Investing money in things is essentially the core principal of capitalism. Putting money (capital) into something now and assuming some amount of risk in exchange for the potential of profits down the line is literally why we call it capitalism. The system does, however, strictly demand that risk of failure be part of the equation. That’s why we have laws against insider trading, laws against using your IRA to get even indirect benefits today instead of holding them until you retire, and so on and so forth. But there is a dearth of such laws when it comes to investing in real estate.
We have almost nothing against investors doing everything possible to mitigate the risks they take—and it’s here that investing in real estate shines above and beyond more volatile systems like the stock market. That’s because, unlike with other forms of investment, there’s no such thing as “insider trading” in real estate. There is no information you could acquire that you aren’t allowed to use to decide what properties to purchase, when, and for how much, and that information asymmetry between you and other players in the real estate game puts a lot of power in your hands.
Download Your FREE copy of ‘How to Rent Your House!’
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
The Lag Between Planning and Execution is Your Best Friend
When you work for a big business and you know that your company is about to announce the successful development of the jPhone (“The jPhone: It’s one better than the iPhone!“), you aren’t allowed to buy a bunch of stocks in preparation for the announcement and then sell them once their value jumps up in response to said announcement.
Related: Why I’d Choose to Invest in Real Estate Over Stocks Any Day of the Week
But when you live in a neighborhood and you see that an old lot that’s been sitting for years is the site of a trendy new restaurant in the making or you hear that the city council had decided to invest a few million dollars into beautification and revamping some particularly difficult intersections, you are 100 percent allowed to start investing in real estate all over the neighborhood and sell it once the value jumps up in response to the work being completed.
This works because the real estate market reflects the current reality of the economic and physical environment around it, not the plans or the future conditions thereof. This is different than the stock market, which responds fluidly and promptly—like, within minutes—to the announcement of plans, news, or catastrophes. It’s much easier in real estate to see big plans coming a ways away and respond to them before they start to affect land and home values—so you can pocket the gains of those effects yourself.
How to Find “Insider Information” on Real Estate
So, knowing that real estate investment’s principle advantage is one of information, how do you find the kind of information that you can use in this way? There are several answers.
- Keep up with the city leadership. It doesn’t matter whether your city is a big as Detroit or as tiny as Attica. There’s going to be some way for the interested to track the goings-on in city hall. These goings-on often include strong hints (i.e. rezoning ordinances or traffic revisions) or out-and-out declarations of planned investments and major improvements. In many places, simply following the city on Facebook can be a vast source of information.
- Get buddy-buddy with the Chamber of Commerce. Attending Chamber functions and gossiping with Chamber functionaries can reveal quite a bit about the plans of local businesses. Equally importantly, listening to the complaints of local businesspeople can occasionally give you insight into the plans of the big businesses that the locals are worried they’ll have to compete with. Learning that a Trader Joe’s is coming to a particular low-to-middling neighborhood, for example, is a very solid indicator of a good investment opportunity.
- Drive around! If nothing else, coming across a significant new construction and investigating it to find out what’s going up there. This is probably the least effective way of gathering intel—it’s more of a matter of serendipity than one of planning —but it’s not one you should ignore if “seren” happens to “dip” right in front if you. This can even include seeing a prominent house on the block being renovated, though obviously that effect will be much smaller than seeing a Costco going up just up the street.
The Cloud to All This Silver Lining
Of course, there is a flip side to this coin as well, and that is time-to-profit. Stock markets’ volatility keeps you from being able to take advantage of information asymmetry to the degree that real estate can, but it also allows you to make a profit in a matter of seconds. Investing in real estate takes weeks at the absolute fastest to turn a profit, and if you’re looking at the future plans of businesses and municipalities to drive your investment, you’re almost certainly looking at months or years of lead time. (Also, a stock you can buy for the price of a VCR stands a good chance of being a passable investment—a house you can buy for the price of a VCR is almost certainly a trap.)
Nevertheless, if you’re considering getting into investing in real estate—or, like many modern investors, you had real estate investment thrust upon you by strange twists of recession-related fate—understanding the most fundamental advantages that make real estate investment worthwhile is a huge step toward investing intelligently.
What do you think is the biggest advantage real estate has over stocks?
Let me know with a comment!