Property Investment Vs. Stocks, Bonds, & Mutual Funds

There is a world of difference between investing in property instead of stocks, bonds and mutual funds. The transaction costs alone of buying and selling property could easily total tens of thousands of dollars, while stocks, bonds and mutual funds could be traded for fees or other costs typically around 10 dollars. Depending which financial adviser you ask, some will say property is a better investment than stocks, bonds and mutual funds, or vice versa. But the answer really comes down to an individual investor's personal preferences and tolerance for risk once he understands the distinctions.

Physical Asset

Property is a tangible investment asset. You can see, touch and feel an apartment building. As the owner, you could even live there along with your tenants if you like. Stocks, bonds and mutual funds, on the other hand, are paper assets which have cash value. They represent either equity ownership or a debt investment in publicly traded corporations. You aim for these paper assets to be worth more than you paid for them when the time comes to cash them in.

Management Required

Property investments require you to deal with people. There's no way around it. From the closing table, to collecting rent and dealing with subcontractors doing work and maintenance on the property, real estate involves dealing directly with others. Even if you hire a property manager, you'll still have to manage her. With stocks, bonds and mutual funds, you leave all the management to the executives who run the corporations. In fact, it is highly unlikely the CEOs of any of the companies you've invested in will want to hear your ideas on how to manage the day-to-day operations of the company.

Insurance

You can put insurance on your property investments. In fact, the bank will require it if there is a mortgage on the property. Insurance can protect your interest and a lender's interest. If a fire or a natural disaster were to damage or destroy your investment, the insurance company will help you reconstruct the building and reimburse you for lost rent during the construction. No insurance company will guarantee the value of your stocks, bonds and mutual funds. The value of paper assets are vulnerable to stock market crashes.

Leverage

Property investments are usually bought with leverage. Investors will pay only a portion of the purchase price with their own money and borrow the rest from the bank. A bank might be willing to accept a $10,000 down payment from an investor to buy a $100,000 investment property, with the bank loaning the other $90,000 and holding the property as collateral. Banks will not loan an investor money to buy stocks, bonds and mutual bonds using the paper assets as the collateral. An investment in stocks, bonds and mutual funds will not give you the benefit of using leverage.