Monday, May 19, 2008

Part 1: Oil and gas investments vs. real estate investments

First article in a series on comparing oil and gas investments to real estate investments:
This is the first in a series of articles to come based on my own experiences with investments in oil and gas verses real estate (you can read the next article here). These articles are not meant to be comprehensive or definitive on all of the benefits and pitfalls of either. My intent is to provide a comparison of both investment vehicles from the point of view of any accredited investor who does not have a lot of time to manage investments. It is not meant for very sophisticated investors in real estate who have mastered the art of always buying positive income properties. That would be the subject of another article.

Considering the risks and rewards of both:
I have invested in many real estate and oil and gas drilling projects for several years. Both have their good and bad points. Both involve risks and both have the potential for huge rewards. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. In this light, this series of articles are biased on the side of oil and gas drilling investments over real estate for several reasons.

Considering the time commitment for both:
Oil and gas drilling ventures only require up front investigation to find the right project with the risk to reward ratio that fits your investment strategy. Do your homework up front and invested with an oil/gas project that minimizes risks (use of latest seismic technology, highly experienced oil producer and drilling rig operator, use of latest drilling technology like horizontal drilling far into the pay-zone, etc.) while maximizing returns (consider projects that project return of investment in 6 to 18 months for the risks involved). Once a well is chosen and invested in, your time commitment drops nearly to none. The oil producer then takes over and does all the work to hopefully get you a productive well that regularly sends you a check every month. Your only time commitment is depositing the check (if not done electronically from the producer) and entering the project’s K-1 tax information into your tax returns yearly.

With real estate, you can never fully let go of the investment. Renters call for repairs: plugged up sewage lines, leaks, carpet wear, broken appliances, and many other things. Even with a property manager, they require approval for repairs over a set limit and will ask you to send a check immediately to cover the repairs. You always have to be near a phone where they can reach you for those large unexpected repairs. Also, you are at the mercy of the renter who may vandalize the apartment when leaving.

Considering liability exposure for both:
You have very little to no liability exposure with a properly structured oil or gas drilling investment. Look for the oil developer or operator to carry liability insurance for the drilling project. Liability exposure is mostly a factor during the drilling of the well. Once the well is completed and put online, there is no real ongoing liability risk. The resulting oil or gas makes its way to the refinery in one of several methods – trucks, train, barge/boat, or pipeline. The owners of these methods should carry liability insurance that insulates you from exposure. Therefore, at no time with properly structured oil or gas investments do you need to carry liability insurance unless you are drilling the well.

For real estate, there is always a liability exposure to the owner. Renters can get hurt in any number of ways by any number of things. Injury can come from appliances exploding or catching fire, other causes of fire, violent incidents, accidental injury on the property, damage to vehicle, drug or gang problems, etc. Many things can be mitigated, but there is always some level of liability exposure for the owner that requires ongoing insurance. Also, the insurance may or may not cover all damages from a large law suit such as the death of a tenant blamed on something you did do or something you did not do, but should have. Lawyers love landlords who have not properly protected their assets before tenants are injured.

Next article in the series:
The next article will continue these comparisons

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

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