Real Estate Vs Mutual Fund-Which is a Better Investment Option?
CHAITALI CHAUDHURI
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Real estate vs mutual fund has recently become a raging debate. The former has been a strong investment opportunity for investors. Besides, it has become one of the most popular investment vehicles in the last half-decade. The growth has been fuelled by the fact there is no profit cap to how much one can earn from it. However, Mutual funds are becoming more and more popular among investors because of the facilities they provide. Nevertheless, when it comes to investing money Real Estate or Mutual Fund is always a subject of concern. If you are investing in real estate to stay the story is different. However, if you are putting money to enjoy a higher return; then whether to go for mutual funds or real estate should be decided wisely.
In this article, we are going to discuss real estate or mutual funds which one is a better investment option.
The Fundamentals of Real Estate Investments:
Types of real estate investment
How to invest in real estate:
· Apply the buy and hold strategy for properties
· “Fix and flip” while selling properties
· Invest in positive cash-flow businesses
· Analyse the numbers before investing
· Capitalize on a prime location
· Always have leverage on the negotiation process
· Do not invest your own money and find investors instead
· Understand the real estate market cycle
· Sharpen your negotiation skills if you are a promoter
· Stay on a steep learning curve
· Think big but start small
Reasons to invest in real estate:
1. Cash flow:
To put in simple words, one of the greatest advantages of investing in real estate is that it can generate steady cash flow through rentals. Besides, it can cover your mortgages and tax expenses. Moreover, the flow is most likely to strengthen over time after your mortgages have been paid.
2. Tax Advantages:
Most importantly, real estate investors enjoy numerous tax advantages. These are a number of breakups and deductions which reduce their taxable income. Besides, you can take advantage of a long period of tax reduction. This is because you keep improving on your real estate investment throughout. Usually, you can deduct costs for acquiring and managing a property.
3. Appreciation:
In particular, the value of a good property in the market is bound to increase over time. Subsequently, real estate investors usually generate income from rentals, profits from property-dependent businesses, and appreciations. Besides, investors can make a profit by selling the property when its value rises. Moreover, rental rates are subjected to elevation and are another way of ensuring profitable returns.
4. Equity:
To put in simple words, equity is the difference in the market value of a property and the amount you pay for the mortgage. Most importantly, paying down your mortgage and building equity will give you leverage to invest in more properties. Besides, investing in more properties will further increase your cash flow.
5. Diversification Potential:
Undeniably, investing in real estate will diversify the portfolio of assets that you possess. Consequently, this will reduce the volatility of the portfolio and will ensure higher returns with lesser risk.
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6. Leverage:
When you use borrowed capital or mortgages on an existing property in order to acquire another one, it serves as leverage. Leverage increases a property’s potential return value. Moreover, since real estate is tangible and can act as collateral, financing is easily available for it.
7. Risk-adjusted returns:
The fact that real estate provides competitive risk-adjusted returns, serves as one of the greatest advantages of investing in real estate. These returns may vary depending on the location of the property, its asset class and how the property is managed. However, most investors aim at beating the average returns in the real estate market.
8. Inflation hedging:
Real estate’s capability of hedging inflations acts as a huge advantage of investing in it. The link between GDP growth and the demand for the property determines its inflation hedging capability. The demand created for properties increases the rental rates which in turn elevates capital values. Therefore, some of the inflationary pressure is weathered by rents and capital appreciation.
The Fundamentals of Mutual Fund Investment
Types of mutual funds investment:
1. Schemes Based on Maturity Period of
2. Based on Principal Investments
Advantages of Mutual Fund Investments:
Disadvantages of Mutual Fund Investments:
Real estate vs Mutual funds: Let’s Compare
The property or investment debate is always ongoing. In this section, we shall try to resolve the debate.
1. Returns: For real estate, the average 10-year return on real estate investment has been 10 percent. Mutual Fund returns in the last decade, the average returns varied between 12 percent to 14 percent. However, in the long term, real estate can produce better returns.
2. Liquidity: Mutual Fund investments have high liquidity. On the other hand, real estate re-selling can take over a year to find a seller. However, it will give better returns once the seller is found.
3. Investment Amount Needed: You can start a SIP in a mutual fund for Rs 500 only. However, in comparison, the financial obligation towards real estate financing is much larger. However, the return is much higher for real estate.
4. Risk: Mutual funds aim at maximizing returns by minimizing risks. The risks are higher in real estate but the returns are higher.
Wrapping up
Still wondering which is a better investment idea? To put in simple words, mutual funds and real estate have their own advantages and disadvantages. Indeed, in the long run, the returns on real estate investment are much higher. You are, however, advised to understand your requirement, purpose, and invest wisely.
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So, looking for more information on home buying tips? Keep exploring Real Estate Smart Tips.
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