Should You Keep Your Money in the Bank or Invest In Real Estate?
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If you’re lucky enough to have extra cash after paying off your regular expenses, you might be wondering: should you just leave your liquid cash in the bank, or should you consider investing it in real estate? While it can be nerve-wracking to throw your money into a property where you don’t have easy access to those funds, experts believe it could be worth it in the long run.
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Money in the bank does not grow
To think clearly about this issue, banking executive and real estate expert Andrew Lokenauth suggested, “You need to think of money as a tool and use money to build wealth.”
To that end, money you put in a bank does not build wealth. An average interest-bearing bank account will pay between 0.01% and 0.50% interest, which is lower than the current inflation rate, which was 6% in 2021, he said.
“Inflation exceeded what a savings account pays,” he said. “You actually lose money if you leave it in a savings account.”
Another view, according to Sahil Kakkar, Founder and CEO of RankWatch: “When you deposit your hard-earned money in a bank, you simply lend it to the bank for them to use for their purposes up to the time you demand it.”
Of course, putting your money in the bank is also low-risk – you can be pretty confident that your money will still be there no matter what happens in the market. And according to Khari Washington, a broker and owner of 1st United Realty & Mortgage, there are good reasons to have liquid assets, such as an emergency fund.
“If you need your money to be liquid for a rainy day or a significant upcoming expense,” Washington said, “it might be best to keep the money in the bank.”
However, any funds you have available beyond an emergency fund are worth investing in to grow your money over time.
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Real estate increases in value
In general, real estate investing gives you security and protection as it increases in value, Kakkar said. “The property is unlikely to deteriorate in value; Instead, it will either remain at its current value or increase in value.”
You can benefit from rental income
Another benefit of investing in real estate is that it gives you the opportunity to earn rental income.
“In general, it’s better to invest your money in real estate,” said Daniel Chan, CTO of Marketplace Fairness. “The main benefits of investing money in a property are that you can make a profit on the investment as the value of the property increases and you can use the property to generate income in the form of rentals.”
Lokenauth added that there are other benefits, such as, “You can use the home’s equity to borrow for additional investments.”
Real estate is a hedge against inflation
Economists expect inflation to be quite high in the coming years, said Tom Mercaldo, CEO of Wheeler Cross and WheelerClark.
“Housing wealth is typically the best inflation hedge available,” he said. “Real estate will appreciate with inflation, cash in the bank will not. … Its purchasing power is actually being eroded by inflation.”
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Collateral
Another benefit of home ownership, according to Andrew Bryant, financial expert and founder of Credit Weld, is that “Unlike stocks, you own real estate outright and can use it as collateral for loans, giving you more security than owning stock in a company.”
You can also refinance a property and pull out equity to access cash.
tax benefits
There are also tax benefits to owning real estate, said Chris Muller, director of audience growth at DoughRoller.
“Rental income from investment property is exempt from self-employment tax, and the federal government gives real estate investors tax breaks,” he said. “Your rental property may also offer you additional tax deductions based on your income level and classification as an investor or real estate professional.”
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The disadvantages
The main disadvantages of investing in real estate are that it drains your cash, can be time-consuming, and often requires a lot of money up front in the form of a down payment, Bryant said.
“It can take time and effort to manage rental properties,” Bryant said, “and if you’re not careful, you could end up losing money on it.”
Leonard Ang, CEO of iPropertyManagement added: “Most forms of this are quite capital intensive. Unless you’re a wholesaler, you generally need a lot of money upfront to start building a portfolio, and this can be hard for most people to find without risking their homes in the form of a second mortgage or refinancing set.”
Market fluctuations can also affect property values, so it’s good to be smart when buying.
“If you have a reasonable investment time horizon, are comfortable with a semi-passive approach and have no other superior investment options, then real estate is an amazing investment,” said Donald Olhausen Jr., owner of We Buy Houses in San Diego.
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About the author
Jordan Rosenfeld is a freelance writer and the author of nine books. She has a BA from Sonoma State University and an MFA from Bennington College. Her articles and essays on finance and other subjects have appeared in a variety of publications and clients including The Atlantic, The Billfold, Good Magazine, GoBanking Rates, Daily Worth, Quartz, Medical Economics, The New York Times, Ozy, Paypal, Die Washington Post and for numerous business customers. As someone who has had to learn many of her lessons about money the hard way, she enjoys writing about personal finance to empower and enlighten people on how to make the most of what they have and live a better quality of life.