Commodities Vs. Real EstateBy
Prudhvi Reddy, 09-Jan-2020
The term Real Estate means physical or real property, consisting of land and building on it, the word ‘Real’ comes from the Latin root things or res. Real Estate or the property market is a very attractive market whose returns are very high if timed correctly. Real Estate Market differs for different locations as their performances depend on different factors such as income growth, economic stability, location, and unemployment. There are four types of Real Estate:
- Residential Real Estate,
- Commercial Real Estate,
- Industrial Real Estate,
There are a lot of things considering which can make investing in Real Estate profitable.
The following are the few unique characteristics of Real Estate to keep in mind while investing.
- Long Term Investment:
Investment in Real Estate can be extremely long term, durable, and multi-generational wealth. There is no fixed maturity for a real estate investment, unlike other investments who have a fixed maturity period.
The performance of this investment in the long term is extremely profitable than in the short term.
- The risk involved in Investment:
Unlike other markets, real estate works very differently as investing in markets like stocks, commodities are very transparent as the investors can access real-time market information and immediate changes can be made in their portfolio. But in real estate, there are a lot of risks involved related to the property, that the seller can purposely withhold or himself be unaware of the problems.
Hence, it is advisable to make research and inspections when buying real estate and if you buy a property in an auction, unseen than taking the consideration of higher risk while making an offer.
Every property is unique in character or content making this market diverse. As all real estate is local, the investors can use local knowledge of a community taking the most advantage and manage a highly profitable portfolio of real estate investments.
- Liquidity of Real Estate:
As it can’t be easily sold without a substantial loss in value, Real Estate is considered illiquid. When it comes to investing in real estate, the lack of liquidity is a good thing though as it makes Real Estate a stable appreciating asset class for long-term investors.
- High Cost:
Investment in Real Estate is higher than any other type of Investment. The saying that ‘It takes money to make money’ applies to Real Estate investing. Though the costs which include the purchase and closing costs, rehabbing, and financing are high the rewards are higher in the form of cash flow, profits, and returns. Because of the high costs, the number of investors in this asset is limited adding stability and long term appreciation.
Risk associated with Real Estate is one of the reasons for making this asset class profitable for intelligent investors having a proven plan for success.
You cannot invest in Real Estate and leave it like that, it requires constant attention for which you can hire an expert team to locate rehab and manage real investments on your behalf.
Commodities are natural resources, having a global market, but limited geographic distribution. The commodity market is a market which deals in the primary sector of the economy which includes, any industry involved in primary production, that is the extraction and collection of natural resources; such as farming, forestry, hunting, fishing and mining rather than manufactured products such as fruit, sugar, cocoa, etc. For investors commodities are available investment alternatives. There are several tradable commodities divided into four categories :
- Metals (such as gold, silver, platinum, and copper)
- Energy (such as crude oil, heating oil, natural gas, and gasoline)
- Livestock and Meat (including lean hogs, pork bellies, live cattle, and feeder cattle)
- Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar)
- Fungibility and Uniformity: Commodities are fully fungible that is interchangeable as the commodity is not uniquely identifiable. The commodities are graded and classified into a specific type making their characteristic uniform and fungible, in spite of having differences in the quality of some commodities like oil, etc. to make inspection easy. large commodity markets, who can't inspect the product, can exist today with its many traders and speculators only because the inspection is not necessary.
- Seasonality: The prices of many commodities, especially agricultural products are affected by the season. Seasonality is caused also by varying seasonal demands, as crude oil prices rise in summer as driving increases in vacation, while natural gas prices increase in winters, as it is used to heat homes.
- Diversification: One of the main advantages of investing in commodities is Diversification, as the commodity price keeps fluctuating at different times and rates from other investments such as stocks or bonds.
- Hedge against bad economic times: Even at the time of bad economic conditions, being the necessities, especially agricultural products and energy, their demand and therefore, their prices remain buoyant even when the economy sours.
- Hedge against Inflation: The first sign of inflation may be the rise in commodity prices. The price of commodities may rise even faster if rapid inflation seems immediate, as people will be moving out there money from investments that don’t offer a hedge against inflation, to protect their assets. As people move out of the money from stocks, real estate, bonds, etc. and move it to the commodity market, the prices of commodities automatically increase and depress the stock prices as the profits of many companies diminish due to the higher price of the commodity.
- Volatile: As the supply and demand of the commodity market cannot be predicted or controlled based on many factors, this market is very volatile.
- Risks: Two types of major risks are involved in the commodity market. a) geopolitical risks b) currency risks.
The countries which are the major suppliers of commodities, few events in such countries can cause the price of commodities to fluctuate wildly from day-to-day. For companies that extract natural resources, the major geopolitical risk for such countries is a threat of nationalization or an increase in taxes. For example, oil prices in Nigeria gyrate wildly, when there is civil conflict, which threatens the supply of oil.
When the value of the currency used to buy the commodity declines concerning the currencies of the suppliers of that commodity is known as Currency risk. For example, the price of oil increases, when the value of the United States Dollar declines against major currencies.
Companies are the engines of economic growth and assets like Real Estate and Commodities which are natural resources or raw materials that act as fuel to those engines. We continue our look at the prospects for various asset classes in the current market environment today with a survey of the commodities and real estate landscape. Both of these assets are usually hard assets. As Dennis Gartman always says, “if you drop them on your foot, they hurt”. Real estate and commodities investing have become very popular as diversifiers for a sound investment portfolio.