When it comes to investing, there are many options available to you to choose from, and two of the most popular among investors are mutual funds and commercial properties. But which is the best investment option for your portfolio?
That’s what we’re going to be looking at today. Below, you’ll find the pros and cons of investing in both mutual funds and commercial property, along with all of the information you could ever need.
Many investors find that investing in commercial property comes with fewer risks than mutual funds, and there are good reasons why. Let’s start by taking a look at both the benefits and disadvantages of choosing an investment property.
Some of the benefits that come with investing in commercial property over mutual funds include:
One of the biggest benefits you’ll gain from investing in commercial property is that, compared to residential property, you’ll get a higher rental income. This is because the spaces are typically larger, and they have longer lease terms, which results in strong, steady cash flows and better returns on investment.
Choosing a commercial property as part of your investment strategy also leads to a diversified portfolio, which, in turn, means you can spread risk across different asset classes and mitigate the impact of market fluctuations.
Commercial properties also have the potential to appreciate in value over time, especially those in prime locations with high demand, and this can result in capital gains if and when you decide to sell the property.
There are many tax benefits to choosing commercial real estate investments over mutual funds, as well. These can include depreciation, mortgage interest deductions, and deductions in property taxes, which can help reduce your overall tax liability.
Unlike mutual funds, investing in commercial property gives you direct control over your assets. This means that you’ll be able to make decisions regarding property management, improvements, and leasing strategies, giving you more autonomy in managing your investment.
While investing in commercial property comes with several excellent benefits, just like any other investment, there are some disadvantages you should be aware of, too:
As commercial properties typically require a larger upfront investment, you’ll need to have funds in place to get onto the commercial property investment ladder, which can be challenging for some investors, particularly those looking to start investing.
Another disadvantage of choosing commercial property over mutual funds for your investment is that you may experience a long period of vacancy. This is because finding suitable tenants for residential property can take longer, leading to potential income gaps and higher operating costs.
Commercial property values and rental rates can be more sensitive to economic slowdown and market fluctuations, too, and these changes in economic conditions can impact occupancy rates and rental income.
There are also various regulations and zoning laws associated with investing in commercial property, which can impact the property’s permitted uses and potential for redevelopment. In turn, both the property’s value and investment returns can be affected.
Now, let’s explore the pros and cons of investing in mutual funds over commercial property.
When you invest in mutual funds, your investment is looked after by a professional fund manager who will have experience and expertise in selecting and managing investments. They’ll conduct research, analyse market trends, and make investment decisions on your behalf, meaning that you can stay hands-off while still getting fantastic investment outcomes.
You’re also provided with access to a wide range of investment options with mutual funds, including stocks, bonds, and alternative assets. Also, with professional management, you’ll have access to these without needing an extensive knowledge of financial markets, making mutual funds a good choice for experienced and beginner investors alike.
Mutual funds offer better liquidity compared to commercial property investment, and this allows you to buy or sell fund shares at the current net asset value on any business day. As a result, you’re offered the opportunity to access your investment capital whenever needed.
As mutual funds pool money into a diversified portfolio of assets, transaction costs are reduced. Also, as mutual fund expenses are typically shared amongst investors, the overall costs for each investor are lower.
Another advantage of choosing mutual funds is that they often offer risk management features, such as asset allocation, diversification, and risk-adjusted investment strategies. This can make them less of a risky investment and can help you achieve your long-term investment objectives.
As you can see, there are some great benefits to investing in mutual funds. But what are the disadvantages?
As mutual funds are managed by a professional investment manager, they also come with management fees and other expenses, which can reduce your overall returns. These fees can also vary widely among funds, as they are typically expressed as a percentage of assets under management.
When investing in mutual funds, all decision-making is carried out by your investment manager. This means that you have limited control over specific investment decisions, such as which stocks or bonds to buy and sell within the fund’s portfolio.
Another disadvantage of choosing mutual funds over commercial property is that you may not be able to customise the fund’s portfolio to your specific preference. This is because mutual funds have predetermined investment objectives and strategies, which may not align with your own financial goals or risk tolerance.
Some mutual funds charge sales loads or commissions when investors buy or sell shares, including front-end loads and back-end loads, which can erode your returns. This can be especially damaging if you frequently buy and sell fund shares.
Commercial property offers the potential for regular rental income and appreciation and comes with some great tax benefits. Mutual funds, on the other hand, are a good choice if you want to remain as hands-off as possible, have greater liquidity needs, and want access to a wider range of investment opportunities.
With this in mind, ultimately, the choice over whether to invest in property or mutual funds will depend on your financial goals, risk tolerance, and preferences.
