Some real estate investment advisors state that to make money in the real estate market, you should leverage your investment. This means to invest around 10% of your own money and borrow the rest. This expands the capacity you have to invest. The stock market has its own version of leverage. This is known as margin purchasing. Another term is buying stock on margin.

When you buy stock on margin, you are borrowing from the broker. The securities and exchange commission (SEC) and the Federal Government have set rules in relation to margin purchasing. They have stated that you cannot borrow more than 50% of what you actually have in your own investment. That is, if you wanted to purchase $1000 of stock but only had $500, you could borrow the rest. There would be an interest that you would need to pay on the borrowed funds.

There is also a tremendous risk associated with this borrowing. If the price of the stock goes up, you win. When it goes up to your exit point, you can sell the stock, pay off the loan and pocket the difference. The risk comes to play if the price of the stock goes down. You must maintain the 50% ratio. Thus if the value of the investment falls down from the 50% ratio, you are subject to what is known as margin calls. This means the broker requires more funds from you. If you have the funds available, you can cover the margin buy reducing the debt. If you do not have the funds available, you must sell enough of the stock to make up the funds required. Since the forced sell comes when the price of the stock is below your purchase price, you are forced into an investment loss. This can be very heartbreaking. You have the potential to lose a lot of money this way.

The difference between leveraging real estate and leveraging your stock market investments is that if the real estate market goes down, you only have to pay the interest payments and wait. With the stock market margins, you have your margin calls. It is a pretty scary way to go. I know because I have lost a lot of money by purchasing stock on margin. I will not go that way again.

If you choose to buy stock on margin, you need to realize the risks. Make sure you have done all the financial and technical analysis and that you can afford to cover the margin calls if there are any. I would not recommend this for the beginning investor.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Real Estate Investment Trusts (REIT) is one additional way to invest in your portfolio. REIT’s are a pool of money from investors that invest mainly in real estate. There are really three types of REIT investments. Equity REIT’s invest in everything physical about real estate including apartment buildings, shopping centers, office buildings and industrial plants. Mortgage REIT’s invest in mortgages and make money from interest payments but not appreciation. Hybrid REIT’s are a combination of both.

REIT’s get a tax exemption but by doing so are required by law to return to the investors 90% of its taxable income. Thus investments in REIT can result in taxable income. Some individuals who invest in REIT’s choose to use their non-taxable funds for this reason.

There is some upside to investing REIT’s. One is that you do not need large capital holdings to invest in real estate. Second is that you do not have to deal with all the issues that come from being a landlord. Third REIT’s have shown to have a negative correlation to stocks. Therefore owing REIT’s will serve to diversify your investments. Fourth buying and selling REIT’s is like buying and selling stocks so it is easy to move in and out of an investment, unlike the actual owning of property You can do stock market trading in REIT’s..

The downside to investing in REIT’s is that you are not actually benefiting as much from the appreciation of property but do bear a good part of the risk since you have placed your investment in real estate. If the real estate market goes down, your investment goes down also. Another is that you will have taxable income every quarter in the form of dividends whether your tax situation can handle it or not.

A professional investor designing a balanced risk investment portfolio may consider investing in REIT’s. However, they would not consider giving up the potential large returns from stock investments to invest in REIT’s. They may move a small percentage of their portfolio to gain the diversification but it would not be much, say 5%. This is because REIT’s are exposed to the risk of price volatility by global economic factors and crises in other electronic markets and countries. Direct investments in real estate does not carry that risk since the price of the investment is not being determined by other factors than the real estate market.

In the latter end of 2009, the stock market and the economy began to improve. Unemployment was improving and the economy begin to grow. However, the real estate market is still down, so moving even a small percentage of your investments to REIT’s at this time does not seem to make a lot of sense. Real estate may come back in 2010 though, so jumping in now may be jumping in ahead of the game. That is a hard call to make.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.