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Andrew Ikeda

Stock Options vs. Lease Options?

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Greetings Fellow Investors


I've been investing in the stock market for 2 years now and have totally enjoyed it.

I have yet to start in real estate investing but will in March when I return back to the US from Korea. The potential in l/o's really excites me.

Well, I was reading a book called "A Random Walk Down Wall Street" by Burton G. Malkiel and he was trashing the late night real estate gurus! I'm so happy Michael is not one of them!! :wacko: (No offense meant Michael) As you will notice, Michael is very prompt and straight with answers. He's so prompt it amazes me!!

Anyways, the author goes on to state that bank deposits are the safest way to invest. It got me to thinking how ridiculous investing in securities and banks really are. This book was informative but not very educational except in the fact that the stock market is unpredictable...so what's new, eh?

Earlier this year, I got interested in stock options and 'calls' and 'puts' and the various and complex methods used with these kinds of investments.

To me, a lease option is similar or like a 'call' option in stocks. You buy low and sell within a short period of time for a higher price..or so we plan.

The 'put' option works just the reverse in that you sell high now and then buy later when the stock drops in price/value. What I am wondering is if there is something of an equivalent with real estate investing...be it l/o's, flipping, wholesaleing, whatever? Is there a method for making or preserving cashflow or capital while real estate prices drop?

As I understand l/o's you make your money by raising rents and raising the value of the property to name a few. I'm not sure if there is a method for making money if property values go down. I'm not even sure if this is a good question. Heck, I'm not even sure if I understand what I just wrote! :lol: Anyways, just some food for thought.

Does anyone have any comments or ideas about this? Anything and everything will be greatly appreciated.

Best to everyone and have a Happy New Year!!



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Hi, Andrew. Actually, your post does make sense. In another life, or what seems like another life, I traded commodities. There, you can actually invest and profit while prices recede. You sell, or "short" the market in anticipation of a price drop, be it gold prices, soybeans, crude oil, or pork bellies. It doesn't matter. If you're short the market and prices drop, you profit.

Real estate, of course, is totally different. I don't know anyone who invests in real estate expecting prices to drop. Of course, as wise investors we are aware that prices flucuate. As wild as appreciation has been over the past few years, we can readily see a comparable price drop in the future.

Does this mean we should avoid real estate as an investment? Of course not! If your strategy is to buy and hold, then the ups and downs of the market are, for the most part, unimportant. For example, you buy a single family property to keep long term and use as a rental property. Unexpectedly, there is a price drop over the next few years of, say, ten percent. If you need to sell at that time then, yes, that affects you. But, if this property is being held as a long term investment, the cyclical patterns that may occur are buffered by your long term approach. In the meantime, your tenants are paying off your mortgage, and eventually prices will turn and appreciation will occur once again. Leaving you, the wise investor, sitting pretty.

If you should have a property under control with a sandwich lease type set up, you have even less to worry about should the local real estate market collapse. If your tenant/buyer elects not to exercise their option to purchase, and you do the same, at the end of the lease agreement you return the keys to the homeowner. You're out of the loop and the property once again becomes the homeowner's responsibility.

You, on the other hand, did make money in a declining market, didn't you? You collected option money upfront, and you collected some positive cash flow each month.

I've said it before, and I'll say it again: many times, controlling a property can be better than owning it!

Happy New Year, Andrew.

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