Investing in Real Estate Vs. Mutual Funds

by Annabella Gualdoni, Demand Media

    Should you aspire to be the next Donald Trump or the next Warren Buffett? Real estate, stocks and bonds have all had a history of making people rich but also have the potential to lose money for their investors. Choosing which is the right investment will depend on a number of factors, such as your time horizon, your tolerance for risk and how actively you want to manage your investments.

    Basics of Mutual Fund Investing

    Mutual funds are an easy way to invest in stocks and bonds. You are able to diversify by owning a wide range of individual stocks and bonds while a professional fund manager makes the big decisions. If you have high-risk tolerance, you can buy mutual funds with the possibility of high returns. If you are risk averse, you can make less risky selections. Not all mutual funds are created equally, but when you do your research, you will find funds with low expenses that have performed well historically.

    Basics of Real Estate Investing

    Owning your own home is the most common real estate investment. Hopefully its value will go up over time, but even if it doesn't, you have a place to live. Income property is a different story. In addition to the initial upfront and mortgage costs, you must figure in taxes, insurance, repairs and maintenance. Also factor in the potential for occasional vacancies to check if the math shows your investment will be profitable. Many landlords struggle to barely break even each year, but they invest in the hopes that property values will increase.

    The Uncertainty of the Markets

    Every type of market has its ups and downs. If you expect to need access to your money in just a few years and wait for things to turn around, you might be better off investing in a stable mutual fund that offers a lower growth potential but holds less volatile investments. Even if you wind up losing money, selling off mutual funds is quick and easy. Real estate is a long-term investment, and unloading a piece of property can take years, even if you are willing take a big loss in a down market.

    A Day in the Life of a Landlord

    Landlords don't just collect the rent and bask in the glory of their ever-appreciating asset. Being a landlord comes with a lot of responsibility and a certain amount of risk. Not only do landlords have to find tenants, but they also have to make sure the tenants pay rent on time and keep the property in good condition. They also have to field phone calls in the middle of the night for such emergencies as frozen pipes. Commercial landlords usually relegate most repair issues directly to their tenants, but they must still actively maintain their buildings and could always face vacancies. Wall Street may cause you some restless nights in a bear market, but at least you'll never have to shovel its sidewalk or send an exterminator to eradicate its bed bugs.

    The Best of Both Worlds

    If you want to cash in on the real estate market boom without the day-to-day hassles of being a landlord, there are options. Many mutual fund companies offer real estate funds. You can also invest in REITs (real estate investment trusts), companies that invests in real estate. Like a mutual fund, you can buy shares in a REIT. A REIT distributes its profits annually like a stock dividend, but the trust professionally manages the properties so that you don't get involved in the operations.

    About the Author

    Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.