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Alternative Investment

Real estate vs alternative investments

Investors use real estate to grow and diversify their portfolios, but there are other options as well

Investors use real estate to grow and diversify their portfolios, but there are other options as well

The main motive of investing is to generate cash. People invest for various purposes. Some do it to make a living, while others invest to save money for retirement. For those unfamiliar with investing, it can be difficult to understand. It is mandatory to understand first which would be better for you, as an investment is a big deal and investors will get their answers here so they can make decisions about where their hard-earned capital will be allocated.

Every investor has a niche that they focus on and understand. There are many different fields investors can use to make money like traditional/ alternative investments or real estate investments. The traditional/ alternative investments include stocks and bonds, gold, art and collectibles, currencies, etc., and real estate investments include all types of investments like buying and selling of residential and commercial properties, besides taking properties on a lease.

The contrast between real estate and stock market investment is the cash flow. Rental properties put cash in the proprietor’s pocket every month while stocks possibly put cash in the proprietor’s pocket when they are sold.

However, we should engage the contention and check the numbers out. Over the past 10 years, real estate has beaten the stock market. Over the past five years, the stock market has returned 23% more than real estate. In the previous year, real estate has beaten the stock market by 4%.

Both are great ways of investing money for solid and consistent ROI if invested responsibly. For a greater output, the investors prefer asset-based investments like real estate. Because of the benefits that real estate investing offers, investors use real estate to grow and diversify their portfolios.

There are advantages and disadvantages of investing in these types of real estate assets, and how to invest in them differs from traditional/ alternative investments.

1. Tax advantages: Real estate investors are highly favoured by tax laws. There are a lot of tax deductions available for real estate property owners including property tax, real estate interests, mortgage interests, repairs and maintenance, and upkeep. To combat inflation one can even depreciate their rental properties over time.

2. Leverage with other people’s money: One of the greatest parts of investing in real estate is that one can use others’ money to invest. In real estate, one can purchase an asset with only 20% of the funds, which is not possible in stock markets. For investment in stocks, one has to fully invest their funds.

3. Fewer fluctuations: Real estate investments generally don’t fluctuate with the stock markets, so they are usually not affected by market conditions. They are often considered a good way to diversify your portfolio.

4. Diversify your portfolio: Real estate investments have a low correlation to the stock markets; they help to diversify their portfolio. By investing in real estate funds one will have access to markets that one wouldn’t have had access to before.

Points to ponder

1. Bad locations: The community and the comparable properties in that area of your property have a huge impact on its value.

2. Maintenance and upkeep: Some of the properties come with underlying issues that could be expensive.

3. Potential vacancies: Vacancies over one month or more, costing property owners to pay from their pockets.

4. Structural risk: A property depends on the foundation to hold up. Structural damage can cost real estate investors.

Other risks

1. Equity risk: The market price of the stock fluctuates all the time depending on supply and demand. There is always a risk in this niche that applies to investing in shares.

2. Volatility: Higher stock price volatility often means higher risk and helps an investor to estimate the fluctuations that may happen in the future.

3. Capital gains tax: Any profit or gain arising from stock market investments is known as a capital gain. Short-term capital gain tax is taxed at a 15% rate and long-term capital gain is taxed at a 10% rate respectively.

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 decide on your own, get a second opinion.

The writer is Founder & CEO, AssetDeals.

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