In these past years, the personal finance sector is seeing a lot of growth. People are figuring out that to succeed and win with the finances, you must first learn the rules of the finance game. As you learn more about the financial markets, you are often presented with many investment vehicles, like bonds, stocks, currency, and real estate to name a few examples. For many, the variety of options can get confusing. To add to the complication, each investment vehicle will have companies and raving fans saying – “this one is the best.”
This article aims to help clear some of the confusion by comparing the difference between forex trading and real estate in an unbiased view as possible.
Capital Gains Versus Cashflow
When talking about capital gains, most people refer to the value you gained after a winning position. On the other hand, cashflow generally means an investment vehicle that will produce money for you on a periodic basis. It’s crucial to understand these two concepts as it’s one of the most significant factors when deciding between Forex trading and real estate.
Perhaps the most attractive form of real estate investing is buying a property and renting it out. If you have done your due diligence and did the math right, you will most likely end up with an investment vehicle that gives you cash every month. In other words, it’s an excellent cashflow investment.
However, keep in mind that there are other ways of making money from real estate. You may be thinking of buying a property when the market prices are low, and selling it back when the price is high. With this process, you are after capital gains. If the capital gain is what you are looking for, then Forex trading then becomes a strong contender. Keep in mind that this article is not saying Forex trading is better than real estate investing when it comes to capital gains. The reason for this is because the two are significantly different.
The difference is mostly based on speed. With Forex trading, market prices move faster. Thus, the possibility of getting more capital gains is also faster. On the other hand, property prices are very slow compared to the Forex markets. In fact, you could wait for years for a 10% move, while that kind of movement happens in months, weeks, or even days in the Forex markets. Of course, this depends on market conditions and the currency pair you are trading.
Before we move on to the next point, you must know that speed, or also known as volatility in this context, is a double-edged sword. With high volatility, it cuts both ways as it hastens the capital gains if you win, and also makes you blow your bankroll faster if you don’t know what you are doing.
As a result, investing in real estate for property gains is slower, but it’s safer because of the low volatility. With Forex trading, it’s faster to gain value, but you can also blow your bankroll faster. Now, this is where most people are back to square one if trying to decide between Forex trading versus real estate investing. For many, both investment vehicles’ pros and cons hold legitimate concerns that it’s hard to make a decision, which likely results in making no decisions. Thankfully, there’s a rule of thumb to help you guide with the decision making.
It all starts with “where are you now? And, where do you want to go financially?” It’s best to think in terms of a spectrum. Where you are now is at one end of the spectrum, and your destination is on the other side.
If you are just starting out, what you are looking for is capital gains as there’s little to protect in the first place. Now, as you go closer to your financial destination, your concerns slowly shift more and more to the protection side. Otherwise, you could lose everything as higher gains will generally mean higher risk.
Ultimately, if you are still far from your financial destination, then capital gain is what you should be aiming for. Thus, Forex trading is a better vehicle for such a task. As you go nearer to your financial destination, slowly shifting more and more to real estate becomes a better idea in general.
In the financial world, you need to spend money to make money. In other words, you need capital. And, there’s a huge difference between the needed capital for Forex trading and real estate.
The Forex broker market is a very competitive business. Hence, Forex brokers are lowering their minimums just to entice you to sign-up with them. In fact, there are Forex brokers out there that don’t require minimum deposits. That means you can start forex trading with as little as $5, $10, or $100. However, you becoming a millionaire starting with $5 in Forex trading is next to an impossibility. It’s possible, but it takes so much time that you’ll likely need more than a lifetime to achieve such a feat. But that’s not the main point here.
With Forex trading, you can already get your feet wet with as little as $5. Once you learn about the ropes and start to make money with Forex trading, you can then add in more capital.
Also Read: How to Start Forex Trading with $100
On the other hand, real estate requires huge amounts of money in general. For example, if you want to purchase a property worth $350,000 and the bank is willing to loan you 90%, then you’ll need to put up the 10%. And, that’s $35,000 out of your pocket. Of course, there are creative ways to reduce your down payment to zero.
In fact, that’s one of the most attractive parts of real estate investing. Having said that, property acquisition fees and related costs will still require hundreds or even thousands. And, if you make a mistake, that means more money down the drain.
In the financial world, liquidity means how fast you can buy or sell an asset. Low liquidity means it’s harder to acquire or sell an asset. High liquidity is the opposite. The liquidity of an asset can play a big role in your overall strategy. If you are a person that doesn’t have a lot of cash reserves, you want an asset with high liquidity to convert it to cash as soon as possible in case you need it.
With Forex trading, liquidity is very high. And, that means you can buy or sell instantly as a retail trader. So if you put money in your Forex trading account and you suddenly need cash for an emergency situation, you’ll have no problems with such.
The same can’t be said with real estate, which is widely known as a low liquidity market. Thus, it may take weeks to months before you can convert your property into cash.
Keep in mind that liquidity only plays a role in your decision-making if you don’t have a lot of cash reserves. Or, if you want your money to be nimble, so you can switch investment vehicles if an excellent opportunity arises.
Wrapping It All Up
When it comes to Forex trading versus real estate, no single answer works for everyone. And, that’s because everyone is different in terms of financial position and risk tolerance.
The best thing you can do is to analyze your situation, look at the pros and cons of the said vehicles, and then make a decision. The more important thing here is to make a decision. Not going into Forex trading, real estate investing, or any investment vehicle because it seems complicated, is the worst thing you can do for your financial health.