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Real Estate vs. Bonds

What are Bonds?

A bond is a fixed interest rate investment that consists of loaning money to an entity that borrows the funds for a specific period. The most common examples of bonds used today are available through the government entities at the nation, state, and local levels, as well as through certain businesses to help finance projects and raise money. So, instead of obtaining a loan through the bank, a state government for example, may issue bonds directly to investors to keep an operation going, or to fund a new project. Bonds tend to have very low yields usually below inflation rates.

You may hear a bond be referred to as a fixed income security. A fixed income security is a type of investment where the borrower repays the principal amount by a specific date through periodic payments that incorporate a fixed interest rate to investors. Those who invest in bonds receive a contract that lists the agreed upon interest rate and the time by which the loaned amount must be repaid by, also known as the maturity date. A bond verses a stock market investor is aware of the repayment amounts in advance due to the agreed upon interest rate. A stock market investor is dependent upon a stock's performance, with no guarantee of a dividend, or his or her original investment. A typical bondholder would receive the bond principal, which is the original loaned amount, in addition to a fixed interest rate which is the investor’s return.

Real Estate vs. Stocks Comparison Chart

Hard Asset
Real Estate Hard Asset
Bonds Hard Asset
Real Estate Inflation
Bonds Inflation
High Cash Yield
Real Estate Cash Yield
Bonds Cash Yield
Real Estate Leveraged
Bonds Leveraged
Tax Advantage
Real Estate Tax Advantage
Bonds Tax Advantage
Equity Buildup
Real Estate Equity Buildup
Bonds Equity Buildup

Real Estate vs. Bonds Comparison Details

Is a Bonds a Hard Asset?

Since a bond is not a tangible or physical item of worth that is owned by an individual or a corporation, it is not considered a hard asset.

Are Bonds affected by Inflation?

Inflation can cause the federal reserve to raise interest rates. When the Federal Reserve raises interest rates, yields tend to rise. As a result, prices fall and have the potential to impact bonds by lowering the value of the fixed income investment. For example, if you have a bond that has a 2% interest rate, and the rate of inflation after purchasing this bond grows to 3%, you are esentially looking at a true rate of return of -1%.

Do Bonds have a High Cash Yield?

No, bonds in general do not provide high cash yields, not to be confused with high yield bonds that companies offer. Organizations offer high yield bonds to attract investors and offset risk. This means that bond investors who invest in high yield bonds, may receive a higher interest rate payment when the bond reaches maturity, but that does not equate to a high cash yield, it may just offer a percentage or half a percentage higher than a normal bond.

Can Bonds be Leveraged?

Bonds can be leveraged, but the interest that would be required on any borrowed capital would be higher than the amount that the bond could pay you in interest.

Are there Tax Advantages from owning Bonds?

Bonds that are issued by governmental units and U.S. territories and possessions are exempt from federal, state, and local income taxes. Corporate bonds are subject to income taxes on any interest or income received from the bond.

Do Bonds build Equity?

Bonds do not build equity. Unlike real estate, where equity buildup is possible through debt decreasing or property value increasing, bond investments do not equate to ownership of the issuing entity. Bond issuers pay back the principal loan at the agreed upon interest rate to the investor when a bond matures.

Risks of Investing in Bonds

Purchasing a bond equates to purchasing a debt. The entity that issues the bond, is borrowing an investor’s money with the promise to repay it with a fixed interest rate over time. Companies sometimes default and cannot repay their debt, which puts the investors at risk. Inflation can also work against a bond investment as detailed above constituting a true return in the negatives. Similarly, there is reinvestment risk with bond investments, where the only option to reinvest any earnings is at a lower rate compared to the rate that generated the proceeds.

In Summary

Bonds make up one of the three main generic asset classes, with cash equivalents and stocks. Certain types of bonds show more promise than others, for instance government bonds are guaranteed by the full faith and credit of the U.S. The type of bond will also determine if and how taxes apply upon receipt of any proceeds. Compared to real estate, bond returns receive devastating blows with inflation, and yield small returns with an intangible investment. If you are seeking investment opportunities and are serious about making your money grow the farthest, consider real estate over bonds.

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