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Real Estate Vs. Index Funds

In the world of investments, it’s important to understand the pros and cons of each option.

Some strategies are successful while others fail to push forward. With this in mind, it’s best to consider two of the more intriguing investment options available to the average person – real estate and index funds. For those sitting on a large amount hoping to invest, these two options will pop up again and again.

Here’s an in-depth assessment of both investment options and what they have to offer.

What is Real Estate Investing?

This is the most common form of investing in life and is something many citizens consider at one point or another. In general, real estate investing refers to the concept of owning, purchasing, managing, and/or renting real estate for the purposes of making money. Various strategies are used under this specific investment option including flipping houses, setting up rentals (monthly income) or simply holding for a long-term sell.

Pros

1) The Potential for Significant Returns

It starts with the potential for large returns over a short period of time. In general, other types of investments take far too long to bring meaningful returns and this can become a troubling waiting game. This is why many investors look towards real estate as a way to make a considerable amount of money over a few months or years. These returns can end up being life-changing depending on your timing.

2) Multiple Ways of Earning

Real estate investing is a boatload of fun because it’s all about finding your path. Some prefer the idea of living in their house, while others want to rent out their property for a monthly income. The best part is, both options are viable and sometimes people do a bit of both (i.e. renting out their basement).

With multiple ways of earning from your prized possession, it becomes a lot easier to see a path that suits your risk profile. The same cannot be said for other investment vehicles.

Being able to play around with the options is what makes this such a fascinating opportunity.

3) Easier to Customize Investment Strategies

Customization is essential when it comes to feeling in control. You don’t want a situation where things are left to the market and you can’t do anything about increasing an asset’s value. For example, if you invest in stocks, you won’t be able to do much in helping the stock rise in value. The same cannot be said for real estate investing and properties. In fact, you are able to make adjustments whether this includes renovations or simple repairs.

This is all going to add up and the rewards will come over the long-term.

For those renting out their property, you can always raise the rent if there’s enough demand.

4) Can Be Lived In

Yes, many citizens simply invest in a personal house and live in it for 20-40 years. This asset appreciates and they’re able to retire on the money made from their sale. It’s a solution that has been used for generations and is a well-regarded strategy among experts. It’s easier to enjoy the perks of your investment if you get an opportunity to live in the asset for decades.

While this may not be an ideal option for some, it does provide a way to maximize your investment.

Cons

1) Maintenance Costs

Real estate investing is not always a bed of roses and this has to be kept in mind with any investment option. With this type of investing, you are going to deal with a number of ongoing costs whether this includes property taxes, repair costs, or home insurance fees. All of these have to be calculated into your overall financial setup.

In some cases, the maintenance costs eat a significant portion of your earnings and these need to be accounted for well in advance.

2) Exposure to Weather Damage

What if there’s a sudden tornado that rushes through the neighborhood and takes out your house? This is a situation most people don’t think about but it can happen to anyone.

If your house is on the wrong end of a tornado, it will get blown apart leading to significant damages. As a result, you will want to protect yourself with the help of home insurance but it is a risk no matter what you do.

The asset can get damaged and it will often happen before you get the opportunity to do something. This is why it is always recommended to understand the weather conditions where you’re buying.

3) Large Upfront Costs

Real estate investing is going to have a number of upfront costs and this can be troubling for the average investor. For example, you may be able to dabble with index funds by putting in $1,000-$5,000 but the same cannot be said for real estate investing. While it is tremendously lucrative when done right, it is also going to come with a noticeable upfront cost.

One of the costs would be a down payment on your house to get approved for a mortgage.

This is a hassle and has to be factored into your investment strategy as soon as possible.

What are Index Funds?

The stock market is a fascinating path for investors but it also comes with numerous risks. Whether it’s penny stocks or traditional stocks, there’s a considerable amount of information and the average person finds hard to keep up. This is why index funds are set up with a selection of pre-determined stocks in one basket.

For example, the index fund may include the top 500 companies in the world based on market cap. This rule will be applied from start to finish by a certified manager. If a company drops out of the top 500, it will also drop out of the index fund under your name. This is all done behind the scenes after you’ve made the investment.

Pros

1) Hands Off Investment

The immediate advantage of an index fund would be the “hands off” approach to investing. You are able to rely on the mutual fund manager to handle how the fund is performing and how it is catering to the needs of each client. They will pick and sell stocks based on their interpretations of the market, which ensures you’re able to sit back and watch as the index fund moves.

This can be ideal for some but it does come with a cost with regards to your control over the investment.

2) Simpler to Evaluate

It’s a lot easier to evaluate how your index fund is doing because the numbers are there for everyone to see. A simple Google search will reveal real-time data based on how the index fund is trading on the open market. This is a great way to keep tabs and feel in control over the asset that’s in your possession.

The same doesn’t always happen with a property because it’s value is dependent upon the buyer. What are they willing to pay after taking a look at the property? What is a person willing to pay for a year’s worth of rental fees? It is going to vary from case to case, which is why it is a risk that has to be kept in mind with real estate investing.

3) Location Doesn’t Matter

Another positive for index funds has to do with location. It doesn’t matter where you’re sitting because index funds can be purchased from the comfort of your laptop/mobile device. In general, you can live wherever you want and there’s still going to be a way to invest in index funds whenever you want to.

This is why so many people like the idea of index funds and do rate them highly.

4) Easier to Sell

Feel like it is time to pull out of the market and move on? If so, it is going to take a few clicks of your mouse for this to be a done deal. The same is almost impossible when it comes to real estate investing. For anyone that is looking to sell within minutes or days, it is always easier to go with index funds even with their slower returns.

Cons

1) Doesn’t Appreciate Quickly

A common concern with index funds is the lethargic growth phases. It rarely shoots up in price because there are too many companies in the fund for such volatile movement.

This is the exact reason index funds are organized in the first place. They are supposed to remove volatility out of the market while ensuring some form of growth over the long haul.

2) Slower Returns

The returns are going to take time to manage and for some, it is always going to be a waiting game. Slow returns don’t always mean appreciation in value but also dividend payments or management costs for the fund.

Final Thoughts

In the end, real estate investing is one of the most powerful investment options on the planet and will remain so. People love buying property and in the right market, you will do well whether it’s through flipping houses or renting them out.

While index funds are ideal in some cases, they won’t provide quick returns and the waiting period does get to you.

About Travis Wright

Hi! I'm the owner of Let's Grow Real Estate and Full Circle Clothing. I love writing, creating businesses and investing.

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