With several investment modes available today like stocks, real estate, bonds etc., one can easily get overloaded with the many options available. Deciding on what investments are right for one’s personal financial growth depends on several factors. These involve things such as the capital involved, your risk tolerance, potential return dividends and such. In such a market, investing in real estate is a popular choice for people as it is a great way to increase one’s cash flows and secure retirement.
It is one of the reasons why many investors look towards purchasing that lucrative residential property in Mumbai. This is because buying a property is an ownership investment. It not only provides returns at the end of the investment period but also generates a rental income. Unlike stocks that come with more market-related risks, real estate gives you more direct control over your finances. So, read ahead as we compare real estate investing with other popular forms of investments for you.
As the success of the business magnate Warren Buffet proves it, stocks have the potential to compound your wealth over time. By investing in mutual funds, one may invest in stocks of many growing companies and generate high returns. Stock investing also gives much easier liquidity than real estate investments. However, the illiquidity of real estate can be an advantage for those who do not want to touch their capital over a long period.
A major drawback of investing in stocks is that it is subject to many market risks. Due to this volatility, the stock prices can fluctuate drastically in a given timeframe. For example – While stock prices of tech companies were booming in 1999, they saw a whooping 75% fall in the dot-com market crash of 2000-02* While real estate prices can fall too, there is usually a 10 to 20% fluctuation in its valuation. This is because people will always need a home to live.
Besides the risk, one can’t deny the excellent returns from mutual funds today which range from 14 to 19% p.a. depending on the fund.** Whereas the rate of returns from real estate range from 9 to 11% p.a on an average. However, the tax benefits are quite more substantial if one invests in real estate.
Overall – While a well-diversified mutual fund portfolio does reduce risk, real estate investments are generally considered more stable investments. One can choose between the two or even both types of investments, as per requirements.
Bonds allow the investor to provide a loan to a company or the government, which on maturity provide returns to the investor. Such corporate, municipal and government bonds have the major advantage of being low risk.
However, bonds do not offer a higher yield when compared with other investments. Moreover, their returns can also be impacted significantly by the rate of inflation. For example, if you are earning 2%, and the inflation rate is 1% – your return on investment (ROI) will be cut in half!
Real estate, on the other hand, offers much higher profits as well as inflation-adjusted returns. This is because real estate benefits more during inflation as material and building costs go up. This in turn increases the rental prices, thus providing incredible profit to investors!
While investing in gold certainly does provide returns, the investor needs to wait for the value of gold to rise to sell it at a profit. Whereas investing in real estate allows you to reap revenue in the form of rent even while you wait for the property price to appreciate. One must also remember that the price of gold changes each day, and the real estate market experiences low volatility in comparison.
Purchasing gold is a good option for diversifying investments, as and when one has small capital to invest. However, real estate investing is ideally the main focus of many as it provides a higher cash flow and a much more stable market.
Real Estate Investment Trusts (REIT)
Real Estate Investment Trusts (REIT) are companies, which invest in revenue-generating real estates such as residential properties, commercial premises and shopping complexes. Investing in a REIT allows investors to purchase shares in real estate companies and beget returns averaging 7% p.a.***
However, these investments offer lesser dividends than owning a piece of real estate. This is because owning a property allows one to play a more active role in managing the business and choosing the market to operate in. It benefits your income directly, and provides a much higher yield.
At Ashwin Sheth Group, we’ve shown you how real estate investing can bring a lot of benefits to your financial portfolio, and increase your wealth in the long run. Do bear in mind that these comparisons are made to help you weigh all your investment options as well as help you decide how you can make real estate investments work for you in such a competitive market.