Part 2: Oil and gas investments vs. real estate investments

Second article in a series on comparing oil and gas investments to real estate investments:
This is the second in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here and next article here.

Considering the risks of investing (part 2):
Investing in oil and gas drilling ventures usually involves available risk capital whereas investing in real estate usually involves significant debt. Both investments involve risk. 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. The level of risk can be mitigated by conducting research to ensure investment in those oil and gas projects or real estate projects that have the optimal risk to reward ratio that fits your investment strategy.

Building wealth on cash verses debt:
Building wealth in Oil and gas drilling ventures involves the risk of investing in bad wells that don’t pay out. However, you don’t have the risk of large debt that real estate investments carry (unless you pay mostly cash for the property). As stated earlier, you can mitigate the potential of a bad oil/gas well by investing with oil producers with strong track records (read our previous article “Conducting due diligence before investing in an oil or gas project”). Also, watch for red flags when considering oil and gas investments (see our previous article “What to watch out for when considering specific oil and gas investment opportunities”).

Once you find an oil producer who consistently produces oil/gas wells that pay good revenues to invested funds with an acceptable number of bad wells, you can continue reinvesting revenues in new wells. Over time, as you reinvest in new wells, you will be building an increasing income stream with significant tax free revenue and significant tax deductions of all invested funds against all income (no other investment vehicle gives the tax advantages of domestic oil and gas drilling ventures). Your wealth will be built on cash with no debt, no worries about managing real estate, and no time commitment other than considering each oil/gas well presented before deciding on the ones to invest in.

With real estate, you can make a lot of money quickly by buying the right investment at the right price with the right leverage. However, as stated above, most real estate investments involve significant debt. This debt usually must be paid very soon after taking possession of the property meaning it must be in income producing condition with a renter very soon to cover the debt payments. Seasoned real estate investors spend a lot of time evaluating potential properties before deciding on the one to invest in. Once the property is decided, the optimal amount of down payment must be determined to bring the periodic debt payments down to a level acceptable against the expected income. The buyer must also consider the other costs against the property such as property taxes, maintenance, upgrades, management fees, liability insurance, hazard insurance, renter incentives, and other costs. A seasoned real estate investor will not buy a property that is not able to get the rental income needed to cover all of these costs. Many novice investors get stuck with properties that are negative since they may not have considered all of these expenses required to keep a property in rentable condition. If done right, real estate is very profitable.

The most successful real estate investors build a portfolio of positive income producing properties that generate income needed to invest in other properties. When the leveraging of debt works in their favor, they care able to turn relatively small amounts of cash into significant wealth in time. However, not many will pay off all of their debts. Therefore, there is always the risk of debt that comes with wealth from real estate.

My personal preference toward domestic oil and gas ventures:
Personally, I like building wealth without debt through being selective about oil and gas drilling ventures that minimize the risk while maximizing the potential return on investment. I will not invest in a oil/gas project that does not have a significant probability of returning my full investment within one year. I also like the much stronger tax advantages of domestic oil and gas drilling ventures over real estate. Building wealth based on cash means less stress, and it provides extra income to consider other investments that may initially start negative before they also become positive.

Next article in this 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 MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. 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