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Should You Keep Your Money in the Bank or Invest in Real Estate?

If you find yourself with extra cash after covering your regular expenses, you might wonder whether to keep your money in the bank or invest it in real estate. While investing in property can seem daunting due to the lack of immediate liquidity, experts suggest that it can be a worthwhile long-term strategy.

Money in the Bank Doesn't Grow

Banking and real estate expert Andrew Lokenauth advises viewing money as a tool to build wealth. He points out that funds in a bank account typically earn between 0.01% and 0.50% interest, which is significantly less than the 6% inflation rate in 2021. "Inflation outpaced what a savings account pays," he explains, meaning you could actually lose purchasing power by leaving money in a savings account.

Sahil Kakkar, founder and CEO of RankWatch, adds, "When you deposit your hard-earned money in a bank, you are simply lending it to the bank for their use until you need it."

However, keeping money in the bank is low-risk, ensuring your funds are accessible and secure, especially important for maintaining an emergency fund, says Khari Washington, broker and owner of 1st United Realty & Mortgage. For significant upcoming expenses, keeping money liquid in a bank might be the best choice. Beyond an emergency fund, though, investing can help grow your wealth over time.

Real Estate Grows in Value

Real estate generally appreciates over time, providing a safeguard against market fluctuations, according to Kakkar. "It is unlikely that the property’s value will deteriorate; instead, it will either remain at its present value or increase."

You Can Profit Off Rental Income

Investing in real estate also offers the opportunity to earn rental income. Daniel Chan, CTO of Marketplace Fairness, highlights that real estate investment can be profitable as property values increase and through rental income. Additionally, Lokenauth notes, "You will be able to leverage the equity in the home to take out loans for additional investments."

Real Estate Is a Hedge Against Inflation

With inflation expected to remain high, real estate can act as an effective hedge. Tom Mercaldo, CEO of Wheeler Cross and WheelerClark, explains, "Real estate will grow in value with inflation, whereas cash in the bank will lose buying power."

Loan Collateral

Owning real estate provides collateral for loans, offering more security than stocks, says Andrew Bryant, founder of Credit Weld. Real estate ownership allows for refinancing and accessing cash through equity.

Tax Advantages

Chris Muller, director of audience growth at DoughRoller, points out tax benefits for real estate investors. Rental income from investment properties is exempt from self-employment tax, and investors can take advantage of various tax breaks and deductions.

The Cons

However, investing in real estate has its downsides. It requires significant upfront capital, which can be challenging without taking on substantial debt, warns Leonard Ang, CEO of iPropertyManagement. Managing rental properties can be time-consuming and, if not handled properly, potentially unprofitable, says Bryant.

Market fluctuations can also affect property values, so it's essential to invest wisely. Donald Olhausen Jr., owner of We Buy Houses in San Diego, suggests that real estate is a great investment if you have a reasonable time horizon, are comfortable with a semi-passive approach, and lack superior investment opportunities.

In summary, while keeping money in the bank offers security and liquidity, investing in real estate can provide long-term growth, rental income, inflation protection, and tax advantages. Weighing these factors can help you make an informed decision based on your financial goals and risk tolerance.

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