significant closing costs, which can take as much as 6% to 10% off the top of the sale price. That’s a hefty cut compared with stocks, especially now that most brokers charge no fees for stock trades.
  • It’s difficult to diversify your investments with real estate. Location matters when investing in real estate. Sales may slump in one area, while values explode in another. Diversifying the purchase of real estate properties by location and type (a mix of residential and commercial, for example) requires much deeper pockets than the average investor has.
  • The return on your investment isn’t a sure thing. While property prices tend to rise over time, there’s always a risk of selling a property at a loss —  the 2008 financial crisis is a reminder of that. This is also true of stocks, of course.

Investing in stocks

Buying shares of stock has significant pros — and some important cons — to remember before you take the plunge.

The pros

  • Stocks are highly liquid. While investment cash can be locked up for years in real estate, the purchase or sale of public company shares can be done the moment you decide it’s time to act. Unlike real estate, it’s also easier to know the value of your investment at any time.
  • It’s easier to diversify your investment in stocks. Few people have the time — let alone the cash — to purchase enough real estate properties to cover a broad enough range of locations or industries to have true diversification. With stocks, it’s possible to build a broad portfolio of companies and industries at a fraction of the time and cost of owning a diverse collection of properties. Perhaps the easiest way: Purchase shares in mutual funds, index funds, or exchange-traded funds. These funds buy shares in a wide swath of companies, which can give fund investors instant diversification.
  • There are fewer (if any) transaction fees with stocks. While you’ll need to open a brokerage account to buy and sell stocks, the price war among discount brokers has reduced stock trading costs to $0 in most cases. Many brokers also offer a selection of no-transaction-fee mutual funds, index funds, and ETFs.
  • You can grow your investment in tax-advantaged retirement accounts. Purchasing shares through an employer-sponsored retirement account like a 401(k) or through an individual retirement account can allow your investment to grow tax-deferred or even tax-free.

» Ready to start investing? Check out the best online brokers for stock trading

The cons

  • Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view of the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility.
  • Selling stocks may result in a capital gains tax. When you sell your stocks, you may have to pay a capital gains tax. If you’ve held the stock for more than a year, however, you may qualify for taxes at a lower rate. Also, you may have to pay taxes on any stock dividends your portfolio paid out during the year. (Understand more about taxes on stocks.)
  • Stocks can trigger emotional decision-making. While you can buy and sell stocks more easily than real estate properties, that doesn’t mean you should. When markets waver, investors often sell when a buy-and-hold strategy typically produces greater returns. Investors should take a long view of all investments, including building a stock portfolio.

An alternative to traditional real estate: REITs

Don’t feel like flipping homes or building a rental property empire? Fortunately, there is an easier option: investing in real estate investment trusts, or REITs.

REITs are companies that own (and often operate) income-producing real estates, such as apartments, warehouses, offices, malls, and hotels. The most reliable REITs have a strong track record for paying large and growing dividends. Many online brokers offer publicly traded REITs and REIT mutual funds and ETFs.

Bottom line 

Stocks and real estate have their perks and cons. But, it’s safe to say that real estate investment leads to the charge in price appreciation, volatility, rental income, and long-term returns. However, when picking out the best investment opportunity for you, the best way to hedge against risk is to know how to avoid them. Find out common real estate scams in Pakistan in our previous article.

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