Is it Better to Invest in Mutual Funds or Property?
Should you invest in mutual funds or real estate? Both are great assets, but which one is better for you? Learn more...
There are so many different ways to invest your money, that it can be daunting and difficult to know where to begin. Depending on what you read, there will be different people promoting different types of investments. So, what is the best way to invest your money and make it grow? We will look at two common forms of investment. Mutual funds and property (real estate) investment. Then we can determine which one will work best for you in the long run.
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What is the difference between mutual funds and property investment?
Chances are you would have heard of both mutual funds, and property investing. But what are they, and what are their differences? Both are a form of investment where you will invest a certain amount of money and reap some form of benefit. These benefits can be through rental income or dividend returns.
Investopedia describes mutual funds as being the most popular investment vehicle for investors. A mutual fund is a pool of money collected from investors to invest in different securities and assets. These include stocks, bonds, and other money market instruments. The funds are managed by a money manager who allocate the funds in the pool. Each investor shares in the gains and losses from the funds. Returns are paid through dividends.
Property or real estate investment is something that many people know at least a bit about. In simple terms, investing in property involves the purchase of real estate. Whether it be commercial or residential. And then making money from it through strategies like rental income or fix and flip.
As can be seen, mutual funds and property investment are similar in the way that they are both investments that brig about potential long-term returns, but they are also quite different in how they operate.
What are the main benefits of mutual fund investments?
Mutual funds may be more complex than property investing, but they have many benefits. The main benefits of mutual funds are described by Investopedia as being the following:
- Portfolio management. You do not need to be an expert in finance and funds to invest in mutual funds. When you buy a mutual fund, part of what you are buying is a professional portfolio manager. This manager’s job is to do the hard work for you. The value of this expertise should not be underestimated.
- Risk reduction. Mutual fund investments use diversification – they will spread an investment anywhere from 50 to 200 different securities. Therefore, if there is a major failing in one section, it will not affect you too much.
- Liquidity. Because you are not purchasing a physical product, your investment is considered liquid. If you need to sell for whatever reason, this can be done almost instantly. You do not need to wait to wait for a buyer and negotiate costs like with physical assets. Be aware of associated fees though.
It is clear why mutual funds are so popular with American investors – they are easy and convenient and do not require a great deal of management.
What are the main benefits of property investment?
Investing in property is a quite common and popular investment strategy, and if done smartly, can bring about large rewards. Some of the main benefits of property investment are described by Investor Junkie a being the following.
- Appreciation. A well-chosen property will appreciate over time. This means that the value rises. Even small renovations can make the appreciation of a property go up a lot. While stocks can lose their value completely, there will always be at least a small amount of value in a physical property.
- Tax benefits. While it is true that there are ongoing costs associated with owning property, there are also some good tax benefits. Rental income is not subject to self-employment tax, and you can claim many expenses and costs associated with upkeep.
- Steady cash flow. If you are lucky enough to find a good, long term tenant in a rental property, then you will find yourself having a consistent and often high level of cash flow coming in. If you have a high value house in a desirable area, you can charge any tenants for the privilege of taking residence in your property.
Of course, there are costs and risks associated with real estate investment, and if you are not careful, these can outweigh these benefits. But it is clear why investors are so keen to get into the real estate boat.
What about real estate leveraging through appreciation?
One unique feature that exists in property real estate is the ability to leverage through appreciation. As a property rises in value for whatever reason, then you have leverage to use this extra value to purchase and/or increase the potential return on investment (as explained by Investor Junkie). Ways that the value could rise can include renovations or additions to the property, a booming economy or the value of an entire area rising (through new infrastructure or city planning).
You can also help the rate of appreciation by investing extra money into your property. If you were to invest 20% of the value of your house, you could have the total value of your property grow by 30%. This then gives you future leverage to use for other real estate investments. This appreciation is something that is lacking in mutual funds, mainly because there is no physical asset to speak of.
If you are wanting to invest, then choosing either mutual funds or property investment will be a good choice for long term returns. Whether mutual funds or property investing is the better choice depends on many factors, including your personal circumstance, how much you are willing to invest, and your tolerance to risk. There is no perfect investment strategy, and what works best for one person may not be best for you.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.