Investment Property

Investment Property: Buy and Sell Or Buy and Hold?

On several occasions since in magazine IG and in line with the views of various specialists, we note that the option of investing in bricks is the darling of investors in unstable countries like ours, given the low confidence in the financial system and the capital market.

But beyond the geography of one’s choice or the type of real estate investment focuses on the acquisition of houses, apartments, offices, garages and all the options we are analyzing in our publications, today we will stop investment in two ways: the buy and sell in the short term and in succession, or to purchase and retain ownership for a longer time period.

What is the most appropriate investment strategy? Well, there is no single answer. The decision to choose one method over the other should be part of an explicit strategy in turn is part of the general investment goals of each person, and must also adapt to the opportunities of the market. Then we will discuss these two types of investment and see what are the advantages and disadvantages in each case. The idea is that everyone can find out which one fits more appropriately to your investor profile.

Investment

But before turning to each strategy, let’s very briefly four main reasons why it may be beneficial to invest in real estate:

1. The properties provide a more predictable income than bonds or shares.

2. The properties tolerate the vagaries of inflation because the value of income and cash flow often rises as much as the inflation rate.

3. Real estate provides an excellent place to locate the capital at a time when investors are unsure of the chances in the stock market, bonds and shares, or when these options appear to be inadequate in the long term.

4. Net assets resulting from investment in real estate provides an excellent foundation to finance other investment opportunities.

Buy and sell short-term

In principle, the first apparent advantage of changing (buying and selling) properties in a short time is the ability to effectuate an immediate profit. In such cases, the key is to find a good that, with minimal investment, raise value and satisfying the requirements for a quick sale.

For most investors, change properties can be considered a more long-term tactic. But the transaction costs are much higher on both sides: the sale and purchase, and therefore, can significantly affect earnings.

There are two types of properties that fall within the scheme of buying and selling in the short term. First, we might mention the houses or apartments that are purchased below current market values, since they are in difficult financial situation. Second are the properties that have a structural problem or design that can be modified or resolved to increase its value. In the latter case, the buyer invests capital to raise values as opposed to simply buying a property for a low base in order to create broader investment gains. Of course, it is also possible to combine these two strategies when you buy and sell properties, and many investors are devoted to it in the alternative.

Of course, you have to take time, experience and ability to deal with taxes and additional costs involved in such operations “fast.” On the other hand, find these investment opportunities in the short term may be difficult, unlike other opportunities that can be sustained over time.

Investment House

Buy and hold property

It is generally believed that buying and maintaining a property is an ideal recipe for a surprising enrichment. Most people who amassed great

fortunes in the U.S. and in many other countries did accumulate large tracts of land. Even after periods of depreciation of land values almost always recover in the long term, for one simple reason: there is a limited amount of land.

However, owning a long-term ownership involves a lot of administrative and legal issues that investors in stocks and bonds never have to face. In fact, it is an investment strategy for many investors do not have the right skills.

Most investors, especially those who become the first owners of rental properties are ill prepared or ill equipped to deal with the responsibilities of managing such properties. The process of finding qualified tenants and meet their needs, in addition to ensuring the maintenance of the property can be stressful and time consuming. And a successful management is essential for the investment is really helpful.

Choose a strategy

In order to choose the right tactics, the investor should consider some basic questions. Real estate investment, is it a central part of an overall investment strategy? Is it fits into the overall goals? Do I have a proper plan in which you insert? How much risk and how much profit is appropriate for my investment portfolio? Do I have adequate tolerance and ability to assume the administrative responsibilities that come along with each type of investment?

The choice between the two strategies depends on the situation of each particular financial and investment goal. Training, information and planning are essential at the time of opting for one of these alternatives.

What form is best suited to your profile?

Tell me what you think about the strategy most appropriate for you.

Until next week good investment!


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Investing Basics: How to relatively value a stock, and why it’s important

Overview–What is relative valuation?

Relative valuation is a process that most investors go through when analyzing an opportunity. If you want to value a stock, you can approach it relatively or absolutely. A common form of absolute valuation is the discounted cash flow analysis (but we’ll save that for another post). With relative valuation, there are different methods, but the one we’ll go through today is based on common valuation metrics. These are ratios and measurements that a lot of people have heard of at least once, such as P/E, EPS, and Market cap. All of these metrics are easily available for publicly traded companies, so it is much easier than other methods (DCF, comparable transactions et al.) where you must track down hard-to-find information.

But first, a few definitions

Most common ratios are based on the price per share of a stock, and so change dynamically as the stock price does. However, we don’t need to worry about the exact ratio at any point in time, since relative valuation is an imperfect science. Let’s see what a few of the most common relative valuation metrics are:

Price to earnings ratio (P/E): The price per share divided by the total net income (bottom line) for that year or quarter.

Price to sales ratio (P/S): The price per share divided by the total revenue (top line) for that year or quarter.

Price to book ratio (P/B): The price per share divided by the total net assets of the company (net assets = the value of a company’s assets minus the value of its debt)

Earnings per share (EPS): This is a simply ratio of the total earnings available to common shareholders divided by the number of shares outstanding.

Market capitalization: This is the total market value of all of a company’s stock. It is simply the price per share (quote) times the number of shares outstanding.

How to relatively value a stock using Google Finance

In this section, I’ll show you specifically how to relatively value a stock using Google Finance, since it’s a free and extremely easy way to do so. First, go to Google Finance. In the search bar, where you normally enter keywords to search for, enter the name of your favorite company (don’t worry, I won’t judge you if Apple comes to mind). Find your company on the list and click on it. The next screen will look like this:

 

The above page shows the user interface and chart for Citigroup (C). The top portion below the search bar includes all the basic metrics mentioned above, so you can always see them at a glance when you search a company. Right below that shows you the section of the comparables (comparable metrics) between Citi and its main competitors.

If you click on the Add or Remove Columns button, it will pull up a list. You can then check the boxes on the different metrics you can measure. When you are finished selecting the metrics, press “Save Changes.”

 

While some of these metrics may not make sense now, suffice it to say that they all measure the financial health of a company. At a very basic level, one of the rules of value investing is that you want to buy a company that earns a solid profit, since a company that loses money over the long run is unsustainable.  If you see a lot of negative signs in front of the EPS, the P/E, or any of the other basic metrics, this might be a warning sign to tread carefully. In the example above, Citigroup does not show a P/E ratio because it has lost a great deal of money over the past year. As a result, it might not be the best candidate to use relative valuation on.

Analysis–What does any of this mean, and how is it helpful?

Relative valuation is helpful when analyzing companies because it gives a relative price with respect to key metrics compared to other similar companies. Take for example, two big banks: Bank of America (BAC) and Citigroup (C). Both are in the same industry (financial services) and are both large companies. As they make money in pretty much the same way, it seems fair to say that comparing them relatively is justifiable. The share price for each company should presumably be about the same when measured against their sales or earnings. If you can buy BAC for a price-to-sales of 5.00, then buying C for a price/sales of 6 or 7 makes it seem expensive.

Relative valuation can give an indication of a company being overpriced in a specific industry. Back in the dot-com bubble of the late 1990s, some new internet companies traded at price-to-earnings of more than 100. Today, any company trading at that high of a P/E is considered speculative, since it clearly does not have the earnings to support its price. As a general rule, growth stocks (companies that are relatively younger and growing quickly, e.g. Google, Apple) tend to have higher price-to-earnings than do value stocks (companies that are more established and have stable earnings, e.g. Merck, General Electric). That doesn’t necessarily mean that one is better than the other, but only that they should be approached differently when considered as an investment. Relative valuation works best when all the companies under consideration are in the same line of business, and are all either growth stocks or value stocks.

A few caveats

Like any investing tool, relative valuation has its limitations and should only be used in conjunction with other tools in order to arrive at a conclusion for an opportunity. There are always many factors affecting a company’s share price, so it is not always actionable if you find out one company is overpriced according to its P/E measure. I’ll make a post in the future detailing all the various reasons why a stock price might move, so stay tuned for that! [edit: see here]