Most investment portfolios consist entirely of “soft assets” or “paper assets,” such as stocks and bonds. However, by adding “hard assets” like gold and real estate, you can take advantage of the benefits of tangible “real” assets. But which asset should you add to your portfolio? Let’s take a look at gold investments vs. real estate investments.
Real Estate Leverage vs Gold Leverage
The main benefit of real estate investing is leverage, which is the use of borrowed capital to increase an investment’s potential. For instance, with a 20% down payment and a mortgage for the balance, you can purchase a home with the intention to rent it out — you don’t need the full amount to be able to buy a property. Real estate is a tangible asset that can be used as collateral, so financing is available.
For example, you could obtain a mortgage on a property with the intention to renovate and flip it within a short period of time to (hopefully) make a solid profit. In other words, you have the possibility to make a significant profit on a property without having to purchase it outright.
While it’s possible to leverage gold, you don’t get the same benefits as with real estate, which, for example, allows you to reduce your risk by upgrading your property. So, our recommendation is to avoid going into debt to invest in gold and to generally stay away from using leverage for any investment, including stocks and bonds. Only buy gold you can fully own by purchasing it via existing funds, such as an IRA roll-over.
So when it comes to leverage, real estate wins!
Using real estate vs gold to diversify your assets and hedge against uncertain market conditions
Diversification is essential for portfolio success. The key to true diversification is to include assets in your portfolio that are uncorrelated. For instance, when one asset class, such as stocks, implodes, you want to have an asset in your portfolio that protects your investments by growing leaps and bounds when the implosion occurs. This will reduce volatility and losses, which take a long time to recover from.
Real estate offers some diversification from the paper asset markets, like stocks and bonds, but the performance of both stocks and real estate is tied to a positive economy. The most recent example that comes to mind is 2008 when stocks and real estate collapsed together.
Gold, on the other hand, is known as “the perfect hedge.” An investment in gold protects against inflation, which shatters the purchasing power of the dollar, destroys stocks and bonds, diminishes the return from real estate, and, thus, erodes your real wealth. Physical gold’s intrinsic value is immune to monetary and fiscal policies that created inflation in the first place, so the precious metal helps to protect your savings against inflation.
Adding physical gold to your portfolio also safeguards your investments against financial crises. The precious metal has repeatedly shown its resilience against recessions and other economic turmoil where traditional assets — like real estate — imploded.
In fact, during financial crises, gold typically grows in value and thereby protects your portfolio against losses. Gold also lets you diversify outside of traditional paper assets, which means your gold investments are safe from Wall Street and the banking system. Those two were a big reason for the real estate crash in 2008.
Real estate doesn’t offer the same level of diversification as gold investing. For portfolio diversification, gold wins!
What is the Counterparty Risk Associated with Gold or Real Estate?
Counterparty risk is the probability that another party in the transaction cannot fulfill their part of the deal. An investment in gold involves no counterparty risk. Precious metals are real, tangible assets that you can hold, and they have a known market price. Precious metals cannot default on payments or go bankrupt. Once you own the gold, it’s yours.
The risks involved with real estate investing, on the other hand, include not only your ability to pay your mortgage but also counterparty risks. For instance, if you’re renting or leasing your property to a third party, your ability to pay your mortgage relies on their ability to pay the monthly rent/lease. If your tenant is not paying you, you will be in a world of hurt with your mortgage on the home they are living in rent-free.
For lack of counterparty risk, gold wins!
What is better for producing income between owning real estate and gold?
Assuming you manage your property well and that your tenants pay on time, real estate can provide reliable passive income, which can not only cover your mortgage but even provide a profit. If real estate didn’t generate any yield, no one would invest in it.
Gold, on the other hand, provides no yield. But here’s the deal: Gold doesn’t need to provide yield. Gold is money, and money is a store of wealth, not a cash flow–generating asset. Gold holds its purchasing power, thus hedging your wealth against inflation all the time. For real estate, however, you need the yield to cover the loss of wealth during inflation.
While gold doesn’t need to generate yield — as its explosive growth in value over the last 20 years proves — it doesn’t generate income. So, when it comes to this category, real estate wins!
What has better liquidity between gold and real estate?
Gold is recognized and accepted worldwide, and it’s easy to both buy and sell. In fact, buying or selling gold can be done more or less immediately, typically within hours. If the gold is part of a Precious Metals IRA, you can also take a distribution and choose to liquidate and receive cash or receive the actual coins and bars themselves, There is always a buyer for your gold, and because of its price transparency (see below), you should not encounter any surprises regarding the price.
Real estate, on the other hand, has low liquidity. The process of buying or selling real estate takes a long time — it can take months to sell a property if the market’s “cold.” Transactions also involve a lot of paperwork and high fees. In addition, there’s significant uncertainty concerning the real estate price at the time of the sale, which forces you to look at old prices for homes in the area (“comps”).
When it comes to liquidity, gold wins hands down!
What is the divisibility of real estate? How easily can gold and real estate be divided?
If you want to liquidate a portion of your gold investment, it’s as simple as selling a single gold bar or a few silver coins. You can buy fractional gold coins, so you can even liquidate gold in smaller amounts if you want to as well.
The picture is very different for real estate. You cannot sell part of your real estate investment — you either sell it or keep it. If you’ve invested in land, you can possibly sell parts of it, but it involves a complicated and time-consuming process with your municipality.
For divisibility, gold wins!
Which has better tax benefits gold or real estate?
When you invest in real estate, you can get a wide range of tax benefits. For instance, you can deduct mortgage interest, operating expenses, legal costs, property taxes, and property depreciation.
The tax benefits of gold investing are more limited, but some tax benefits exist in a Precious Metals IRA, including the ability to defer taxes.
When it comes to taxes, real estate wins!
How does the location of owning real estate impact it as an asset vs gold?
The value of your property will, ideally, grow over time, but you could end up with significant losses should circumstances surrounding your property change. Real estate is a local investment, and future developments and changes to bylaws, zoning restrictions, and infrastructure can have a significant impact on the value and yield of your real estate investment. For example, the new mall down the street could lead to traffic congestion, or the new power plant built a few miles away could make your neighborhood much less attractive.
Gold has no location. Your gold will not be inferior in any way to other gold even if you purchased it in a “bad” neighborhood — gold is gold, no matter where you purchase or sell it. That is a clear benefit because it removes a great deal of uncertainty.
For not relying on location for your investment success, gold wins!
What are the capital requirements of owning real estate and owning physical gold?
Purchasing a real estate investment property outright requires significant capital. Of course, you can purchase real estate on the more affordable end, such as a studio apartment, a property in a less desirable neighborhood, or a fixer-upper, but even then you need substantial capital.
Most investors finance their real estate investment via a mortgage, but that doesn’t remove the capital requirements — you need to prove that you’ll be able to pay back the loan plus interest, so your personal finances will be scrutinized. And then there’s the down payment, of course..
The situation is a lot simpler for gold investments. You can buy a 1 oz gold coin or bar for under $2,000, and if that’s too much, you can buy a silver bar for as low as $30 an oz. In other words, you can get started with investing in gold with much less capital and then contribute to your investments over time.
For its ability to make smaller investments, gold wins!
What is the difference in price transparency for real estate and gold?
When investing in gold or selling your gold, all you need to do is contact a precious metals dealer, and you’ll have a quote within 24 hours. You can also easily follow the performance of your gold investment — you just need to check the spot price to know how your investment is doing.
Real estate prices are much less transparent than gold prices. Sure, you can see the listing price, but the price is always up for negotiation, and if there are many buyers, you risk a bidding war, driving up the prices. Accessing historical prices for a property is sometimes more difficult, and finding out what upgrades or damages a property has incurred during its life typically requires an inspection, and even then you won’t know exactly what’s hiding behind the walls.
With real estate, you also don’t know the current value of your investment — you cannot simply go online and see the price like you can with gold.
For price transparency, gold wins!
What are the ongoing expenses for owning real estate and how do they compare to owning gold?
The costs involved with real estate investing don’t end with down payment and mortgage payments. To maintain the value of your property, you must budget for maintenance costs — you’ll inevitably need to do repairs. If you’re renting out your property, you are obligated to maintain it, and the amount of maintenance needed in part depends on how well your tenants are treating your property.
You also need to pay for homeowner or landlord insurance, utilities, etc. And if you’re not comfortable acting as the landlord yourself, you’ll need to pay a property management company to take on that responsibility.
In reality, real estate can be lucrative, but it takes work — a lot of work. And, in many cases, a lot of worry as elements out of your control can keep you up at night.
Investing in physical gold requires no work at all. Depending on where you store your gold, there could be fees for depository storage or for a safety deposit at the bank, and you should pay insurance fees if you choose to store your gold at home, but compared to real estate costs, the costs related to gold investing are negligible. Most importantly, there is no work with investing in gold. You buy it and keep it until you want to cash out.
Because it requires no work and only very low ongoing costs, gold wins!
Should you own gold or real estate?
The simple answer is “yes” — there is room for both in your portfolio. As we discussed above, diversification is one of the fundamentals of investing. To diversify your assets in an IRA when holding paper assets like stocks or bonds, gold is the obvious choice, but in your general portfolio, there is a place for real estate investing as well.
Your mix of assets ultimately comes down to your financial goals and your preferences. Make sure you speak with a trusted advisor before making any investment decisions. You can also look at how the two assets have performed historically, although there is no guarantee that either asset will continue to perform as it has so far.
The chart below shows the development in the average sales price of a home in the US versus the spot price of gold from 2000 to today.
Over the two decades, the average home has roughly doubled in value, while gold has grown over 500%. Will the assets continue their upwards trend? No one knows. The only thing we can say is that both assets have performed quite well since 2000.