Round Out Your Portfolio With Real Estate

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Owning equity in a home or other real estate is most often a very secure investment that a person can count on to increase in value over time.

Real estate, especially a house occupied by the owner, is by far the most widely owned form of equity investment. Buying a home deserves to be classed as a financial investment to the extent that it meets these tests: First, the average expense of maintaining the house, not including amortizing the mortgage, will be less than the family otherwise would pay for rent, so that the use of savings to pay for the house results in lower living expenses. Second, the price paid for the house is no higher than other people would be willing to pay for it, so that, if necessary, the house can probably be sold for about the same amount that it cost.

Of course, a family may decide that the chance to buy their dream house is too wonderful to pass up, and to heck with the extra cost! But by making the tests just suggested they avoid kidding themselves into believing that the house is strictly an investment, when actually part of the purchase cost is an expense.

Besides home owning, an investment in real estate can be a farm operated by the owner, or land or buildings rented out for someone else to use as a home or for business. Or land may be owned mainly in the hope that its market value will rise. When a real estate owner sells, the price he receives may be more or less than his cost. This is a risk that is inherent in owning an equity.

Where one man is sole owner of an equity, all the profits or the losses are his; or if he owns only part of the equity, then he and the other owners share in the profits or the losses. Whether he is sole or part owner, he has no guarantee as to how much, if any, income he will receive, or at what price he can sell out.

In a small business enterprise, an equity owner is usually not merely an investor; he is also a manager, putting in considerable time and whatever skill he possesses. Several million such enterprises are operating in the United States.

A medium-sized or a large American business organization is pretty likely to be a corporation, with its equity divided into shares of stock. One man or a small group may own enough of a company's shares to be sure of controlling its management, but in tens of thousands of corporations in the United States, at least some shares are sold through the stock markets to anyone who will buy, and such stockholders usually have no connection with the company's management.

All corporations issue common stock, a purely "equity" type of ownership. Some have one or more additional classes, usually called "preferred stock," these are equities with some fixed-price features. When a corporation makes a profit, its management decides how much is to be passed on as dividends to shareholders. The dollar outcome of owning common stock, including both dividends and change in price per share, is not guaranteed, not even approximately, and the results may be good or bad. Intelligent owning of common stock requires more study than lending does.

It is the smart investor who puts a portion of his money in equity investments -- they are generally safe, and real estate in particular tends to only increase in value over time.

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