I remember hot topic at sulit.com.ph which asks about which investment vehicle is better to invest in, real estate or stocks? Of course you would expect me to have a bias towards real estate, but before you make up your minds, let me first try to objectively state the advantages and disadvantages for both, based on what I know.
For the first part of a series, I will only be focusing on one aspect, leverage.
What is leverage?
Leverage generally refers to the use of loans or debt to increase a person’s purchasing power. Let me illustrate further below.
If I had Php100,000 cash, how much real estate would I be able to buy?
Most people would answer I can buy a property worth Php100,000, which is true.
However, It is also true that I can actually purchase a property worth Php1,000,000 at 10% downpayment with only Php100,000 cash. The Php900,000 would be covered by taking out a mortgage loan from banks.
Some would say that this is not possible for all types of properties but I can assure you that this is at least possible for all the foreclosed property auctions I have posted in this blog for the past 2 months.
This illustrates how you can use leverage to buy more real estate.
Can I use leverage for stocks?
For stocks however, how much stocks do you think I would be able to buy?
The answer of course is I would only be able to buy exactly Php100,000 worth of stocks.
Can’t I apply leverage for stocks?
Well, I could try to take out a loan to buy stocks but if I did, the bank officer would probably laugh at me or get mad at me for wasting his time, depending on his mood. It is a known fact that no bank in their right mind would ever lend money to anyone to buy stocks.
Why don’t banks give out loans for stock purchases? There are a lot of factors I can think of and I’ll discuss these in the next part of this series.
In the meantime, what are your thoughts about this? Do you invest in stocks or real estate?