Everyday we’re faced with choices, and it’s the choices we make that ultimately determine the condition of our futures.

I’m not going to leap into a long discourse about good choices and bad choices. I’m assuming that if you’re reading this you’re already making relatively good financial choices or at least trying to learn how.

I’m more concerned with the myriad of good choices and how we choose between them. This all may seem abstract, but I intend it this way. I don’t want to get into specifics here in this post.

There are many different ways to become rich. No one way is necessarily better or worse than another. What you need to find is the way that works for you.

Many people have gotten rich through real estate investing. Interestingly, there are also those who don’t believe it’s possible. This is perfectly fine because it’s not the way for everyone.

Many have also gotten rich from investing in the stock market. Others think it’s too risky and therefore avoid it. Again, it’s not for them.

Starting a business is another great way that people have gotten wealthy. Again, it’s also too risky for many.

All of these different strategies or investments are fantastic ways to gain wealth. Not all of them are right for everyone. What’s important is to find which strategy suits you and make the choice and go after it.

I’ll also say that mutual funds held in 401(k)s and IRAs are not the only way to accumulate wealth and minimize risk. They have their advantages such as tax savings, being easy to get into, and being simple to manage. They also have their disadvantages.

Find what’s right for you and try to disregard the naysayers. It’s your future and your choice.

The real estate market and the stock market. Before I get to this, let me first talk a little bit about markets in general.

A Market Economy

In the United States, we live in a market economy. The economy relies primarily on the interactions between buyers and sellers to allocate resources. Prices are generally determined by basic supply and demand.

There are many different types of markets such as flea markets, farmers’ markets, financial markets, real estate markets, stock markets, etc. Each market serves its purpose.

Financial markets exist to match those who want capital (businesses) with those who have it (investors). Stock markets are secondary markets where buyers and sellers of company stocks come together and trade. Real estate markets bring together buyers and sellers of real estate. I hope you’re noticing the pattern.

Even though all the markets bring buyers and sellers together, they are all different.

The Comparison

Recently we’ve been hearing a lot about the real estate market and how the bubble’s bursting and the market’s crashing. In February, we’ve also seen the stock market experience a little crash of its own and then recover. Take a look at the difference though.

The stock market is full of different prices, but at any given point in time there is only one stock price per company. If you want to buy a share of General Electric, you have to pay the current market price for that share. It doesn’t matter if you live in New York, L.A, Seattle or Omaha. There’s one price. When that price crashes, it crashes everywhere. When that price goes up, it goes up everywhere. Also your 100 shares of stock are exactly the same as the next guys’.

Contrast this now with the real estate market. Prices vary across the board here too, but there’s no one market price for a 3 bedroom 2 bath house with a 2 car garage. There aren’t even 2 houses exactly alike. You might find one house in California right now with a market price of about $650,000. A similar house (notice it’s not the same) in Kansas City might have a market price of $150,000.

The differences don’t just stop here though. Just as their can be a price discrepancy, the direction of the price movement isn’t linked either. Every one’s worried because of the bursting bubble right now, but if you lived in Salt Lake City you wouldn’t know what they’re talking about.

The point I’m making here is that you can’t make broad generalizations about the real estate market. There is only one stock market that trades General Electric and MacDo (that’s MacDonald’s if your new to this blog), but there are many markets that sell 3 bedroom 2 bath houses (and some places are even appreciating).

The goal of this post is not to advocate one market over another (be it stock or real estate). I’ll leave that to other posts such as Reasons I like Real Estate and Why I don’t buy Mutual Funds.

I do want to stress, however, that because the markets are different, they require different strategies. With stocks you have to figure out how to win in the one market. In real estate you have multiple markets to choose from.

[Editorial Note: This is why I don’t buy into all the media’s doom and gloom about real estate.]

As you know, there are many different ways to invest and just as many differing opinions. I’m going to give you some reasons why I think real estate is a great investment.

1. I’ve never seen real estate go to Zero.

This isn’t to say that I’ve never seen real estate go down in value, but I’ve never seen it go completely belly up and ultimately be worth nothing. I can’t say this for stocks. I’ve seen stocks provide great returns, and I’ve seen stocks end up being worth nothing or very close to nothing. Real estate is something very tangible and they’re not making any more of it.

2. It’s all about control.

With real estate, I can own it AND control it. I get to make the decision about anything that goes on with the property. I choose who to rent to, who to sell to, and how to improve or not improve the property. Even though there may be a mortgage on it, the bank doesn’t have any ownership interest in the property. Where else can I put down 10% and control 100%?

3. The bank will loan me money to buy property.

Banks are more than eager to lend money for property. Just look at all the news about the sub-prime mortgages and such. Walk into a bank and ask to get a loan to buy stocks with and you’ll get a very different story. Banks don’t want to loan on stocks because they’re “risky”. They’ll loan on real estate all day long.

Now, I’m fully aware that are such things as margin accounts. With these accounts, you buy stocks “on margin” or with a loan. The important difference here is what’s called a “margin call”. Aside from the fee you pay for the margin account, if the value of your stocks drop below a certain threshold, you have to pay the difference or sell of the stock to make up the difference. As long as you’re current on a mortgage, you’ll never be forced to sell or make up a difference in value. A very important distinction.

4. The government subsidizes real estate investments.

You can write off mortgage interest, insurance costs, property taxes, utilities and other expenses associated with the investments. You’re also able to write off associated travel expenses. You can also claim depreciation as a deduction even though the property generally appreciates. This is a huge one. Take about 80% of the value of the property (you can’t depreciate the land, just the improvements on the land), and divide this amount by 27.5. On $100K, this would be $3,636 that you can deduct from your taxes. These are paper losses that will offset any positve cash flow making it essentially tax free for you. If you’re taking a loss on the property, you can write off your losses against your normal income up to a $25,000 loss.

Most of these advantages have no limits, whereas a 401K and an IRA have contribution and income limits.

5. Harness the power of leverage.

Many will argue that stocks return more in the long run. This may be true when you look at percentage return, but more important is “cash on cash return”. This is best explained with an example:

Buy $10K worth of stock and it goes up by 10%, you’ve earned $1,000.

Now, put $10K down on a $100K property with a tenant paying all the holding expenses. If this property only appreciates 3%, you’ve got a $3,000 gain.

This is the power of leverage.

There are other reasons to own real estate and I’m sure I’ll get around to writing about it, but this will be all for now. Let me know what you think about all this…