Real Estate Investing or Bond Fund: Which is better for risk?


Recently, there has been an increase in investing in the real estate market because of the historically low interest rates and the imbalance of supply verses demand when it comes to houses on the market.  However, with the threat of the United States government raising interest rates in order to curb the economic growth, some investors are looking to bond funds as a way to increase their overall portfolio diversification.

Generally, it has been seen throughout the history of the United States, as well as other governments throughout the world, when a government entity such as the Federal Reserve Bank lowers interest rates in order to stimulate economic recovery the housing market grows, because people are able to get loans for purchasing a home without the added cost of interest.  But, when the Federal Reserve Bank raises interest rates the government bonds gain a better rate of return on investment.  While the state of the country is currently trying to determine which direction to go it is also a time for investor to establish what type of investment would be better for their portfolio.

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There are a couple of methods for investing in real estate.  One of the methods is to actually invest in the physical real estate, become a landlord and rent the space out to either individuals or local businesses.  However, you also have the headache of building maintenance issues as well as the potential for tenants not pay rent.  Another method is to invest in a mutual fund that holds real estate investments.  This type of mutual fund invests in companies that have real estate exposure.  The third is something called a Real Estate Investment Trust (REIT) this is a company, trust, or an association that invests directly into either properties or mortgages on a residential or commercial level.  All of these investments would be exposure to the real estate market but the mutual fund and the REIT would be considered more liquid should you need to get out of the market.

Bonds are considered something to invest in as a person ages in an attempt to replace employment income.  Bond funds work in the same way a stock mutual fund by pooling money with several investors.  However, a bond fund seeks to invest not just in the U.S. government bonds but bonds from corporations, municipalities, and other government entities, in an attempt to mimic the overall market.  What makes these funds so attractive is that they have monthly dividends that could be used as income.

In terms of risk, a bond fund is the safer choice because the government backs most bonds, however, bond funds do not have the potential for growth compared to investments in real estate.  An investment audit needs to be preformed in order to safety assess your capacity of risk and possibly consulting an investment professional to guide you through the process.  Always research and understand the type of investment that the professional is suggesting before you invest, otherwise you may need an investment fraud attorney.

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