Gold vs. Real Estate: Investment Analysis

Gold and real estate are among the most popular investments available on the market. Both have their unique characteristics that attract investors while also posing their own investment risks.

This comparison will provide a deeper understanding about the benefits and drawbacks of both assets. Then you can make informed decisions that align with your investment strategy and financial goals.

Gold vs. Real Estate Comparison Overview

Gold and real estate are different investment options with varying characteristics. Gold is a physical precious metal that investors purchase for a variety of reasons. Investors tend to buy this commodity because it is a safe haven asset that can be used to hedge against inflation. Gold is known to be a valuable asset during times of geopolitical instability and economic uncertainty. The yellow metal enjoys high liquidity and long-term value. It can also be a great portfolio diversifier to uncorrelated assets like stocks.

On the other hand, real estate is a property that investors buy to generate passive income. They can choose to hold onto it for a lifetime, or sell it after a certain time for a profit. Real estate investments tend to produce a reliable stream of cash flow. Yet its value can change according to economic conditions and the housing market. Real estate properties require management, maintenance, and transaction fees can be high.

To cite a recent example for comparison, SPDR Gold Shares (ticker: GLD), a fund that tracks the price of gold, has returned 0.71% over a 10-year period while Vanguard Real Estate ETF (VNQ) returned 6.85% during the same period, according to data by Morningstar. In general ETFs are a liquid investment that are the right option for first-time investors.

Why Invest in Gold: Pros & Cons

Pros:

Gold is a time tested investment known as a store of value. This means, over time, its value doesn’t deteriorate; rather, it incrementally grows. That’s a vital investment characteristic because with inflation running high in the economy today, investors want to preserve the value of their money. If you don’t, the value of your paper currency (dollars) will slowly wither away. This is why gold is a great hedge against inflation.

Gold is a great way to diversify your investment portfolio. This is not only because gold can combat inflation, but also because it’s an uncorrelated commodity to traditional assets like stocks. This means that when there is volatility in your portfolio, gold can offer some stability and help protect against the stock market’s fluctuations. Physical gold also has no counterparty risk, meaning you never have to worry about a broker or trading partner defaulting on their contractual obligations.

Physical gold bars are great for portfolio diversification.

There are different ways to invest in gold or get exposure to the precious metal. Investors can own physical gold bullion (such as gold coins) or buy stock of companies that mine or produce gold. The former is a more direct investment, meaning you are the sole and responsible owner and manager of the physical gold bullion. Meanwhile the latter is an indirect way of getting exposure to gold. This refers to becoming a shareholder in a publicly traded company whose profits and earnings are based on gold mining. Likewise, you can invest in a gold exchange-traded fund (ETF) or a basket of stocks that hold gold mining companies rather than picking individual stock names.

Cons:

Keep in mind, with any investment, even a time-tested one like gold, there are always risks. If you choose to own gold in its physical form, there are insurance and storage costs that you’ll incur to manage it. Selling gold also is subject to capital gains tax. These additional expenses can eat into your overall returns as a consequence.

Investing in gold indirectly through stocks has its own risks as well. While gold, the commodity, is known for its low volatility, stocks are known for their daily price fluctuations. Gold stocks are no different. So, if you choose to buy into gold stocks, keep in mind there’s additional risk since you’re investing in a publicly-traded company that mines gold. You’ll need to assess market trends and the stability of its business.

Gold does not usually deliver high returns. It’s a relatively low-yielding asset whose role is to protect against wide portfolio losses. Unlike a company that sells products or services to generate earnings and profits, the value of gold appreciates over time as its price steadily increases. Long-time gold investors are likely aware of this but it’s important to keep in mind when forming your investing strategy.

Why Invest in Real Estate: Pros & Cons

Pros:

Real estate is considered a safe investment with low risk because its value tends to increase over time. Plus there are several exceptional benefits associated with the investment.

There are many options when it comes to real estate investing. Investors can buy into single-family residential homes, commercial buildings, or multifamily apartment buildings. Investors can make recurring cash flow on a monthly basis from the rent occupants pay the property owner. These payments provide regular monthly income and are expected to be stable since tenants must pay up if they want to stay in their home, apartment, or building. This allows investors to accumulate passive income in the form of rent payments.

Real estate investors have the opportunity to get tax breaks in the form of tax deductions. Real estate investors can deduct operating expenses related to property taxes, insurance, mortgage interest, property management fees, and maintenance costs for repair. You can also write off depreciation costs on your taxes. Depreciation is the incremental loss of the property’s value from natural wear and tear. Overall, these taxation benefits and write offs reduce your taxable income. That can ultimately help you save money on taxes. This is an incentive for investors because taxes are one of the biggest expenses. Therefore, minimizing that cost can increase returns.

Similar to gold, real estate is considered an inflation hedge. Inflation occurs when prices in the economy steadily increase over time. Many of these costs are associated with household expenses, especially rent or mortgage payments. This means that inflation and real estate value (particularly housing prices) are correlated. So, when inflation rises, the value of a home can appreciate or increase alongside it over time, making it a profitable long-term investment.

Cons:

While investors can earn a nice profit on real estate investing over time, it’s important to consider some of the drawbacks.

First and foremost, real estate is an illiquid investment (low liquidity). This means that it cannot be easily bought and sold. For example, when investing in the stock market, investors or traders can easily buy and sell a stock in and out of the market. This makes stocks liquid, or easily convertible into cash. In contrast, real estate (whether residential or commercial) has to be held for the long-run. This is because investors tend to have to hold on for some time before they start seeing significant returns on the investment.

While real estate historically tends to increase in value over time, just like any investment there is the risk of it declining over time. For example, if the prices of residential homes are too high or monthly rent is unattainable to a target audience, there may not be enough demand there for the real estate property, which means cash flow from rents is not coming in.

Market timing for real estate is tricky, but it can determine your long-term return on your investment. If you as the investor buy a real estate property when its value is the highest in the property market, there’s a possibility that its value declines and you’re compelled to sell it at a lower purchase price than what you bought it. This is antithetical to the long-term investing principle of buy low, sell high. That’s why it’s important to pay attention to real estate market dynamics and understand when its optimal to buy into a property and when to sell.

Land vs. Gold as Investments

There are notable differences between land versus gold, several of which were discussed earlier. But both assets have similar characteristics that can lead to appreciation of the assets value over time. They offer reliable investment opportunities as a property's value increases or the gold price rises.

Land has utility. An investment with utility means it can yield more benefits if you invest in the property. In the case of land, you can build things like a home or produce goods like crops on it which can be sold for more money, making the property more valuable.

Moreover, real estate investors may be interested in purchasing land because there is limited supply. When there is a finite supply of one asset class, combined with sustained or high demand, that commodity becomes valuable. This means that if these supply and demand dynamics persist, the value of land will appreciate over time.

Gold has utility too. It is not only used to make beautiful gold jewelry but has other applications like in the manufacturing of electronics and in the production of electric vehicle batteries. The many use cases make the precious metal in high demand. And since there is limited supply, this can only mean its value has the opportunity to rise above the current price.

Takeaway

Both real estate and gold investing have their own merits and challenges. Real estate investing offers the potential for rental income and property appreciation. But investors must have the risk tolerance to holding property long-term since it's an illiquid asset.

On the other hand, gold has a history as a store of value. It is considered a hedge against inflation and is a safe haven asset during difficult economic conditions. But unlike real estate, gold doesn’t produce recurring cash flow.

Unlike stocks and bonds, gold and real estate are not intangible assets—i.e. they are real assets, not paper investments. They are highly stable investment options that can be passed on to future generations, bolstering your family's financial security.

While investors will choose each asset according to their investment goals, both gold and real estate are great investments to diversify your investment portfolio, which can help reduce risk and maximize returns.

Always consult a professional financial advisor or asset management experts before making any investment decisions!

Written by Paulina Likos

Read more about precious metals and other investments from the experts at Gainesville Coins:

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Gold Mutual Funds vs. Gold ETFs: What's the Difference?

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