Are Real Estate Investments A Myth?
Investing in a primary residence is perhaps the best decision anyone can make to secure their financial future. Problems begin when people begin considering investments in second homes as vacation houses, rental properties, commercial properties, Etc. Some even invest in vacant land hoping for potential appreciation and begin playing an entirely new game.
The returns on real estate after considering inflation is less than what is offered by common stocks. This means that returns from real estate ownership are no longer worthwhile despite many Americans becoming enthralled by the ownership of properties. What is the myth of investing in real estate? Does it make sense for Americans to make investments which do not provide adequate returns? Let us look at why real estate is considered beneficial as believed.
Many Investors Consider Real Estate As More Solid Than Stocks
The average investor in most cases does not look at the stock he or she owns as a fraction of an authentic business which has infrastructure, employees and hopefully is also profitable. They just view it as a piece of paper which wiggles around on a chart. They have no idea about the concept of the owners earning and the yield they may derive. It is for this reason that they begin to panic when stocks of a particular company drop from $75 to $35. People think of equities as similar to a lottery ticket than as ownership and expect to witness an upward movement every time they open the Wall Street Journal.
Those who have invested in a rental property run their hands on the walls, switch the lights on and off, mow the lawn as they greet new tenants. They have shares of bed, bath and of the things sitting in their brokerage account. They begin to believe that over the long-term they will in all probability build their net worth because of their ownership of such properties even though it doesn’t really feel like property ownership.
Real Estate Does Not Have A Quoted Market Value Every Day
Real estate offers lower returns after tax and after inflation, but it proves particularly beneficial for those who don’t have a clue about what they should be doing if they see a quoted market value every day. They can continue holding their property and collecting the revenue from rental income while being completely ignorant of the fact that a fluctuation in interest rates will mean that the value of their holdings also that affected like stocks and bonds. Benjamin Graham addressed this mistake of investors when he taught them that the market was there to serve and not to instruct them. Graham mentioned getting emotional about movements in the market was similar for investors giving themselves emotional and mental anguish over the mistakes made by people in their judgment. Real estate is no exception to this rule because the price is what the investor pays and value is what he or she gets.
Confusing That Something Which Is near To Something Which Valuable
Psychologists have often been telling us that we are overestimating the importance of something close to us and readily available as compared to something which is far away. The psychologists may have a point of view and it would be the reason why many people are cheating on their spouses, embezzling funds from corporates and rich people with millions in their accounts feeling bitter for losing a small amount because the cash was left on the nightstand at a remote place.
This principle may also offer an explanation about why some people feel better after receiving $200 as rental income which appears in their mailbox every day against $250 from earnings generated by the common stocks they are holding. It may also give a clue about why many investors prefer to receive cash dividends than share repurchases despite the latter being tax efficient and resulting in the creation of more wealth on their behalf.
Humans like to be in control of the things they have in investments like in properties which aren’t going to vanish even if the commercial building is leased to tenants that disappear overnight. Apart from a natural disaster which in any way would be covered by insurance the chances of people holding real estate waking up and finding their holdings have disappeared are unlikely. The safety of investing in real estate provides a level of emotional comfort for many people which could be the reason why they consider these investments as being better than investing in stocks or bonds.
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