June 12, 2012
By Jake Ryan
Well, first we should start by comparing the two. What do they have in common? Well, they are both a part of the alternative asset class in that they provide inflation protection. They are both tangible assets. In a time where the government is trying to print, print, print its way to prosperity, tangible assets play well in this type of environment.
Now, what are some of the differences? With real estate, you’re allowed to implement levels of leverage. By taking out a mortgage, in say a real estate investment, you’re able to leverage say 5 to 1 on your principal, provided you can get an 80/20 mortgage. This allows the investor to produce sizeable gains in relation to the amount of principal they start with. Real estate also generates cash flow. Do you want to be a dairy farmer or a rancher? A rancher involves buying an asset, potentially improving it, or not, and then selling it in the future for a capital gain. This type of investing can call on the need for hope since there’s not really much you can do while you wait for the gain to come.
Even though gold is considered a good investment right now, you still have to sit back and hope it increases in value. As a dairy farmer of investing, cash flow is king. And real estate provides cash flow. Coupling cash flow with leverage can produce some of the best investment outcomes out there. And, your tangible asset is protected against inflation. Not only is the investment protected, but the cash flow is protected, too. How many people have noticed in the rental market that rents have gone up considerably in the last 5 years?
Now, some other differences between gold and real estate, real estate can require considerably capital outlay. I mean you can’t buy a piece of investment property for $1,000. You can, however, invest in gold for as little as $175 (buying a 1/10oz gold coin). Gold is considered a commodity, specifically a precious metals commodity, but I think the market is going to start thinking of it as a currency (again) pretty soon. Right now as Europe unfolds, investors are fleeing to the US Treasury market as the safe haven investment. But, once Europe is in our rear view mirror and the market starts to take a closer look at the US and its public debt problem, where are people going to flee for an investment safe haven? I say, along with many others, that it’s going to be gold. History has shown that every fiat currency scheme that’s come, has gone with the fiat currency finally pricing at zero.
Did you know that the US dollar has lost 95% of its purchasing power since the invention of the Federal Reserve in 1913? Wow, only 5% to go.. how long with that take? You see people will start to factor in the unfunded liabilities the US Gov’t has in the form of Social Security and Medicare. Right now, we post a debt of what?.. $15T? Well, the 2006 US Comptroller came out last year and said he predicts the total debt to be more like $80T. $80T!!! This is going to create serious market disruption and who knows how real estate will play short-term. In the long run, it does have inflation protection. But, in the short run I think gold is where the people will run.
So, which is the better investment? I would say both. Both are better than pretty much everything else. With interest rates rising sometime in the future, who knows when, bonds are probably the worst investment/asset class right now for the long term. And stocks will become quite volatile as the currency markets disrupt. Really any US dollar-denominated asset could feel the pain. So, real estate or gold….? My answer is both.
Jake Ryan | firstname.lastname@example.org | 855.202.0VCG x14
VCG – www.veniceconsulting.com