Where to invest? Rental Housing VS Municipal Bond Funds
Rental properties can be a great investment if you have the willingness to manage your own properties. And with mortgage rates recently at historic lows, it may be a good time to finance the purchase of a new property, although the unstable economy may make it more difficult to actually run it, as tenants are more likely to default due to unemployment.
To go this route, you need to select the right property, finance it or buy it outright, maintain it and deal with tenants. You can do very well if you make smart purchases. However, you will not have the convenience of buying and selling your assets in the stock market with a click or a tap on your Internet-connected device. Worse, you will have to endure the occasional 3 a.m. phone call about a broken pipe.
But if you hold on to your assets over time, gradually pay off debt, and let your rents increase, you will likely have a powerful cash flow when it comes time to retire.
Risk: As with any asset, you can overpay for housing, as investors discovered in the mid-2000s. With low interest rates and a tight housing supply, home prices rose in 2020 despite the problems facing the economy as a whole. Lack of liquidity can also be a problem if you ever need to have money available quickly.
Liquidity: Housing is one of the least liquid investments out there, so if you need cash quickly, investing in rental properties may not be for you (although a cash-out refinance is possible). And if you sell, a broker can deduct up to 6 percent of the sale price as commission.
Municipal Bond Funds
Municipal bond funds invest in a variety of municipal bonds, or munis, issued by state and local governments. The interest earned is usually exempt from federal income tax and may also be exempt from state and local taxes, making them particularly attractive in high-tax states.
Muni bonds can be purchased individually, through a mutual fund or an exchange-traded fund. You can consult a financial advisor to find the right type of investment for you, but you may want to stick with bonds in your state or locality for additional tax benefits.
Municipal bond funds are great for first-time investors because they provide diversified exposure without requiring the investor to analyze individual bonds. They are also suitable for investors looking for cash flow.
Risk: Individual bonds carry the risk of default, meaning that the issuer is no longer able to make further payments of income or principal. Cities and states don't often go bankrupt, but it can happen, and historically muni bonds have been very safe - although a rough 2020 has tested that safety a bit.
Bonds can also be callable, meaning that the issuer repays the principal and cancels the bond before its maturity date. This results in a loss of future interest payments for the investor. With a bond fund, you can spread the risk of default and early redemption by owning a large number of bonds, thus absorbing the blow of negative surprises from a small portion of the portfolio.
Liquidity: You can buy or sell your fund's shares every business day. In addition, you can usually reinvest income dividends or make additional investments at any time.
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