Twenty-six percent Americans who have extra money they don’t need say that real estate is the best long-term investment for their cash. Though mortgage rates are at historic lows, does this mean that real estate is really the best way to invest your money?
Here are three reasons supporting real estate as the best investment, and three reasons supporting other investments towards which you may want to consider allocating your money.
The key to the castle
Real estate protects against inflation
Inflation may seem like a dirty word, but for real estate investors, it can actually be an advantage. While returns on assets like bonds can be undervalued due to inflation, real estate generally keeps pace with it (emphasis on “generally”). This is because home and rent values usually increase during times of inflation, matching the rate at which the value of the dollar drops. In fact, inflation can even increase the value of a real estate investment and lower the difficulty of paying back mortgage debt over time (assuming the interest rate on your mortgage is fixed).
The gift that keeps on giving
Not only is property a tangible thing to look at but renting it out will also put money in your hands every month. Renting helps you generate an ongoing income source and can be part of an overall strategy to begin building wealth. Unlike other investments that need to be cashed in, owning real estate gives you money that you can use in real time (even to pay the mortgage on the property you rent out). After this money accumulates, it can be used to buy other properties and grow your investment portfolio. Also, putting aside Covid-19, people still need homes to rent during times of economic unrest (as they may have trouble buying themselves), so your investment may even pay off in times of overall financial strain.
Holding all the cards
While the appreciation of the value of certain assets depend on external markets, real estate is what you do with it. For example, you may not know if a company you’ve invested in is about to hire a new CEO whose decisions will ultimately drive the price of their stocks down. On the other hand, you can choose where to buy your property, how much you want to renovate it, who you want to rent to, and how much to invest in the upkeep; all of which can determine how good your investment is. In other words, the ability to profit from your real estate investment lies in your hands.
Property isn’t everything
Stocks have less monetary risk
Like real estate, stocks have been shown to be good hedges against inflation. This means that their value is protected over time when the dollar becomes worth less than it was when you bought the stock. But real estate is expensive, while stocks like ETFs (exchange-traded funds) generally have very low fees. They are based on indexes, meaning a group of companies or stocks which pertains to a specific sector of the market on which the management is an expert. This can help you diversify your portfolio without investing in a bunch of individual stocks or spending a lot of money. Also, the most money you can lose with stocks is the original amount you invested, where you can lose more than the principal value of your real estate investment due to maintenance and insurance costs. Investing in stocks minimizes risk and won’t make you house-poor like real estate can.
Retire your way with an IRA
Another low-risk investment that is better than real estate is an IRA (individual retirement account). There are many investment options within the account – such as trading options or mutual funds – but you can also just put plain old money away for the future. Where real estate investments incur taxes, the assets you funnel into specific IRAs (like Roth IRAs) can grow tax-free, and your money can be withdrawn without income tax penalties. There are several kinds of IRAs available that differ based on your income level, but there is usually a suitable option for everyone. Retiring with money in an IRA is the tax-free blessing that real estate isn’t.
Invest in yourself
Instead of pouring your money into a property that ties you down, start the business you’ve always wanted to. Aside from having the freedom to choose your own hours and allocate your energy however you want, you can do something that’s both satisfying and lucrative. While starting your own business may be risky, it gives you the potential to grow revenue that far surpasses a monthly rent check. Additionally, you’ll have tax benefits as a business owner that you won’t be able to enjoy if you invest in real estate. Real estate income may feel safer, but it won’t give you the same earning potential or emotional fulfillment that starting a business can.
The Bottom Line: While offering attractive payoffs and an element of control, real estate may not be your top choice when compared to stocks, IRAs, or owning a business. Bearing this in mind, where do you want to invest your money?