From student, 21: Invest in stocks or apartments?

ON MONEY

January 14, 1996|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

I'm 21 and a junior in college. Over the past three years, I've managed to save almost $10,000. I need your advice: Should I buy IBM and Merck stock or buy an apartment building?

Recently, I wrote the president of my bank and told him of my plans to buy a $100,000 apartment building with $10,000 down. The president wrote me back stating that I would need 20 percent down when buying commercial real estate in order for any bank to consider financing me. Determined as I am, I decided not to give up.

I began to think of ways I could raise the additional $10,000 to finance the building. Some options are buying IBM or Merck stock. IBM currently sells for $110 a share, while Merck is at $56 a share. I was wondering if it would be wise to buy IBM or Merck stock now and expect it to double in value by January of 2000.

Right now, I have four MasterCards with a combined credit limit of $13,000. Should I borrow $10,000 that way, or should I buy the stock now? When do you expect IBM stock to reach its historical high of $175 a share again?

I commend you for having managed to save nearly $10,000 by the tender and wonderful age of 21! Your zeal combined with good follow-through (writing directly to the president of your bank, as well as your letter to me) lead me to believe that you'll eventually achieve your goals. (Note: My favorite definition of a goal is "a dream with a deadline.")

However, I must insert a word of caution here: Look before you leap, and know what you're leaping into.

First of all, buying an apartment building is quite different from buying stocks. In fact, running an apartment building is like holding a second job. You'll need to screen prospective tenants, get credit reports, collect rents, monitor the condition of the property, take care of maintenance, repairs, taxes and insurance, and be responsible for much, much more.

Investing in stocks is simple. You simply call the broker, place the order and then monitor the investment.

But here again, there are many traps, and your letter highlights the risks. When you sent your letter to me, IBM was at $110 a share. As I write this column just two months later, the stock has dropped to $91 a share. Merck, on the other hand, is now at $64.50, up more than 15 percent.

Instead of betting your savings on one or two hunches, I would recommend you invest the money in a no-load growth mutual fund and watch it carefully. You might not double your money in four years, but you'll probably see it grow nicely.

Meantime, talk to other apartment owners, and read everything about real-estate management you can get your hands on.

And keep saving. Remember that in addition to the down payment, you'll need money for points, inspections, other closing costs, taxes and insurance.

Borrowing on credit cards might be the worst possible source for additional money. Depending on the card's balance calculation method, you could be paying well over 20 percent per year on the actual amount outstanding. So, forget that option.

As to when IBM might be back to $175 a share, the answer is perhaps in one year, five years, or maybe never. There is no way to project the future price of any stock with certainty.

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