Last Updated on July 24, 2022 by The MediFi Guy
So what exactly is investing? For our purposes, to invest refers to the act of buying one of the following things:
1) Stocks, also known as Shares or Equities (all synonymous)
2) Bonds
3) Cash
4) Property
The proper term for the aforementioned things is “asset classes“
Property
When it comes to property, there are essentially 2 ways that you can invest in it: either actively or passively.
Active investing comes in the form of owning a property and acting as a landlord. This can involve renting out the property to tenants, or buying and holding property with the goal of later selling it for a profit.
As a landlord, you purchase a particular property with the aim of renting it out to tenants and making a profit from the surplus left over after you’ve paid for all the expenses related to the cost and maintenance of the property. You can also make a profit by renovating a property that you purchased and later selling it for a higher price than that which you bought it for (flipping it). Active investing as a landlord requires your active involvement and participation in the entire process and consequently can be very labour intensive.
Passive investing comes in the form of Real Estate Investment Trusts (REITs). Just think of a REIT as a business that buys up a lot of properties, and then acts as the landlord letting it out to people for rent. You as the investor can then buy shares in the REIT, thereby receiving a share of the rental profits in the form of dividend payments. You can also later sell your shares at a higher price, assuming their value appreciates. This form of passive property investment is analogous to buying stocks in any other company, and therefore does not require your active input in day to day running of the properties, as the REIT essentially acts as a middle man landlord on your behalf.
Property has historically provided high average returns similar to stocks. The risks of passive investment in property via publicly-traded REITs are similar to those of investing in publicly traded companies. The risks of actively being a landlord are the same as those of having your own business. Also, investing in property tends to be less liquid than stocks, requiring a longer time period invested to earn the high returns
In summary, the 4 types of asset classes that you can invest in (for our purposes) are:
Stocks
Bonds
Cash
Property
There do exist others such as commodities, and specialized investments such as hedge funds, but we don’t need to delve into those to achieve our main objective of achieving financial independence. They’re just “nice to know”, not must know like the others.
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