Most people who want to establish a financially-secure future choose to invest or trade in real estate. Indeed, if you take a look at the list of names of the wealthiest people in any category, most of them have allocated major portions of their assets in real estate. Donald Trump, who made his fortune in real estate, is very popular and his success story is an inspiration to all of us.
Books like Rich Dad, Poor Dad by Robert Kiyosaki and other property investing books introduce the average person to real estate investing. Thanks to these books, many people have opened their minds to new possibilities which they can now envision for themselves.
This article will not dispute the validity and the wisdom of investing in real estate. However, it might not be the best option for everybody. Each of us has different limitations and our circumstances vary. At the start — for most of us — we have to choose which area to specialize in since there is only so much money to go around. What I can do, is to at least highlight a few aspects that make Forex trading and real estate investing so distinct. I then leave it to you to decide what you would like to focus on.
I should let you know that I have not yet invested in real estate myself, but I have considered it and I have asked myself the same questions you might be asking yourself now. I have read a lot on the subject matter and my assessment is purely based from my readings. Individuals using real estate as their vehicle to create wealth may have different perspectives and I strongly advise you to seek their counsel to gain a more balanced outlook on this issue.
Passive income vs. capital gains
If you like the idea of buying property to receive rent revenue, then the real estate market maybe better for you. You can structure your properties and contractual agreements to maximize the passive income you get from your tenants.
However, if you prefer to buy a property mainly because you think you can resell it at a higher price later, then you want to make money mainly from capital gains. If this is your philosophy, then Forex could be a better trading vehicle for you than real estate because exchange rates fluctuate faster than real estate prices. Furthermore, transactions are easier and they are instantaneous to complete.
Capital requirements
To buy real estate, you need have at least 10% of the acquisition cost of the property if your bank is willing to lend you the other 90%. If the house costs $600,000, you will need to cough up $60,000. That is a year's gross income for many people.
If you want to start trading Forex, most brokers allow you to open a trading account for as little as $100. You can trade 100,000 units of a currency (a standard lot) with that amount and a margin leverage of 1:200.
Liquidity
Whenever you want to buy or sell currencies, there is always someone willing to buy from — or sell to — you at the most competitive price. The Forex market is the biggest and the most liquid market in the world and if you have hundreds of thousands of dollars you want to exchange for another currency, you can do so within a couple of seconds. To buy or sell a house or an apartment, you expect to wait for weeks if not months.
Market transparency
In the real estate market, one house is not the same as another. Each property is unique. One might have a better foundation, a worse design or a prettier garden than another. Knowledge of these strengths and weaknesses become a significant factor if you are to make money from a transaction. Therefore, if you enjoy or if you are good at selling, promoting, negotiating, and bargaining based on these differences, the real estate market is for you. Further, your lawyers, accountants, advisers, real estate agents, and consultants play a significant role in your success.
If you want to trade currencies, there is no need to negotiate the price with the other party. If you are a seller, there is no need to educate potential buyers as to the benefits of your product. If you are buying, you have peace of mind that you are getting the best possible price for the currency from your broker at that particular point in time.
Transaction costs
Buying and selling real estate is much more expensive than buying and selling currencies. It involves hefty real estate agent commissions and local taxes. Whereas FX trading is nowadays done on thin bid/ask spreads and very low commission due to a ferocious competition among Forex brokers.
Shorting the market
When you have a property and you suspect that its price will go down in the future, your options are limited: hang on to the property or sell it now. If you don't have a house to sell, you cannot profit from a declining market opportunity. In Forex, if you suspect that a particular currency will depreciate in value, then you can sell it short without owning it. You buy it back again after it has already reduced in value to realize your gain.
Mediated transactions
In real estate, you are dealing directly with the other party, taking on the other side of the transaction. This is why you need to go through a lot of paperwork and consult your lawyers to ensure that you know about the options available to you when the other party fails to fulfill their end of the bargain.
In Forex, you do not have to worry about whether a buyer or a seller is going to fulfill their part of the deal for whatever reason, because you are not directly dealing with that particular person. You are dealing with the broker who either makes the market or ensures that somebody will always take the other side of your trade.
Convenience
The Forex market is open 24 hours a day, 5 days a week. You do not have to meet the buyers or sellers in person. You do not have to conduct meetings with lawyers, accountant, bank representatives, and so on. You can buy and sell currencies in your pajamas at midnight if you like, and the transaction will be complete before you go back to bed.
Conclusion
All in all, if you are an investor looking to make money from a combination of rent revenue and capital gains, you may want to invest in real estate for the long-term. If you are a trader wanting to profit purely on capital gains, then trading Forex is probably better for you than trading real estate because you can start with a small fund and your rate of return is limited only by your ability to trade well. The transactions are mediated, it is more convenient and transaction costs are a lot smaller. The market is also more efficient due to product homogeneity and liquidity. Lastly, there are opportunities to profit regardless if the prices are going up or down.
I believe that if done right, neither venture is more or less riskier than the other. The risks are up to you to manage. With this article, I hope I helped you make a decision appropriate to your circumstances.
