Say you just won the lottery and are now sitting on a huge sum of cash. After treating yourself to a much-deserved vacation and a handful of impulse buys, what do you have planned for all that money?
Will you buy into the stock market? Keep it hidden under your mattress? Or perhaps invest the remaining sum into an income-generating rental property? Since many savvy investors now turn to alternative investmentssuch as real estate to diversify their portfolios, we’re comparing real estate vs. cash to give you insight on the best options for growing your wealth.
Liquidity
By definition, cash provides you with the most liquidity imaginable. You have the money in your account and can choose how to spend it at the drop of a hat. Come across an unbeatable deal on a Caribbean cruise for the family? Enter your credit card information and start packing. Total your car and want to upgrade to the latest model? Simply write a check. With cash on hand, you have complete spending flexibility with no penalties or fees to worry about.
Real estate investments, on the other hand, are considered illiquid, meaning you can’t obtain cash from them unless you sell the property or take out a home equity line of credit (HELOC). Depending on the market you’ve invested in, you may need to wait years for your property to become profitable or to increase in value enough for you to access the additional equity.
Tax Benefits
One of the reasons people love real estate is that it can provide excellent tax benefits. When you earn rental income on a property, you can deduct a number of property-related expenses, including mortgage interest, property tax, operating expenses, depreciation, and repairs. In addition, investors can receive capital gains tax-deferring benefitsand have the ability to trade up or diversify their investment portfolios without taking any immediate tax hit. For many sophisticated investors, investing in real estate is part of a larger tax management strategy.
Cash just doesn’t give you the same bang for your buck in this category. Generally speaking, for every dollar you pocket as cash from your job or other investments, you’ll lose up to 37% to income taxes, either ordinary income, dividends, interest, or capital gains.
Inflation & Appreciation
There are two types of inflation—consumer price inflation and asset inflation. The first type describes “an increase in the general price level of all goods and services in the economy.” For example, when people talk about how candy bars that used to cost 5 cents now cost $2, they’re talking about consumer price inflation. Although this macroeconomic principle seems inherently negative, inflation isn’t necessarily bad for the economy if the rate grows slowly and predictably.
It is bad, however, for people who are sitting on large sums of uninvested cash. Over time as the general price of goods increases, your cash reserves will be worth less relative to your purchasing power. This is one of the primary reasons experts advise people to only save as much money as you actually need for emergency reserves, immediate bill payments, or an imminent purchase.
For real estate investors, the second type of inflation—asset inflation—is very important. This term describes“the relationship between supply (marketable inventory) and demand (ready buyers)...as well as interest rates, especially in terms of its relationship to mortgage funds.” Further, “as buyer-demand for real estate outpaces the supply of property owners actively wanting to sell, the market environment produces a scarcity (in the form of lack of supply of homes for sale), and real estate prices increase (or inflate).”
Although real estate investments aren’t free from the grip of inflation, unlike cash holders, real estate investors actually benefit from the price of their property assets increasing. Real estate appreciation is triggered by increased demand for a certain location, which is often impacted by the area’s population density and income. Even with inflation, real estate investments are highly profitable in the long term thanks to appreciation. Although the level of appreciation will vary based on geographical location, it can make for extremely high investor profitability and is a huge reason why investors love real estate.
Grow Your Cash
With its tax benefits and appreciation potential, it’s easy to see why real estate is becoming an increasingly desirable long-term investment. To understand how you can convert your cash into profit-making real estate investments, please subscribe to learn more.
