The decision to invest in real estate or stocks is a personal choice that depends on several factors like financial condition, requirements, and your preference of investment style. Both real estate and mutual funds involve risks and opportunities, and their returns depend on the country’s economy.
Whether you are about to get into your first job or nearing to retirement, everyone needs an investment plan in place as per their budgets and requirements. People invest in stocks as it takes less time to make money. Real Estate investment is attractive for some as its benefits are diversified.
Mutual funds and real estate are good investment choices, but with the difference that real estate is an investment that can be used for personal purposes.
For an investor interested in diversifying portfolio, real estate investment is a good choice because of the long-term potential returns. For instance, owning affordable land for sale in Oregon will give you good returns as it is raw land and its value will appreciate over the period.
However, mutual funds are for those who want easy investment and quick withdrawal of their investments.
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Deciding Between the Mutual Funds and Real Estate
Mind it! Before getting into investments you must be clear with your objectives. This is because if you know why and where you are investing money, it will be easier for you to select the type of investment.
Given below are a few parameters to help you learn about mutual funds and real estate investments and assist you to select the best between the two.
Amount of Investment
The most important deciding factor when investing is the amount of money required. Mutual funds do not require a large amount of money, whereas you will need to spend more money on real estate.
Mutual funds give you the benefit of investing small amounts of money as per your financial stability and then increasing the amount as per your convenience. Real estate requires you to have the whole amount at one go when buying the property.
Individuals who want to buy a small piece of land also need to invest a huge sum of money, whereas you can kick start the mutual fund investment with little amount.
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People may have lots of assets; however, they are worthless if these cannot be used in time of need. Mutual funds’ investments are highly liquid. This means they allow you to liquidate your money; you can sell them in the online market whenever you have fund requirements. Funds would be available to your back-account maximum within two to three business days.
However, liquidation of real estate is a time-consuming process as you will not find a buyer for the property immediately. Moreover, individuals may have to sell their property at lower rates during any financial emergency.
A significant feature an individual looks out for in real estate before investing is its consistency. Though these real estate investments improve in due course, their value may also fluctuate depending on diverse factors like the development of the nearby area and easy accessibility. The value may go up initially during the development of the project. However, it may reduce with time given the difficulties like increased traffic and pollution.
On the contrary, mutual funds show better consistency and provide inflation-beating returns. Even though mutual funds also come at a risk, they can be handled by investing in moderate-risk funds like a hybrid or debt funds that offer consistent returns.
Stock market investments give a maximum output when paired with benefits that enhance our returns, such as the company matching in a 401(K). Here the employer contributes a certain amount of money to your retirement savings plan based on the total amount of your contribution. However, these dividends are not always available, and there is a limit to the benefits arising from them.
The contributing factors that affect the returns of investment on real estate and the stock market are distinct. However, both mutual funds and real estate investments can have a setback during economic recessions. But in the long term returns of real estate investment can prove more fruitful.
Investment properties can earn tax breaks by writing off wear and tear on the property and depreciation. If you sell your stocks, it may result in capital gains making your tax burden much heavier. Your holdings may not grow if you do not invest more money.
Real estate capital gains can be put off if an individual purchased another property after the sale of the previous one, called a 1031 exchange in the tax code. 1031 exchange is a provision made by the Internal Revenue Code 9IRS that allows the owners of investment properties to delay federal taxes on a few real estate exchanges.
The Banking crisis of 2008, combined with that of the housing bubble (Housing bubble is when the prices of the houses increase due to demand, assumptions, and exorbitant spending), are some fatal risks to the real estate industry that occurred in the past. Such risks start with the increased demand in the face of limited supply and people investing their hard-earned money in the markets, further increasing the demand.
At a later point, the demand stagnates, leading to price fall and the bubble bursting. Real estate requires lots of study before investment, and it is an asset that cannot be cashed quickly. There are risks in handling the repairs of a rental property and the tenants.
The stock market fluctuates and is subject to market and economic risks. Company stocks are volatile and suffer due to economic and political troubles. Stocks are dependent on the tax revisions, monetary policies, and changes in the interest rates set by the country’s Central bank. Investors may miss out on high-growth investments if they depend on only high return dividends.
The initial capital required to buy a property is more than investing in the stock market. However, investing $25,000 in securities will buy you $25,000 in value if you do not use the margin (Borrowed money from the broker to purchase an investment is the difference between the loan amount and the investment value). In real estate, the same amount of investment could fetch an investor $125,000 with a tax-deductible interest and mortgage.
Investors wanting to invest in stocks and real estate have to deal with their related risks and rewards. Stock market investments are more attractive as it is a medium of retirement investment for people who regularly contribute to a tax account, such as 401(K) or an Individual retirement account.
IRA is a retirement savings account with tax benefits. However, an investor interested in investing both in the stock market and properties without having to worry about managing them can opt for REIT properties.