Bonds and Real Estate are two unique investment options allowing you to diversify your portfolio while proving to be a relatively safer investment than stocks, cryptocurrency, and some other assets. Both bonds and real estate are steady investment options with relatively low volatility allowing you to invest worry-free while benefitting from potential capital appreciation and predictable income.
Bonds Investment and Benefits
A bond is a debt investment wherein you (the bondholder) gives a loan to the bond issuer in return for a promise to receive your principal along with interest over a specified time. Bonds can be issued by the government of a country or a corporation and have a stated interest rate that may be fixed or variable and provide investors with an income that is predictable. Bond coupon payments are paid quarterly or semi-annually, which provides investors with visibility over future cash flow and their total return on investment.
Real Estate Investment and Benefits
Real Estate Investment involves purchasing land, commercial spaces, or residential homes. The purpose of a Real Estate investment is to generate returns through rental income, price appreciation, or both. Real estate investments generally require a larger capital investment, and the returns are dependent on various factors such as location, real estate market trends, economic conditions, demand, etc. The main benefit of Real Estate investing is that the returns from rental income generally outpace inflation. One downside of this type of investment is that sometimes the property may be vacant for a prolonged period and if you are unable to find a tenant, this results in loss of income.
Similarities between Real Estate and Bond Investment
Both Bonds and Real Estate investments are considered good diversification options within a portfolio that enables investors to reduce risk. Also, they both are generally considered safer compared to other asset classes such as stocks and alternative investments. In addition, both investments are closely linked to interest rates, as the price of bonds declines when interest rates are high, as well as Real estate values generally decline as financing costs increase and market demand slows.
Are Bonds a better investment option than Real Estate?
The answer to this question depends on your age and stage. Investments in real estate can yield similar returns to bonds. However, real estate comes with several challenges, including finding tenants, paying for repairs, ensuring the property complies with the law, etc. Sometimes, the real estate property value can also decline depending on market conditions.
Bonds, on the other hand, provide you with periodic returns and repay the initial investment at maturity. Bonds also have a lower initial investment amount, as you can buy a bond investment with as little as US$10,000. Bonds are also highly liquid, allowing you to generate cash within 2-3 days versus waiting 3-6 months when selling a property. Because bonds give higher returns than cash and money market instruments, a bond is the best investment option that offers a fixed return and the potential for capital appreciation without worrying about tenants, property rates, vacancy, or any other concerns.
However, if you are an investor who has the capital to cover the acquisition costs, the expertise and time to deal with property maintenance, tenant selection and servicing then you could consider investing in real estate. If you are not, then US dollar bonds are a good alternative/ complement to real estate, as they offer you a steady predictable income with far less hassle!
Anna-Joy Tibby is the Assistant Vice-President, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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