Wednesday, March 13, 2013

Why Real Estate Investing Is Better Then Bond Investing

*Disclaimer: We do not give investment advice. We just conjecture and pontificate. So anything you read is strictly opinion.?

Many people are continually looking for investments for their self directed IRAs or 401(k) s. These investments might range from various growth or equity stocks listed on the NYSE to bonds in the debt market; they might also range in the direction of private equity deals through personal contacts or real estate investments within their own home town. The biggest question that seems to be the determining factor on whether one investment is chosen over another is which one will provide a decent rate of return?

The Bond Market

The problem with the current bond market is that the interest rates are unprofitably low. This creates two problems, 1) If you invest in a bond you are bound to receive that rate on those invested dollars until the bond matures or it is called; since interest rates are so low it is unlikely the bonds will be called. With inflation rates at or near the same level as the interest rates buying a bond nearly means that you are giving away free money when considering the time value of money; 2) If interest rates increase the value of the bond decreases dramatically. In other word, you not only lose out because of the 2008 crash, but you also lose out when the market increases again and the Fed raises interest rates; very unfortunate.

Why Real Estate Is Better

The two reasons above in addition to one other creates three reasons why real estate is a better investment than the bond market.

  1. When you invest in real estate you can hold the asset as long as you would like before you sale it, assuming you don?t default on a mortgage and lose it to the bank. This allows you be take the driver seat rather than waiting and hoping that a corporation or municipality will or will not call the debt so you can realize the most profitable solution to the investment.
  2. Additionally, as inflation affects our economy over the years you receive a higher payment each month because your rents increase. With that being said, hyperinflation can hit the economy and you will still be able to raise the rents, depending on the length of the contract between you and the renter. In other words you are somewhat shielded the long-term investment risk of a bond.
  3. If interest rates increase it is probably because the economy is doing better and people are looking to purchase homes and other assets. Now the value of your property has probably gone up resulting in an increased return if you need to sale early. Bond prices react in the exact opposite direction.
  4. As the housing market increases you will inevitably see an increase in the value of the property. Again, bonds will react in the opposite direction because of the inverse relationship between bond value and interest rates. So as inflation hits and your rents increase so does the value of your home. Remember, during times of inflation those in debt will benefit while those who hold debt lose.

These four reason are part of the explanation as to why so many are investing more through a self directed IRA rather than leaving their funds to be managed by a bond or stock market trader.

Source: http://www.silverstone.net/why-real-estate-investing-is-better-then-bond-investing/

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