Finance and Money - Spending, Saving or Investing - part 4

In this post I'll go over what I consider to be the last passive investment option - real estate. If you didn't already, check out part 3 of this series, linked here, for my thoughts on other passive investments and an overall view on investments. 

I'll also talk a little about active investments - stocks and other options such as cryptocurrencies. Why a little bit and not dive deep into details? Well, because I am personally not an active investor. I preffer the passive way of investing because it has less risk associated (granted, with less risk come less profits, but I'm ok with that 😄).

That being said, let's start with real estate. 

There are multiple ways that you can invest into real estate, depending on the amount of money you have at your disposal. You could do one of the following things:

1. Buy a property, with cash, and rent it out (or multiple properties);
2. Buy a property, with a bank loan, and rent it out (or multiple properties);
3. Buy a property that needs repairs, with cash, invest in the necessary upgrades and sell it. Also known as property flipping;
4. Buy a piece of land and build some houses or commercial buildings - become what is known as a real estate developer - I know, this requires a lot of work and, from certain angles, it doesn't quite fit into a 100% passive investment;
5. Aquire shares into a REIT or check for a REITs ETF - REIT stands for Real Estate Investment Trust. This option requires the less amount of capital to start with;

Given the fact that most people are probably considering either option 2 or option 5, let's dive deeper into these ways of investing. You should be very careful when buying a property via a bank loan. 

I'll give an example to illustrate the risks in this case.

Say you buy a $100k property by getting a $80k credit from a bank. The monthly rent that you ask for is $1000. The monthly bank payment for your loan is $500. At this point you might say, well, that's an extra $500 per month without me having to do anything. Unfortunately it's not that easy. There are multiple costs that you, as the owner of the property, need to budget. Starting from insurance costs, maintanence costs (e.g. a sink breaks and needs replacing) as well as the vacancy cost - when you don't have anybody renting your property; there's also companies that, for a price, can manage your property for you, so that you are not the one that gets a call at 2 AM from the tenant complaining that the toilet broke.

Now let's talk about REITs. For a "formal" definition, check this link from Investopedia. In simple words, a REIT is a way for investors, with not a lot of capital, to invest in real estate without them actually buying or managing the assets. They will get back a share of the profits that are generated from these assets.

If you want to further limit your risk, because investing in a REIT can be, in some ways, viewed as buying a company's stock, you can choose a REITs ETF. One example (and I want to repeat, it's just an example) is the iShares Developed Markets Property Yield ETF - you can find more details about this ETF here; make sure to scroll down and check the Holdings section (fine, here's the link, for your comfort 😀). 

The key point with REITs and REIT ETFs is that the amount of money that is required for you to start investing is low to very low, compared to the costs of you actually buying an income-generating property. 

Points 1, 3 and 4, from the list above, are pretty self-explanatory. Don't get me wrong, they come with challanges, but there is not much for me to say except always buy a property in an area where "money" is moving in; for example, the city I live in has attracted a lot of investments and has seen many global corporations set up shop, so to speak. This, in turn, caused prices of properties to rise, especially those properties that are near the offices of these corporations.   

That's about it when it comes to investing in real estate; as you can see, there is an option for you depending on your capital and the time you want to allocate to the investment. 

Moving on now to active investing. As I said at the begining of this post, I don't have a lot of experice with this. However, here are some things to consider if you plan on buying individual company stocks:

1. Never invest all your money in a single company - if you are wrong with your analysis and the company goes bankrupt, you lost all of your money.
2. Have a clear entry and exit strategy, based on both technical analysis as well as fundamental analysis - some people argue that one is better than the other or the other way around. I leave this up to you to decide which you preffer more. All I'm saying is that both should be considered.
3. Be involved in the companies that you are invested - check the news, check their official press releases, quarterly reports etc.

Let's look at a BAD example. Say you have $100k and you want to buy stocks in company XYZ. You put all your eggs in one basket and hope for the best. You don't check your investment for an year. What do you think is going to happen? 

Well, 3 things can happen - you can make a profit, you can loose some or all of your money, or you have the same amount that you originally invested - yes, I know, the third option has a very low chance of happening.

The idea with actively investing your money is to increase the chances of you making a profit. This requires constant work, attention and research. It's not an easy game. The risks are higher but, as you might have guessed, the rewards are higher as well. If this sounds like your cup of tea, then, by all means, go ahead and do your thing 😀 Just be aware of the risks.

There is one more thing I want to touch upon with stocks, which applies to ETFs, index funds and mutual funds. 

DIVIDENDS.

The main idea is that you buy a company's stock and said company will pay you a percentage of their profits for holding their stock. This can happen once, twice, three or four times a year, depending on the company.

So, let's say you have 2000 dollars that you want to invest in company XYZ that currently trades for 200 dollars a share. Company XYZ is known to pay out dividends every quarter and, for last year, the dividends averaged 3.5 dollars per share. 

What does that mean? 

Well, say you buy 10 shares of XYZ - you go all in so to speak 😃. If company XYZ keeps the same average of 3.5 dollars in dividends per share, per quarter, this means that if you hold these 10 shares for an year you will get 140 dollars in dividends. 

Also, the company can go up in value on the stock market - so, your initial investment may now be worth more - if XYZ trades now for 220 dollars a share, you are 200 dollars in profit only with the 10 shares that you own. Add the dividends and you may be looking at a profit of 340 dollars. 

In my humble opinion, the best way of "winning", when buying dividend paying company stocks, is to reinvest the dividends that you get, alongside a DCA (dollar-cost averaging) strategy. In this way you will benefit from what is well known as COMPOUND INTEREST. This means that the interest from your investment is generating interest in and of itself. And the process repeats over and over as long as you are playing this game.

For people preffering a more passive investing approach that benefits from dividends, there are ETFs and funds that comprise of companies that pay out dividends. One example is the S&P US Dividends Aristocrats - you can check more about this ETF here.

Now, let's jump to the investing option that, in my opinion, has the most risk associated to it - cryptocurrencies.

 

"Dude, you don't know what you're talking about - crypto is the way you get rich - to the moon 🚀🚀🚀"

Yeah ... I heard this so many times from so many different people. You know how many are rich now? NONE! Investing in crypto is like investing in stocks BUT with A LOT MORE VOLATILITY!

Is it a scam? NO! But you'd better know very well what you are doing when you invest in Coin XYZ. The main point with crypto is that it is deregulated. 

Let's say that I'm a very rich dude who has enough capital to make a coin's value really move up. 

I'll buy in rounds and hire some people to create hype around this coin. People will see that the value is steadily going up and this creates an effect callled FOMO - Fear Of Missing Out. But remember, I am the one that creates these new highs for this coin. 

What generally happens is that random people will start to buy the coin and tell their friends about it as well. 

When the coin hype rises enough and the value of my invesetment reaches a number I am satisfied with, I start selling massively. People are still buying the coin because of hype and I am getting back the profits from my initial investment.  

For example, I invest $100 million and I get back $220 million. It's a 2.2X on my investment. I'd be happy with getting $120 millions in a few months. Wouldn't you? The point here is that in order for me to win this $120 millions, there needs to be other people buying like crazy. Remember that for a trade to be executed, when you are selling, someone else must be buying 😉 This is why crypto is so volatile - there is sooo much hype and there are usually no quarterly reports or significant news that can guide you when investing.

By the way, in the example above, in the crypto world, I am also known as a "whale" 😀

Let's bring this to a close with a short summary.

• Real estate investing is generally viewed as a way of passive investing your money. Depending on your capital and approach you can become more involved if that's what you like. If your initial capital is relatively small, consider a REIT or an ETF or fund that focuses on real estate.
• Buying and managing individual stocks is a form of actively investing your money. You are required to do different types of analysis and be involved with the companies that you invest in if you want to increase your chances of making a nice profit. In my opinion, it is not recommended for an unexperienced/"green" investor, unless you have the guidance of somebody who really knows what they are doing.
• Crypto is also a way of active investment. It is similar to buying stocks but is has a lot more risk associated to it, because of the deregulated nature of cryptocurrencies. Your money can easily be "wiped out"/taken by a player who has a thousand time (or X thousand times) your capital, if you are not very careful!  

At the end of the day, there's always something for you to invest your money in, depending on the amount of money you have and the risk degree you are comfortable with. 

Oh, and since I put "Spending" in the title of this series, here's my 2 cents on the matter. It's your money, it's your choice. I will not tell you not to buy product X and instead invest in a particular ETF or company Y.  

The point of the series was to give you an overview and the necessary details for you to make up your mind and decide what's best for you.