If you are fortunate enough to have extra money after paying your regular expenses, the question may arise: Should you just keep your fluid cash in the bank or should you consider investing it in real estate? While it can be nerve wracking to drop your cash into a property where you won’t have easy access to those funds, experts suggest it may be worth it in the long run.
Money in the Bank Doesn’t Grow
To think about this issue clearly, banking professional and real estate expert Andrew Lokenauth suggested, “You need to look at money as a tool and use money to build wealth.”
To that end, money you put into a bank does not build you any wealth. An average interest-earning bank account will pay between 0.01% and 0.50% interest, which is less than the current rate of inflation, which was 6% in 2021, he said.
“Inflation outpaced what a savings account pays,” he said. “You are actually losing money by leaving it in a savings account.”
Another way to look at it, according to Sahil Kakkar, founder and CEO of RankWatch: “When you deposit your hard-earned money in a bank, you are simply lending it to the bank so that they can utilize it for their purposes until you require it.”
Of course, putting your money in the bank is also low risk — you can pretty much count on your money still being there no matter what happens in the market. And there are good reasons to have liquid funds, such as an emergency fund, according to Khari Washington, a broker and owner of 1st United Realty & Mortgage.
“If you need your funds to be liquid for a rainy day or a considerable upcoming expense,” Washington said, “keeping the money in the bank could be the best thing.”
However, any funds you have available beyond an emergency fund are worth investing to grow your money over time.
Real Estate Grows in Value
In general, real estate investing provides you with safety and protection because it appreciates in value, Kakkar said. “It is unlikely that the property’s value will deteriorate; instead it will either remain at its present value or increase in value.”
You Can Profit Off Rental Income
Another benefit of a real estate investment is that it gives you the opportunity to collect rental income.
“In general it is better to put your money into real estate,” said Daniel Chan, CTO of Marketplace Fairness. “The main pros for investing money in a real estate property are that you can make a profit off the investment, as the value of the property increases, and 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 that inflation will be quite high in the coming years, said Tom Mercaldo, CEO of Wheeler Cross and WheelerClark.
“Real estate assets are typically the best inflation hedge available,” he said. “Real estate will grow in value with inflation, cash in the bank will not. … Its buying power will actually be eaten away by inflation.”
Another advantage to owning a home, according to Andrew Bryant, financial expert and founder of Credit Weld: “Unlike stocks, you own real estate outright and can use it as collateral for loans, thus providing more security than owning stock in a company.”
You also can refinance a property and pull out equity to gain access to cash.
There are also tax advantages for owning real estate, said Chris Muller, director of audience growth at DoughRoller.
“Investment property rental income is exempt from self-employment tax, and the federal government provides tax breaks to real estate investors,” he said. “Your rental property may also provide you with additional tax deductions based on your income level and categorization as an investor or real estate professionals.”
The main drawbacks of investing in real estate are that it pulls your liquid 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.
“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 them.”
Leonard Ang, CEO of iPropertyManagement, added, “Most forms of it are quite capital-intensive. Unless you’re wholesaling, you generally need a lot of money up front to start building a portfolio, and this can be hard for most people to find without putting their homes on the line in the form of a second mortgage or refinance.”
Market fluctuation also can affect property values, so it’s good to be wise about when you buy.
“If you have a reasonable investment time horizon, are OK with a semi-passive approach and have no other superior investment opportunities, then real estate is an amazing investment,” said Donald Olhausen Jr., owner of We Buy Houses in San Diego.
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