Real Estate vs Bonds: Which is a Better Investment Option?

The rising inflation rate in North America and Europe has prompted specific measures from agencies like the Federal Reserve. Although interest rates have been raised by the Federal Reserve, the European Central Bank, and the Bank of England to control inflation, some still aren’t satisfied with the results.

Investors seeking to beat the inflation rate have continuously questioned whether real estate or bonds is the more viable investment choice.

Real estate is a property that includes land and the constructed buildings on that specific piece of land. Many investors diversify their portfolios by buying a property or investing with a real estate fund.

With a real estate investment, you can make money in one of two ways. First, the property’s value could increase, and you could sell at a profit. Second, you can rent the space to receive annuity payments.

Bonds are financial securities that give the holder a fixed return over a specific period. At the end of this period, the principal would be returned to the investor. Companies and governments sometimes sell bonds to investors when they face liquidity issues.

This article will highlight the pros and cons of real estate investments and bonds.

Pros of Real Estate Investments

Consistent Cash Inflow

Most investors go into real estate because of the annuity payments that come in from rent. Rent money is one of the best sources of passive income and is the key reason some people become landlords. Like real estate, you can also earn passive income from crypto.

If you buy a property in the right location, you could receive a sustainable income and still have enough left over. For instance, if you build a structure near a university, you’d be sure to make more money than the average landlord. Due to the presence of students, there’s always a high demand for rooms near colleges.

Property Appreciation

Other than the steady cash inflow in the form of rent, the land also has a high tendency to appreciate over the years. In this sense, real estate is like financial security that secures capital gains for investors.

In essence, when you buy real estate, there’s a high chance that the price of the land and its buildings will rise. Nevertheless, the probability of real estate increasing in value is not certain. That’s why you must conduct a proper real estate market analysis before purchasing the property.

Tax Benefits

A key advantage of becoming a real estate owner is the tax benefits of investing. The money received as rent is not taxable under the self-employment tax laws. The government also offers several tax breaks for insurance, legal fees, and property taxes.

Cons of Investing in Real Estate

Requires a Lot of Capital

When you want to invest in real estate, you must invest a significant amount of funds. The interest rates for real estate financing are competitive, and only the investors with the biggest funds get low-interest rates.

Usually, making a quarter of the total payment should qualify you for a favorable interest rate.

Need for a Manager

If you delve into the real estate business without knowing the details of managing rental property, you could make a loss from the investment. You have to know the prevailing rent in your location, what a lease agreement entails, how to make inspections, and so on.

If you’re new to real estate, you might have to hire a manager to handle all these aspects.

Illiquid

If you need a large sum of money quickly, you can turn to sources other than real estate. Real estate is typically viewed as a long-term investment that cannot be easily converted to cash. In the US, it takes about 55-70 days on average to sell a house.

Pros of Investing in Bonds

Interest Rate Beats Inflation Rate

If you’ve checked the government bond market trend, you’ll find that the interest rate fluctuates with the prevailing inflation rate. The higher the inflation rate, the more interest you’ll receive per period.

This means you’re certain of never getting hit with inflation when buying government bonds. This is very beneficial to investors in these times who are looking to not only hedge their funds but also watch them grow.

Stability of the Investment

If you purchase another financial security like stocks, you bear the risk of your shares reducing in value. Although the value of bonds bought from companies also bears this risk of reduction, purchasing government bonds largely eliminates this risk.

When you buy bonds from a government, there’s a very low chance that the government will default on its debt. Hence, investing in government bonds guarantees that you’ll get the original value of your bonds back.

Bonds Have Ratings

Credible agencies like Standard & Poor’s evaluate bonds by giving them specific ratings. That’s one of the reasons why investors feel safe when buying up investment bonds. However, you have to do thorough research on a bond before you invest.

Cons of Investing in Bonds

Interest Rate Could be Low

Although investors see bonds’ interest rates as attractive when inflation is high, low inflation leads to a reduced fixed income. Purchasing fixed-income securities like bonds when interest rates are low doesn’t always sit well with risk-taking investors.

Bonds Come with Restrictions

Bonds are usually treated as a long-term investment planning strategy. If you invest in them like short-term security, you could get penalized. For one, there are government bonds that you must hold for at least one year. You could also attract a penalty of some months’ interest if you redeem them before five years.

Bonds Could be Illiquid

Although this depends on the type of bond you’re buying, investment bonds could sometimes be illiquid. Selling bonds issued by the US Treasury and big firms is easy. However, smaller firms don’t offer attractive bonds and thus have reduced demand.

If you hold bonds from a smaller company, you could be left with bonds you’d find difficult to sell on the market.

Final Thoughts

Real estate has always been compared to bonds, with investors looking to make the better choice. Real estate comes with value appreciation and annuity payments as a benefit to the owner. On the other hand, bonds are more secure with less variance in payment schedules.

Real estate, however, is illiquid and capital-intensive. With bonds, you might have to deal with low-interest rates during periods of low inflation and several restrictions.

Do you prefer investing in bonds to real estate? Have you invested in any? Did you yield returns? Share your thoughts in the comments.