When one thinks about investing their wealth, their main aims might differ. Most of the time, investing money is all about earning more income in the long run. It’s also about not letting one’s earnings sit idle since inflation will soon rescue the amount of wealth you have. This is why investment in the stock market or some real estate is a good idea.
There might be several other reasons why people want to invest. But right now, we’re discussing one of the main considerations before investing: should you go for investing in real estate property or mutual funds stocks?
After all, there have been success stories for both real estate and mutual funds. On the other hand, investing in either of the two does have its risks and limitations. If you want to choose the right kind of investment but aren’t sure what that is, you’ve come to the right place. Making this decision requires a bit of time and thought; a lot of factors about stocks, the stock market, and real estate are important.
Real Estate Investment vs. Mutual Funds
Before we delve into the matter of choosing one or the other, let’s have a look at what investing in real estate or mutual funds entails. First, we’ll glance at the basics of both choices:
What is Mutual Fund Investing?
With an investment in mutual funds, your money is essentially going into stocks and bonds. One can diversify their investments by having an investment portfolio containing several stocks from various sources. A professional mutual fund manager will be making the major decisions about the stocks.
If an investor thinks that they can tolerate high risks, they might be able to go for buying mutual funds or stocks that have potentially high returns.
For risk-averse investors, it’s probably best to make stable and low-risk choices. One mutual fund might not be like the other, but research will show us several options with low costs and a lucrative history.
What is Real Estate Investing?
The most common and basic kind of real estate investment is buying your own home. If all goes well, the value of the property will appreciate over time. Even if that doesn’t happen, you have your own real estate to live at the very least.
When you want to invest in real estate, however, keep in mind that income property requires some more effort. You have to deal with the mortgage costs, upfront expenses, along with maintenance, repairs, insurance, and taxes. The hassle is the main cost of having a rental property, but you do get a somewhat steady income from it.
With a rental property, though, there’s also the risk of vacancies, deadbeat tenants, and late payments to consider. Make sure to do the math beforehand and see if the real estate investment will pay off at the end. Of course, a mobile home is a good investment as well, so keep all aspects of real estate in mind.
Factors to Consider When Deciding Between Real Estate Investment or Mutual Funds
If you’ve narrowed your choices down to these two aspects of investing, here are some factors to consider before taking the plunge. Hopefully, pondering upon these will make your decision easier and help in achieving your goals:
1. Market Uncertainty
All kinds of markets have ebbs and flows, and the stock market is no different. Some investors might be looking to just earn a bit on their money and eventually cash in after a few years. If that’s the case, they’d be better off going for a stable mutual fund.
This kind of mutual fund will probably have a lower potential for growth and returns. However, it will also have investments in stocks that aren’t too volatile or risky. Even if an investor ends up losing money on such mutual funds or stocks, they can still sell them off fairly easily and get a major chunk of their investment back.
On the other hand, it’s important to remember that investing in real estate is a long term commitment. Even if you do want to sell a bit of property, the process can take several years no matter how low your price is.
2. The Responsibility of a Landlord
Tenants of a rental property might think that their landlord is being too tough on them. We’ve all seen movies or other aspects of pop culture where a cruel, heartless landlord just won’t budge on the rent! When you’re actually a landlord in the modern world, however, the reality of this position will soon become apparent.
First of all, it’s not like landlords just collect a lot of rent and rest easy in their wealth. In reality, they have to deal with a lot of responsibilities and risks. They have to find decent tenants for their properties; if they can’t, the place will sit vacant and simply eat up money in maintenance, repairs, and taxes without giving any return. Stocks, on the other hand, won’t make you lose money if you don’t buy them.
Even after finding tenants, a landlord will probably have to be responsible for all sorts of maintenance and upgrading issues. Even if you’re a commercial landlord and relegate such issues to tenants, the fact remains that you have to maintain the building as a whole. With stocks, you don’t need such maintenance.
When considering the stock market, in comparison to this landlord hassle, this choice might be better for your stress levels. Sure, investing heavily in stocks is not without risks, but at least you won’t be responsible for settling tenant disputes, shoveling sidewalks, or calling up exterminators for a persistent bedbug problem. Needless to say, having stocks in your portfolio won’t contribute to such issues.
3. Why Are We Investing?
Before taking the leap with real estate or mutual fund stocks, one should be sure about their end goals with investing. The three main reasons why you might invest in real estate are staying, renting, or holding on for increased value. Below, we’ll be glancing at each reason:
Getting a house for staying
If someone is purchasing real estate to stay in for themselves, some might say that it’s not really a direct investment. However, it is a way of keeping one’s assets safe until a time comes when they need it. Still, the house you live in isn’t technically part of your net worth.
A rental property can be commercial or residential, but the idea is to lease it out to tenants and earn the rent.
Some investors go for real estate in the hopes that the property value will appreciate, so they’d be able to sell for a tidy profit. Flipping houses is a common example of this, but it usually involves the investor fixing up the place and thereby increasing its value before selling it to the highest bidder.
Investing in mutual funds or stocks
One of the main reasons why investors go for mutual funds stocks is the easy liquidity. We’ll discuss this in more detail further on. For now, it’s sufficient to say that in case of an emergency, it’s always best to have some stocks to cash in.
4. The Leverage Factor
When someone purchases a mutual fund, they get around $1 of the find for every $1 they invest. In comparison, buying real estate allows one to leverage their investment. Investing a dollar in real estate means that you get around $5 worth of that property.
This occurs because you’re usually only paying 20 percent of the price as a down payment, while the rest is covered by a mortgage. In a nutshell, this means that the expected return will be more than twice what you invested in the first place.
Even if you go for manufactured housing and turn that into a rental property, the returns will be quite a bit higher than the low return on most stable mutual funds. In short, if you can afford to have your investment tied up in the long term, real estate is the place to be.
5. The Liability Factor
Many of us might have heard some interesting stories of a person tripping, falling, or getting insured on someone else’s property and suing them. The reasoning behind the case might be that the property owner should have cleaned up an oil spill better, or pruned the trees before they dropped branches. If the alleged victim wins the case, however, the property owner will have to pay the damages.
While the returns on a real estate investment might seem very attractive, there’s no doubt that the risk of getting sued is an additional hassle. Several other things could also go wrong, which ultimately eats into your profits.
On the other hand, a mutual fund probably isn’t going to make you liable for any damage. No one will trip over it, get injured by it, or demand that you make expensive upgrades for the sake of the tenants. Overall, the relative peace of mind that you get with mutual funds or stocks is pretty valuable as well.
6. Price Discovery
When investing in real estate, it’s essential to recall that there’s no index here. Prices aren’t listed where everyone can see them. This means that a real estate investor wouldn’t know how much their property can bring them tomorrow, and what it might have brightened them yesterday.
We might estimate the value of our real estate but there’s no way of knowing for sure. For some investors, this might not be a very comfortable position in the long term.
Mutual funds, however, disclose their NAVs (Net Asset Values) on a daily basis. This means that such investors can check on their portfolio and see how it’s doing every single day. They can then make their financial plans for the near future with more certainty.
With a mutual fund, investors get the advantage of compounding their investments. This means that they get their returns every single day, no matter how small.
Of course, if you want compounding to significantly impact the investment portfolio, it’s best to let it be for the long term. For real estate, however, there’s no compounding.
8. The Convenience Factor
We’ve already covered the fact that managing real estate is both expensive and inconvenient. It’s true that managing a few mutual funds isn’t too stressful. You invest, check the returns and updates on occasion, and collect the income.
Another factor about buying mutual funds is that one can conveniently do so online. You can also sell it with just a couple of clicks if the need arises.
On the other side, buying real estate means a long process of registration, finding proper tenants, handling litigations, spending on upkeep, staging, and other aspects. This is certainly an inconvenience, but certain investors may like the struggle for the sake of a lucrative return.
9. The Mobility Factor
Finally, we have to look at the mobility of our investment. The world is a global village now, and we don’t know where life might take us. Our family, our children, or their children might move to a whole new area at any time. When you invest in real estate, however, you can’t take it along to different cities or countries.
Since mobility is an essential factor for many of us, it might have us choosing mutual funds instead. After all, many folks have to change places due to job transfers, expanding businesses, etc. If you think that’s a risk for the future, it’s best to keep things light by going for mutual funds.
Overall, it seems like if an investor wants to take advantage of the real estate market boom, they’d probably be going for that option. For those who don’t want the hassle of dealing with tenants and maintaining their rental property all the time, mutual funds are a way to stay out of all this. Of course, there are options that give you the best aspects of each choice. A mutual fund company might have real estate funds among other types. There are also real estate investment trusts (REITs for short) where a company invests in real estate and sells out the resulting shares.
At the end of the day, choosing your investment plan is a complex job. If there’s a lot of money on the line, you’d be best off consulting a professional about these matters. Make sure to brush up on your knowledge of all the choices beforehand, and you’ll hopefully march forward with a strong investment plan soon!
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