Investment Basics

Investing in Real Estate vs Alternative Investment Vehicles

Real estate investing vs alternative investment vehicles

The goal of investing is to make money. People invest for a variety of reasons. Some do it for a living while others invest to put money away for their retirement. Everyone has a unique situation with unique goals. The important thing is that you have a financial investment strategy that helps you reach your goals. 

Real estate has become a popular investment vehicle to help build wealth in the long run while generating cash flow along the way. 

In this article, we will show you how investing in real estate compares to investing in alternative investment vehicles like stocks, collectibles, currencies, and more. 

What are the Different Types of Investment Vehicles? 

There are many different fields and vehicles investors can use to make money. Every investor has their own niche that they focus on and understand. Some investors choose real estate while some make money by using alternative investments. The stock market is one of the most common ways to invest money. Most people build their retirement in the stock market by enrolling in a 401(k)s or Individual Retirement Accounts (IRAs), which can be used for real estate investments. 

Some investors use art and collectibles to build their wealth. You can invest in gold, currencies, crypto, NFTs, there are a ton of different ways to make money. Some are more volatile than others. 

Alternative Investments 

  • Stocks & Bonds
  • Gold 
  • Art & Collectibles 
  • Currencies 
  • Businesses 
real estate investing vs stock market investing

How Has Real Estate Performed Compared Stocks Past & Present?

Investors have argued which is a smarter investment real estate or the stock market for decades. Many people claim that the stock market returns 7% annually and the real estate market barely hedges inflation. 

Yes the stock market historically offers 7% return on investment but that doesn’t mean every year you are gaining that 7% return. In 2020, the stock market plummeted, do you think investors made 7% return that year? I doubt it. Some years the stock market outperforms 7% by a significant amount and some it doesn’t. The same goes for real estate. 

The difference between real estate and the stock market is the cash flow. Rental properties put cash in the owners pocket each month while stocks only put cash in owners pocket when they are sold. 

But let’s entertain the argument and look at the numbers. Over the past 10 years real estate has outperformed the S&P 500. Over the past 5 years, the S&P 500 have returned 23% more than the Vanguard Real Estate ETF. In the past year, the Vanguard Real Estate ETF has outperformed the S&P 500 by 4%.

Both are great ways to invest money with solid and consistent returns if invested responsibly. To each their own, but as Yieldi we prefer asset based investments like real estate. 

Reasons to invest in real estate

What Makes Real Estate a Great Investment?

Investors have used real estate to diversify and grow their portfolio because of the benefits real estate investing offers.

Tax Advantages 

Tax laws favor real estate investors. There are a ton of tax deductions for rental property owners including property tax, property insurance, mortgage interest, repairs, and maintenance and upkeep. You can even depreciate your rental properties over time to combat inflation. 

Leverage with others People Money

One of the greatest parts of investing in real estate is that you can use other people’s money to do so. With real estate, you can purchase a $500,000 asset with only 20% of the funds. You can’t do that in the stock market. You need to completely fund your investments in the stocks. 

Less Volatility 

Real estate is a physical asset which makes it less volatile than stocks. Yes, the housing market can crash and the value of your home can decrease but you still have a physical asset that holds value and can still generate cash flow. The Vanguard Real Estate ETF is an index made up of commercial properties and is used to gauge the state of the housing market. The S&P 500 is 3 times more volatile than the Vanguard Real Estate ETF. 

More control 

Owning a real estate property gives you much more control over your investment than stocks. You can make changes and improvements to your property to help increase the value of your investments. Another plus, as we mentioned earlier, all of the improvements and upgrades you make are tax deductible. 

What are the Risks of Investing in Real Estate? 

Without risk there is no reward. Although real estate may be less risky than alternative investment vehicles there are still some risks investors need to be aware of. 

  • Bad locations: the community and comps to your property have a huge impact on its value. 
  • Maintenance and upkeep: some homes come with underlying issues that could be expensive.
  • Potential vacancies: vacancies can be 1 month to multiple months costing property owners to pay out of pocket. 
  • Poor tenants: tenants who don’t pay on time or take care of your property can be a hassle. 
  • Lack of liquidity: selling is a long process. If you need cash you can’t sell and liquidate the funds easily. 
  • Structural risk: your property depends on the foundation to hold up. Structural damage can cost real estate investors. 
Real estate investing risks

What are the Risks of Investing in Alternative Investments?

If you are going to invest in alternative investments then you should know the risks of investing in each type of vehicle. 

Risks of Investing in Stocks 

  • Equity risk 
  • Volatility 
  • Timing of the market 
  • Capital gains tax 
  • Corporate misgovernance
  • Trading suspension 

Risks of investing in art & collectibles 

  • High costs and fees 
  • Risk of asset being destroyed 
  • No income until sold 
  • Capital gains tax of 28%
  • Condition directly correlates with price
  • Difficult to compare comps

Risks of investing in currencies like cash, bitcoin, etc. 

  • Inflation risk 
  • Price correlation 
  • Timing of the market

Get Help from a Financial Professional 

Deciding where to invest your money can be an overwhelming process. It’s a huge decision that will impact the rest of your life. Don’t make the decision on your own, get a second opinion. At Yieldi, our financial experts will sit down with you, discover your goals, and help you build an investment strategy step by step to help you reach your goals. 

Contact our team today to schedule an appointment!