Real Estate Investments as Compared to Corporate and Government Bonds

Real Estate Investing and Home Values
Real Estate Investing and Home Values. iStockPhoto

When comparing investment opportunities, the time frame for holding the investments and the rate of return during that time are the primary considerations. Risk is also a concern.  Let's see how real estate can significantly outperform bonds, corporate or government:

Risk vs Return:

Bonds are relatively safe, but the safer the bond investment, the lower the interest rate of return.  Government bonds, cosidered almost risk free, have very low yields.

 They frequently have yields below inflation.  They are easier to buy and sell than real estate, but if you're earning 2% and the inflation rate is a mild 1%, your ROI has been cut in half.

Rental property investing consistently yields in the high single digits into double-digit returns.  You get the appreciation over time coupled with monthly cash flow with rents coming in at higher levels than the mortgage and expenses.

Bonds and Income Taxes:

Many government bonds are not taxed at the federal level, but we've already discussed the low yields of those.  If you opt to move to higher yield corporate bonds, you'll get higher interest rates.  However, you'll also have greater risk of default.  You'll also be paying regular income taxes or capital gains taxes depending on how long you hold the investment.

Real estate gets some great tax breaks, the depreciation deduction being one of the best.

 You get to deduct against income a portion of the value of the property every year.  You didn't actually spend any money, but you get a tax deduction.

Combine even a nominal rate of inflation with an income tax burden, and you really take a beating with bonds.  

Inflation Reversal:

Bonds pay a fixed rate of interest over the life of the investment, thus purchasing power with that interest drops with inflation over time.

 Inflation can decimate your returns on the safest bond investments.

Rental property can generate higher rentals in periods of inflation. Higher costs of materials and labor generally translate into higher housing costs, and thus higher rents. Purchasing power doesn't erode in this scenario.  Inflation normally drives up real estate prices across the board.  You're reaping your cash flow rewards, but also building appreciation over time that can actually be helped by inflation.

The value of the bond is static, while real estate can increase in value through appreciation.

When considered along with the other ways in which rental property can generate returns, it would appear that real estate investment is superior in many respects to investing in bonds.  Don't take my word for it.  Just do some Web research for rates of return for bonds versus rental real estate.  If you think some of the real estate stuff is hyped, just cut it by half and I think you'll still be impressed.