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If you are lucky enough to have extra money after paying your regular expenses, the question may arise: should you just keep your cash in the bank or should you consider investing it in real estate? ? While it can be nerve-wracking to deposit your money in a property where you won’t have easy access to those funds, experts suggest it may be worth it in the long run.
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Money in the bank does not increase
To think clearly about this question, banking professional and real estate expert Andrew Lokenouuth suggested, “You have to think of money as a tool and use money to create wealth.”
To that end, the money you put in a bank does not make you rich. An average interest-bearing bank account will earn between 0.01% and 0.50% interest, which is lower than the current inflation rate, which was 6% in 2021, he said.
“Inflation has exceeded what a savings account pays,” he said. “You actually lose money by leaving it in a savings account.”
Another way of looking at things, according to Sahil Kakkar, founder and CEO of Rankwork: “When you deposit your hard-earned money in a bank, you simply lend it to the bank so that it can use it for its purposes until you need it.”
Of course, putting your money in the bank is also low risk – you can pretty much count on the fact that your money will always be there no matter what happens in the market. And there are good reasons to have liquid funds, like an emergency fund, according to Khari Washington, a broker and owner of 1st United Realty & Mortgage.
“If you need your funds liquid for a rainy day or a big expense ahead,” Washington said, “keeping the money in the bank might be the best thing to do.”
However, any funds you have beyond an emergency fund are worth investing to grow your money over time.
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Real estate goes up in value
In general, real estate investing gives you security and protection as it increases in value, Kakkar said. “Property value is unlikely to deteriorate; instead, it will either remain at its current value or increase in value.
You can enjoy rental income
Another advantage of a real estate investment is that it gives you the opportunity to collect rental income.
“In general, it’s better to invest your money in real estate,” said Daniel Chan, CTO of Market equity. “The main advantages of investing money in a real estate property are that you can make a profit on the investment, as the value of the property increases, and that you can use the property to generate income in the form of rent.”
Lokenauth added that there are other benefits, such as “you will be able to leverage the equity in the home to take out loans for additional investments.”
Real estate is a hedge against inflation
Economic experts expect inflation to be quite high in the coming years, said Tom Mercaldo, CEO of Wheeler Cross and WheelerClark.
“Real estate assets are generally the best inflation hedge available,” he said. “The value of real estate will rise with inflation, but the money in the bank will not. … Its purchasing power will actually be eaten away by inflation.
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Another perk of owning a home, according to Andrew Bryant, financial expert and founder of Credit solder“Unlike stocks, you own real estate and can use it as collateral for loans, providing more security than owning stock in a company.”
You can also refinance a property and withdraw equity to access cash.
Owning real estate also has tax advantages, said Chris Muller, director of audience growth at Doughroller.
“Rental income from investment properties is exempt from self-employment tax, and the federal government provides tax breaks for real estate investors,” he said. “Your rental property may also provide you with additional tax deductions depending on your income level and your categorization as an investor or real estate professional.”
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The main disadvantages of investing in real estate are that it takes your cash out of circulation, can be time consuming and often requires a lot of money up front in the form of a down payment, Bryant said.
“Managing rental properties can take time and effort,” Bryant said, “and, if you’re not careful, you could end up losing money on them.”
Leonard Ang, CEO of ipropertymanagement, added, “Most forms of it are quite capital intensive. Unless you’re wholesale, you usually need a lot of money to start building a portfolio, and that can be hard to come by for most people without putting their house on the line as a second. mortgage or refinance.
Market fluctuations can also affect property values, so it’s good to be careful when buying.
“If you have a reasonable investment time horizon, are fine with a semi-passive approach, and don’t have other superior investment opportunities, then real estate is an incredible investment,” said Donald Olhausen Jr., owner of We buy houses in San Diego.
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