How does real estate compare with other asset classes?

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real estate vs other asset classes

One of the oldest forms of investing known to man, Real Estate investments, have been around before most of the modern stock markets had even started evolving. It is a preferred form of investing which offers regular income (rent), security and safety for the family of the property owner and is devoid of complex calculations which surround other investment options. Investment in real estate involves buying a property either for capital appreciation or monthly rental income or both.

“Buying real estate is not only the best way, the quickest way, the safest way, but the ONLY way to become wealthy” – Marshall Field, American Entrepreneur

In this article, we will look at how investing in real estate compares with other asset classes.

Real Estate vs Stocks

There has been a lot of debate on whether real estate is a better investment option as compared to stocks. While ‘one man’s food can be another’s poison’, we will refrain from making the judgment. However, here are some unique offerings of real estate which make it an attractive investment option:

  1. Inflation-matching regular income: This is for those investors who purchase a property and lease it out for rental income. When we invest in an asset with an objective of regular income, we need to ensure that this income keeps up with the rate of inflation. You need to carefully select stocks and monitor them regularly to ensure that your returns are at par with the inflation. On the other hand, the market prices for property rent automatically correct themselves with an inflation. Hence, regular income from rental property vs stocks is an aspect you must consider.
  2. Buy low – Sell high: The simple rule of making good returns is by buying an asset at a low price and selling it at a higher price. With stocks, it is nearly impossible to predict if the value of the share will increase or decrease in the future. Real Estate market is simpler to predict since property prices, invariably, rise despite slumps, if any.

Keep your investment objective, risk preference and current portfolio in mind before looking at real estate vs stocks as your next investment option. You might also want to look at the real estate vs stock market chart to get a better perspective of things.

Real Estate vs Bonds

Most investors turn to bonds to reduce the risk exposure of their portfolio. However, with market-linked instruments, the rule is simple – lower the risk, lower the returns. Most bonds offer fixed returns over the tenure of investment. This means that with time, as inflation soars, the value of the returns in hand drops. Real Estate investments can offer rental income which rises with increased living costs, thereby offering inflation-matching returns at all times. They are not very high in risk either.

If you are looking to boost the low-risk investment section of your portfolio and are contemplating between real estate vs bonds, then do consider these points before investing.

Real Estate vs Mutual Funds

Like stocks, Mutual Funds are invested in market-linked assets. This brings an inherent volatility to your investment. Further, the portfolio is managed by professional fund managers. While this sounds good on paper, you are not truly in control of your investments. They give you an option of diversifying your investments to hedge against the risk of volatility but if you fail to do it optimally then you stand a chance of over-exposure to a particular asset class.

You can invest really low amounts in Mutual Funds, whereas real estate requires you to invest a large amount. Also, Mutual Funds are more liquid than real estate (open-ended schemes).

When you are looking at real estate vs mutual fund investments, remember that these are asset classes that should make your investment portfolio balanced. Ensure that you understand both the sides of the coin and decide judiciously.

Investing in REITs vs Real Estate

A Real Estate Investment Trust (REIT) is a company that owns and usually operates income-producing real estate. These trusts own properties like homes, offices, apartments, hospitals, etc. In UAE, REITs are required to pay out 80 percent of their net annual income as dividends. By investing in REITs, you get an opportunity to benefit from a diverse pool of income-generating real estate without having to purchase the property. However, since you are a shareholder, decreasing occupancy rates and/or drop in property prices can impact your revenues.

Purchasing real estate, on the other hand, gives you direct control over the property. You can select a geographical location that you deem fit and lease the property to tenants on a regular basis. It does involve more work than investing in REITs but offers a better chance of generating good returns. Investing in REITs vs Real Estate depends on your preparedness to invest a huge amount or take a loan.

Summing up

While every asset class has its own set of advantages and disadvantages, real estate is known to be a wealth generator for centuries. While many experts believe that the right Mutual Fund Scheme or selection of stocks can achieve similar results with more liquidity, their dependency on the performance of the market makes them volatile too. Real Estate, on the other hand, is known to appreciate with time. And, the cherry on top is the rental income that increases with increasing costs. Compare real estate vs stocks, real estate vs bonds, real estate vs mutual funds and investing in REITs vs real estate well before signing on the dotted line.

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