Level 2 or Real Estate

This is a Repost from a Blog of MutualFundsPH that is so good I like to share with you. This will help in your decision which investment vehicle to ride on... Mutual funds vs Real estate written by MutualFundsPH on March 9, 2013 in Blog with no comments← older postsnewer posts →


Real estate is another favorite investment vehicle for Filipinos. Rental properties such as condominium units, apartments, townhouses, office spaces, etc. are excellent investments. Raw land also offer market appreciation. But how does real estate compare to mutual funds?

There are pros and cons for both. If you think you should only invest in real estate, consider the advantages of mutual funds that might convince you diversify your investments.

Difference No. 1: Liquidity 

Real estate is obviously not a liquid asset. It takes time to sell real estate properties.
Mutual funds are a lot more liquid. Although most have holding periods of six months, you can pull out your money prior to that for a small redemption fee.

Winner: Mutual funds

Difference No. 2: Leverage 

You can leverage real estate, i.e. you can borrow money to acquire properties. For example you can just make a 20% down payment for a Php1,000,000 property (cash out of only Php200,000). If you sell the property after 30 days for, say Php1,100,000. How much did you earn? Php100,000. What’s your return on investment (ROI)? 10%? Wrong. It’s actually 50% (or 600% if you annualize the gain). Why? Because you only shelled out Php200,000 and made Php100,000. 

You cannot leverage mutual funds. If you buy shares in a mutal fund for Php1,000,000 and its value increased to Php1,100,000 after 30 days, what’s your ROI if you sell your shares? 10% (or 120% if you annualize the gain).

Winner: Real estate

Difference No. 3: Management 

Real estate requires active management. You have to get your hands dirty buying, managing, and selling real estate. It’s a lot of work. 

Mutual funds are professionally handled by fund managers who make investment decisions on your behalf. And it’s very easy to buy and sell shares of mutual funds. If you don’t have time to manage your investments, mutual funds are ideal. Winner: Mutual funds

Difference No. 4: Control 

You have greater control over your real estate investment since you’re actively involved. You can fix up a property to increase its market value, raise your rent, kick out errant tenants, etc.
You have no control over your mutual fund investment since it’s the fund manager who makes all the investment decisions. You do have voting rights as a shareholder, but you don’t have much influence.

Winner: Real estate

Difference No. 5: Returns
It’s hard to find historical data on real estate price and rental appreciation, but numbers thrown around are in the 8%-10% per year range. Rental yields increase by single digits. However, if you invest in foreclosures or buy in a hot property market, you can earn much better returns. And if you earn both rental income and enjoy market appreciation, while using leverage, that’s a powerful combination. 

Returns for mutual funds vary also, depending on the type of fund and the ability of the fund manager. But generally, bond funds generate around 8% average returns while stock funds earn 15%-20% average returns over 10 years.


Winner: Mutual funds in general, but real estate if you really know what you’re doing

Difference No. 6: Risks 

Real estate can be risky. There are many factors like interest rates, inflation, political stability, migration, natural calamities, etc. that affect the prices and rents of real estate. You may also have to contend with fake titles, depreciation, problem tenants, squatters, corrupt government employees, and your own inexperience or incompetence. 

Mutual funds can also be risky. Interest rates, inflation, political stability, etc. also affect the prices of the stocks and bonds that your mutual fund owns. And not all fund managers can consistently generate good returns. But there are far fewer risks than real estate.


Winner: Mutual funds

Difference No. 7: Flexibility

You have a lot of flexibility with real estate. You can hold it, rent it, flip it, fix it, and borrow against it. There are many ways to finance your purchase and many ways to generate income from it. 

The only flexibility you have with mutual funds is to manage your portfolio of funds by rebalancing them such that you keep the same proportion that you want (e.g. 60% in stocks, 30% in bonds, and 10% in foreign-denominated balanced funds).


Winner: Real estate

Difference No. 8: Capital 

You have to pay 10% to 20% down payment to buy real estate. You can borrow the down payment of course and there are ways to purchase property directly from a seller that doesn’t involve making a down payment, but generally you need more capital to get started than with mutual funds. 

You can invest in mutual funds for as little as Php5,000 to Php10,000, and just Php1,000 for additional shares thereafter. 

Winner: Mutual funds

Difference No. 9: Price 

In real estate, you make real money when you buy a property below its market value, like a foreclosure or a pre-selling project. You have a lot more room to negotiate when you buy and sell. 

You buy shares in a mutual funds for the same net asset value (NAV) per share, which is what would be left if the fund sells off all its assets and pays off all its liabilities. So you can’t get a discount when you buy or sell at premium when you sell. Winner: Real estate

Difference No. 10: Diversification 

If you have Php100,000, you can use that as down payment for a property or buy raw land. But you need to raise more capital to buy another property…and another. And by sticking to just real estate, your risk exposure is highly concentrated in the property sector. 

If you have Php100,000, you can buy a single mutual fund, and you’re well-diversified with dozens of bonds and/or stocks, including property stocks. You can invest in bonds and funds of other countries as well. In fact, Php5,000 already gives you instant diversification.

Winner: Mutual funds

Difference No. 11: Taxes 

You pay capital gains tax when you sell real estate. You pay VAT, documentary stamps tax, transfer tax, and registration fee when you buy real estate. You pay realty tax while you own real estate. You pay either a percentage tax or VAT for rental income. 

When you sell your mutual fund shares, your income is exempt from capital gains tax so they’re tax-free. Winner: Mutual funds

Difference No. 12: Time 

Investing in real estate is time consuming. You have to do research, site visits, appraisals, negotiations, documents processing, etc. And that’s just when you buy. It takes a lot of time as well to manage a property and to sell it. 

Investing in mutual funds is quick and easy. Just figure out your investment objectives and risk appetite, and then pick a mutual fund or two that can match what you want. Just fill out a few forms and give out a check or make a deposit. That’s it. When you sell, just fill out another form and you can get your money usually on the same day.

Winner: Mutual funds 

So which is better — real estate or mutual funds? The answer is it should not be an either-or choice. It’s good if you have both mutual funds and real estate in your portfolio.

But if you’re a beginning investor with limited funds or limited time, or both, it’s best to start with mutual funds.

If you want to start up your investments on either of these two, take advantage of IMG Membership. It can save you at least 2% for your Real Property Investments and about 2-3% of your Mutual Fund Investments.

Contact me NOW at 0920-902-1217 or eMail me at richbenj.santiago@gmail.com for your Investment guidance and strategy. It will surely benefit you! And there is more!

Happy Investing...