“Should I put my money into property or mutual funds?” This is one of the first questions that come to every investor’s mind before they start investing.

For long-term investments, you need to do your research because there aren’t many ways to make up for losses if you don’t reach your goal. Tax and investment experts say that when investing for the long term, the first thing to look for is an option that can beat the average growth in inflation. 

This means that your investment tool should give you a return of more than 7% per year. In the last ten years, the rates of return on small savings plans backed by the government have gone down. As a result, people have started to look at other options, such as the stock market, equity mutual funds, real estate, etc.

Industry experts say that in a country like ours that is growing quickly, the mix of investments needs to be a good mix of real estate and riskier investments like mutual funds.

So, should you invest in mutual funds or real estate? This article will compare these two types of investments to help you decide which is best.

To help our investors create better decisions, let’s look at the benefits and disadvantages of mutual funds and real estate. 

How Real Estate Investment Works 

Real estate investment is a way to make money by managing, owning, buying, renting out, and/or selling property. There are many ways to make money by investing in real estate, but they all depend on the same economic factors: (1) the value of the property must go up; and (2) the costs associated with owning and maintaining the property can’t go up more than its value.

PROs Of Real Estate Investment

1. Value Growth

Well-chosen real estate usually increases in value at a rate that is much faster than the annual rate of inflation. Yes, the market changes, and sometimes people buy the wrong kind of property at the wrong time. But there’s always a chance to buy a suitable property at a discount, fix it up to make the equity go up, and then sell it for a profit.

“Buy low and sell high” is the real estate equivalent of “buy low and sell high” in the stock market. And real estate will always be worth something on its own. A stock can go to zero, but a property is a real asset with a value that comes from both the land itself and the “improvements” made to it (the building structures attached to the ground).

2. Unique Tax Benefits

Because of how taxes work with real estate, investors can build their wealth over time. Self-employed people don’t have to pay tax on rental income, and the government gives tax breaks to people who invest in real estate. Some of these are depreciation and tax rates that are much lower on long-term profits. 

Depending on how much money you make and whether you are an investor or a real estate professional, your rental property may give you more tax deductions than you need, which you can use to offset your other income. Since renting out real estate is a business, expenses like travel costs to check on your properties are tax-deductible.

3. Steady Cash Flow

Cash flow is the steady flow of money that comes in from rental properties every month. This is the extra money you have after paying all your bills. Once your property is set up, cash flow gives you a steady, mostly passive monthly income that you can use to build a business, spend time with your family, or buy more real estate.

4. Equity

When you know how to use leverage well, your tenants are buying the property for you. Your monthly rental income pays down your loan and builds equity for you. When you use a mortgage to buy a rental property, the renter pays the mortgage payment. This adds to your net worth every month. Think of it like a savings account that grows on its own, even if you don’t put money in it every month.

5. Inflation-Hedge

Investments in real estate keep up with the rate of inflation. When the price of a loaf of bread goes up, so do rents and property values. The only factor that stays the same is how much a fixed-rate mortgage payment costs each month. So, your cost of ownership doesn’t go up as your rental income increases. 

As inflation makes living costs go up, your cash flow goes up, and inflation makes the property itself worth more.

CONs Of Real Estate Investment 

1. Property Costs Money

To make money, you need money. Don’t listen to the gurus who say, “You can get rich by buying real estate with OPM (Other People’s Money).” You don’t need much money to buy shares of stock, but you do need money to invest in real estate. 

To get started, you’ll need a down payment, money for closing costs, and money to fix up and update the property so that you can rent it out for as much as possible. And once you own the property, there will be ongoing costs like property taxes, insurance, mortgage payments, and maintenance.

2. Time-Consuming

You need to take care of your real estate investments. There is a learning curve, and if you don’t know what you’re doing, you can lose a lot of money in real estate. On top of that, it can take a lot of time to actively manage your rental properties.

3. No Shortcuts

When buying real estate, you should always consider the long term. You’re buying a physical asset that you can’t quickly sell for cash if you need money in an emergency. It takes time and costs more money to sell a house than it does to sell stock shares.

4. Real Estate Issues

Tenants can give you trouble, cost you money, and waste your time in court. If you own rental properties, your cash flow can take a big hit if you rent to a tenant who doesn’t pay or leaves the property in bad shape when they move out. This factor may sound simple, but it can really cause a massive loss of money if you end up dealing with such tenants.

5. Deal-Breaker Risks

It’s important to recognize potential threats and lessen them as much as possible. The following are examples of some of the more serious dangers inherent with real estate investing:

• Costly mistakes in timing a real estate purchase
• Possibly increased legal responsibility for injuries sustained on your premises.
• Being taken advantage of by a “professional renter.”
• Overextended financially. Many would-be property owners fall victim to this trap. Monthly debt service must be affordable regardless of market fluctuations, tenant issues, property vacancies, unforeseen repairs, maintenance charges, and other operating expenses.

How Mutual Funds Investment Works 

In a nutshell, mutual funds operate by pooling money from many investors. Then, those funds are used to buy stocks, bonds, and other investments. Mutual funds invest in several different companies, so investors get instant diversification and less risk. Investors in a mutual fund share in the fund’s gains and losses.

PROs Of Investing In Mutual Funds 

1. Convenience

Mutual funds make it easy to put money away. You can keep them in several accounts, such as a retirement account set up by your employer, an individual retirement account (IRA), or a brokerage account. You’ll only have to put in a sequence for the number of shares you would like to buy and wait until the end of the day for your order to be filled.

Most of the time, you can automate this by purchasing a set number of shares on a fixed schedule, like every two weeks. To make things much easier, you may pay for your employer-sponsored retirement savings plan by having money taken out of your paycheck. This way, you don’t have to think about how your retirement account is growing.

2. Built-In Diversification

Mutual funds are less likely to lose money because they are already diversified. They put money into many different companies, so if one of them do badly or even fails, it won’t hurt them as much. So, they tend to do well without taking on too much risk.

Index funds, like FXAIX, VFINX, and VTSAX, make up some of the biggest mutual funds. These funds try to do the same thing as an index, like the S&P 500.

3. Professional Management

When you buy into a mutual fund, you don’t have to worry about buying and selling securities all the time. Instead, the manager of the fund does everything for you. If your investment strategy is automated, you won’t have to spend much time managing your portfolio.

4. Profit Reinvestment

Profits can be put back into the fund, which is another benefit of investing in mutual funds. For example, if a mutual fund gives you dividends or capital gains, you can usually put that money back into the fund without paying any fees. All of this can be done without the investor having to do anything.

CONs Of Investing In Mutual Funds 

Mutual funds have a lot of good points, but they also have some possible drawbacks. 

1. High Costs

High fees are a problem that many people who own mutual funds face today. Even though mutual funds do a lot to help their investors, fees can sometimes be too high. There are some mutual funds with expense ratios of 1% or more. 

Even though that doesn’t sound like a lot, it can cost some investors tens of thousands of dollars throughout their lives. On top of that, the broker may charge you to buy or sell the fund, and some fund companies may charge you a commission of 1 or 2% of the total investment, also called a “sales load.”

2. Uncontrollable Tax Events

When people invest in mutual funds, they don’t have to worry about buying and selling securities all the time. Most of the time, that means the average investor doesn’t have to do as much work. But if a mutual fund sells securities from its portfolio, investors may get some of the money back by the year ends. These payments are income from investments that are taxed.

Depending on how long the fund held an investment, these distributions are taxed at either ordinary income rates or capital gains rates. This means that your tax bill at the end of the year might be higher than you expected. Those who live in states with high taxes may want to pay extra attention to this issue because it can reduce your gains.

3. No Trading During The Day

Mutual funds aren’t traded as often as stocks and exchange-traded funds (ETFs). Instead, they are only traded once a day. After the market closes at 4 p.m. Eastern time, this is what happens. Even though this isn’t a big deal for investors who don’t do much, it could mean that the order price isn’t what you expect if you place orders by hand.

Key Takeaway

Both real estate and mutual funds are good ways to invest, and you need to know what your financial goal is to choose between the two. You can’t really compare the returns on these two types of investments because they depend on different things that are relative to each other. 

Since market trends seem to change all the time, comparing the returns of real estate and mutual funds is not an easy task. You can make the best investment choice if you do a lot of research on your options, know what your financial needs are, and know how long you want to wait for your money to grow.