SURE, It's Easier To Buy Mutual Fund Shares. But Where's The Fun In That?
Carefully selected, appropriately maintained and properly managed rental properties can provide three things all investors look for: 1) income, 2) capital appreciation, and 3) tax advantages. In fact, in more ways than you may realize, real estate investing mirrors investing in stocks and bonds.
For both, your goals are short-term income and longer-term capital gains. When you invest in real estate, your short-term income comes from rent, instead of from quarterly dividends or interest payments. And your capital gains come from the price of the property you own going up, rather than stock price growth.
That is not to say there aren’t big differences. (And that’s not to say that your portfolio should include only stock market assets or only real estate. Research shows that varied portfolios are much better over time.) Stock market investing is often much more passive. It may also be less time and research intensive than real estate investing.
I have found, however, that taking a more
active investing approach reaps higher rewards. For me, it’s just more
satisfying to own tangible properties than shares of stock that show up as
numbers on a monthly statement.
There are some compelling reasons to add real
estate to your investment portfolio. Among them:
·
Portfolio diversification. Publicly traded stocks, mutual funds
and bonds have a place in every investment portfolio. Most investors also find
it beneficial to diversify into alternatives that are not publicly traded to
achieve optimal asset allocation. Real estate is a common investment asset in
Self-Directed IRAs, largely because most people have a basic understanding and
familiarity with real estate.
·
Comfortability of investing in what you know. You might be very
comfortable with real estate investments, for example, because you understand
them better than stock investments.
·
Ability to select specific investments. Owning the
single-family residential home across town might be more attractive to you than
owning a small percentage of many unseen properties in a Real Estate Investment
Trust (REIT), for example.
·
Higher gains potential. While many alternative investments carry higher risk (much
of which can be mitigated when you know what you’re doing), the upside is the
potential for higher returns than the stock market — much higher, in many
cases. In my opinion and personal experience, carefully selected and managed
real estate properties carry less risk than many stock market investments.
·
Less exposure to stock market volatility. Many alternative
investments are not directly correlated to the stock market and can go the
opposite way when the stock market fluctuates.
·
Desire for tangible collateral. There’s a big difference between owning
shares of a mutual fund that invests in REITS and owning physical properties. Real
estate is a tangible investment which appeals to many investors. I don’t get
excited about my quarterly mutual fund statement, but I do get great
satisfaction from my real estate holdings.
Real estate provides an easy-to-understand
structure for most people. If you own your primary residence, you’ve already
had experience buying real estate. Real estate is tangible, provides portfolio
diversification and protects your overall portfolio against stock market
volatility.
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