In the last year or so we've seen the real estate market tank while most other types of investments have done alright, with the exception of a recent bump in the stock market road. Still, when we compare our investment options, it's pretty hard to dismiss real estate!
Let's take a look at some ways small investors may be able to create wealth and see how they stack up against real estate.
The stock market
Stockbrokers, online and otherwise, allow their clients to use leverage by buying stocks on margin. This means if you want to buy $1,000 worth of stock, your broker will lend you $1,000 more so you can buy twice as much. Therefore, if your stocks double in price, they are worth $4,000, and since you have only $1,000 of your money invested and $1,000 belongs to your broker, you have tripled your $1,000 to $3,000! So, buying on margin makes stock market investing attractive.
Commodities futures trading
Commodity brokers allow their clients to make money by buying on margin. For about $1,500 you can control 5,000 bushels, or about $30,000 worth of soybeans. Here, if the price of the soybeans rises 10%, you make a profit of $3,000. Of course, it can go the other way, too, and if it does, you lose big. Still, fortunes have been made in commodities futures trading and it is a superb example of using leverage.
Multilevel marketing businesses
Another area where people can gain a large amount of leverage is through multilevel marketing. With multilevel marketing a person signs people into his down line. These people recruit and sell products for him, thus giving him the ability to make money from their time and effort.
Buying a new house
Probably, the most ubiquitous form of leverage happens when you put $40,000 down to buy a $200,000 house. Sooner or later most families make a similar investment. A mortgage allows you to control an asset that is 5 times as big as the investment you have made.
Should the price of your $200,000 property double, not at all an unheard of event in real estate, you will have made $200,000 on your $40,000 investment, or a return of 500%! Now that's leverage! It's no wonder people like to invest in real estate!
Risk vs. reward
All these examples show ways a small investor can make money, even a lot of money. However, they all come with a potential downside. Certainly, investing in stocks is a great thing to do, but the market has its ups and downs and buying on margin in the stock market isn't normally what one thinks of as very strong leverage.
There is a lot of leverage in commodities futures trading, but there is also an abnormal amount of risk. When first trading commodities futures, the investor should use strategies, which will define the risk. These strategies include buying options, or spreads. The latter is the way Forex, which is an online investor favorite, is traded. Spread trading tends to make commodity investing a lot less volatile.Multilevel marketing isn't recommended for everyone. Though many success stories have been written because of multilevel marketing, it is a type of business that many people never find success with.
Everybody needs a place to live
Buying a house on the other hand, is recommended for everyone, even if it is bought only to provide a place for someone to live. The price of real estate doesn't always go up, however. In the area I live and invest in, real estate had a major slump between 1988 and 1993. In this time frame, real estate lost value drastically. Now in 2008, many parts of the country are experiencing the same phenomenon.
Buy and hold
However, anyone who bought real estate before, or better yet, during the late 80's slump was richly rewarded if he held on. With real estate, it always seems that you'll come out ahead and make money if you don't give up. Though buying at the wrong time can severely slow down your ascent to wealth, experience tells us if you hold on tight, there will be a turn around sooner or later.
So far, throughout history, real estate prices have always broken sharply upwards when coming out of slumps. If you are able to weather a real estate down cycle until the market turns around, it will be well worth your perseverance because as the price climbs, you will gain the leverage you need to make a lot of money in a real hurry.
So, if you are thinking of buying, don't let the recent downturn deter you. History tells us that buying during downturns is an excellent strategy. If you already bought and are now losing equity, take heart, though real estate prices sometimes fall, its overall direction is up. This why more fortunes have been in real estate than any other commodity.