While high mortgage rates are making it more expensive to buy a home today, many experts still consider real estate to be one of the best investment options. Despite the rise of alternative assets such as cryptocurrency, art, classic cars, and wine, real estate continues to offer stability and potential for long-term wealth building.
If you’re feeling overwhelmed by the growing number of investment opportunities, you’re not alone. Choosing the right investment depends on factors like your budget, time horizon, and risk tolerance. It’s also important to evaluate how much time you’re willing to dedicate to understanding a particular market.
For example, investing in art requires specialized knowledge, while other markets, like cryptocurrency, may require a high risk appetite. Real estate, however, offers a unique combination of stability, control, and potential for passive income.
Why Real Estate Remains a Strong Investment
Many homeowners today are sitting on significant home equity, which they can tap into using home equity loans or HELOCs to fund an investment property. Hannah Jones, senior economic research analyst at Realtor.com®, notes that while the current market presents challenges due to high prices and elevated mortgage rates, understanding the costs and potential income from an investment property is key to making a successful investment.
Here’s how real estate stacks up against other popular investment options.
Buying Real Estate
Pros:
Real estate may not grow as quickly as the stock market (S&P 500), but it has proven to be a solid investment over time. According to Realtor.com, real estate has seen an average five-year return of +26% since 1975. In the past five years alone, typical homeowners have accumulated at least $147,000 in housing wealth, according to the National Association of Realtors®.
Real estate also offers a hands-on investment approach, allowing you to influence your returns by making strategic upgrades or adjusting rental rates. Furthermore, owning property comes with significant tax benefits, such as mortgage interest and depreciation deductions.
Dan Reedy, a real estate investor, explains that real estate offers a different level of wealth-building compared to traditional investments like 401(k)s or IRAs. It’s not just about passive growth—real estate allows for wealth growth you can control.
Cons:
Real estate is less liquid than other investment types. Buying and selling property can take months or even years, and there are substantial upfront costs. Additionally, while homeowners have high equity in their properties, it’s often only accessible through home equity loans or lines of credit.
Ownership also requires a significant time commitment. As Jace Graham, CEO of Rising Phoenix Capital, explains, when you invest in real estate directly, you have full control, but you also assume all the responsibilities of ownership, including maintenance and tenant management.
Real Estate Investment Trusts (REITs)
Pros:
If you don’t have enough funds for a down payment or don’t want to deal with property management, Real Estate Investment Trusts (REITs) provide an excellent alternative. REITs allow you to buy shares in a company that owns or operates a portfolio of real estate properties. REITs are traded like stocks, making them more liquid than direct real estate investments.
REITs also offer the benefit of steady income, as they are required by the IRS to pay out at least 90% of their taxable income as dividends to shareholders.
Cons:
While REITs provide an easy way to invest in real estate without the management hassle, they are taxed as regular income, and they don’t offer the same level of control over your investment as owning property directly.
Cryptocurrency
Pros:
Cryptocurrency has seen dramatic price increases over the years, with Bitcoin soaring from less than a dollar in 2009 to over $88,000 today. Early investors in cryptocurrencies have made substantial profits.
Cons:
However, cryptocurrency is highly volatile, and investing in it carries significant risk. Cryptocurrencies are subject to speculation and frequent bubbles, making them a more suitable investment for those with a high risk tolerance. As Harry Turner, founder of Sovereign Investor, points out, unlike real estate, cryptocurrency markets are much harder to predict and can experience sharp downturns.
Gold
Pros:
Gold has long been considered a safe haven asset. It’s stable and can hedge against market volatility. After the 2008 financial crisis, gold saw a dramatic rise in value, increasing by over 30% in 2011.
Cons:
While gold can be a secure investment, it can also be difficult to sell, especially if you own physical gold. Additionally, gold comes with storage costs, and selling it could incur higher taxes, such as capital gains taxes of up to 28%, compared to 20% on stocks and bonds.
Alternative Tangible Assets (Art, Cars, Wine)
Pros:
Niche markets such as art, classic cars, and wine offer investors the chance to invest in things they are passionate about. For some, these markets can be exciting and profitable, with the right collectibles appreciating in value.
Cons:
Investing in niche markets comes with significant barriers to entry, both financially and in terms of knowledge. For example, the market for classic cars can be exclusive, and tangible assets like wine are highly influenced by external factors like agricultural conditions and market interest.
Additionally, these markets tend to be more volatile and may not provide the stability that real estate offers. As Reedy points out, while markets like cryptocurrency and collectibles can offer huge rewards, real estate offers long-term wealth-building opportunities with a much lower level of risk.
Conclusion
While there are plenty of exciting investment opportunities available today, real estate remains one of the most stable and reliable ways to build wealth. Whether you choose to invest directly in properties, explore REITs, or venture into other asset classes, it’s essential to understand the risks and rewards before making any decisions. Always consult with a financial advisor to determine the best investment strategy for your financial goals.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Investment decisions should be made based on individual circumstances and after consulting with a qualified financial advisor.