Sunday, June 15, 2008

Part 5: Oil and gas investments vs. real estate investments

Fifth article in a series on comparing oil and gas investments to real estate investments:
This is the fifth and final 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.

Summary of comparisons between real estate and oil and gas investments:

Time commitment:

  • Up front time before investing - Both require considerable time up front to chose the right investment that fits within your investing strategy/goals.

  • Ongoing time after investment is made – Most oil and gas investments only require time to deposit checks periodically and to extract info from the K-1 tax form yearly. Real estate, on the other hand, requires time for continuous monitoring of - market conditions; monthly expenses for repairs, rent ads, upgrades; regulation/code compliance; liability exposure/insurance; currency of property tax payments; unplanned events/expenses; crime/violence issues/vandalism; and others. Some of these can be passed to a property manager at a cost, but even they will need your permission and time to deal with many of these issues.


  • Once an investment is made in a oil and gas venture, the investor sits back and waits for income and K-1 forms.

  • Real estate investments require monitoring many issues on an ongoing basis.

Income hedge against inflation:

  • Income from producing oil/gas wells will go up as the price of oil/gas goes up until the well starts to lose production over time. The investor should have continued diversifying through tiered investment in additional wells to maximize ongoing revenues over time.

  • Income from income property will follow market conditions. When markets are tight, income rises fastest. In down markets, there is more competition and income tends to flatten or even decline. Diversification over different types of income properties can help alleviate this issue. Good real estate investors will plan their portfolio to balance each other under different market conditions.

Tax related benefits:

  • Direct invested funds in most domestic oil and gas drilling ventures are 100% deductible dollar per dollar against all income types (passive, active, portfolio, capital gain, and up to 40% of AMT income). Typically 70-90% can be deducted the 1st year for intangible drilling costs with the remaining intangible costs deducted over seven years. In addition, the first 15-23% of yearly income is tax free due to the depletion allowance (similar to how depreciation works for real property).

  • For real estate, expenses are deductible. An income related tax benefit to the investor is the depreciation allowance on buildings usually over 27 years.

Liability exposure:

  • Oil and gas drilling ventures have the highest liability exposure during the drilling of a well. However, this liability is usually contractually the responsibility of the driller to cover with insurance. Therefore, the investor in a partnership have very little to no exposure. The only other period of liability is during transportation of the oil/gas, which again is usually the responsibility of the transporting company to cover.

  • Real estate investors have full liability exposure at all times to fire, earthquake, tornado, and other mother nature events; vandalism; theft; crime events when someone is injured or killed; other injury or death due to issues with your property; and other exposures. Owners must maintain good insurance that specifically covers all events that could happen including the ones mentioned here. There are ways of structuring the real estate investor’s portfolio to limit liability exposure through asset protection methods. However, there is usually still some potential for financial exposure that, at a minimum, could involve legal fees to defend.

Use of debt/leverage:

  • Oil and gas investors usually use risk capital for investing and do not borrow funds for this purpose. Therefore, they tend to build cash flow very quickly from good wells that provides funds to continue investing in additional wells. When done right over time with the right investment strategy, this can result in significant increasing cash flow through reinvestment while maintaining no debt exposure.

  • Real estate investments usually involve some level of debt for leverage. One of the benefits of real estate has been the use of leverage (“other people’s money”) to multiply the returns on the investors invested funds. When done right over time, real estate investors are able to greatly increase their wealth. However, there is usually some level of exposure to issues related to debt. Investors may have a strategy to eventually sell some of their portfolio of properties to pay off all debts on the remaining properties. This would result in a debt free cash flow income that hopefully increases over time as rents increase.

Final thoughts:
As we end this series comparing oil and gas drilling investments to real estate investments, I wish to reiterate that the intention of these articles is not to say real estate investing is inferior to oil and gas drilling investing. In fact, they complement each other very well as components of a total investment portfolio for high net individuals, investment trusts, institutional investors, investment partnerships, corporate investors, and other investment related entities. Each of these needs to consider their respective investing strategy/goals to determine what percentage of risk capital to put into real estate and/or oil and gas investments. What you don’t want to do is blindly go into any investment without a plan, strategy, and goal to guide the daily decisions that will lead you to those associated targets. Taking the first step is always the hardest. Methodically taking each additional step forward will hopefully lead you on the right path toward continued success.

Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address Also, email us if you have any other thoughts or questions for us to answer. Thank you.

- - - - - - - - - -

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

No comments:

/* Start Google Analytics Code ----------------------------------------------- */ /* End Google Analytics Code ----------------------------------------------- */