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Investing in Gold vs. Real Estate: Which is Better?

by Jason Hanson on October 24, 2010 · 25 comments

  
investing in gold vs real estate

When you hang around enough investors and entrepreneurs you get to know people who invest in a little bit of everything – single family houses, gold, oil, and raw land, to name a few.

And lately, the investment that keeps popping up among my circle of friends is investing in gold. Also, it seems like “gold investing” commercials are everywhere these days. (Thanks Glen Beck).
So, it got me thinking . . .

As an investor, which is better for my money, gold or real estate?

Well… with the government printing money like it grows on trees, we’re bound to have inflation, which will cause the price of gold to continue to increase. Plus, gold never goes out of “style.” For the past 5,000 years it’s been used as money and many people would rather receive payment in gold these days than a soon-to-be worthless dollar. I certainly expect the price of gold to increase in the next several years, but I have no idea how high.

But here’s the thing: Gold right now is priced at almost $1,400 an ounce. And to buy an ounce of gold you have to pay $1,400, plus a percentage over that. (Usually 5% or 6%, which is the dealer’s markup).

There are no discounts for gold. And once you buy it, the only way you make money off it, is when it increases in value and you sell it.

Now let’s get to real estate, specifically single family houses.

If you’re a wholesaler, you don’t have to put any money down except a $10 deposit and you can make $5,000 to $10,000 when you assign your contract to someone. (I like that leverage). You can also do lease options and subject-to’s and get in for virtually no money down.

If you get a rental property, then you’ve got cash flow coming in. Unlike gold, which is “dead weight”, the property you own will generate a monthly income. It may only be a couple hundred bucks at first, but over time as you pay down your mortgage it can certainly add up.

Also, I mentioned inflation earlier. Real estate is just like gold in that it is a “hard asset.” Once inflation takes off, the price of real estate should enjoy a healthy gain.

The bottom-line is: If I were you, I’d stick to buying houses and worry about buying gold later on. If you’re a multi-millionaire now, then sure, buy gold and diversify a little bit. But if you’re a new investor starting out, save your money for a rainy day and begin by wholesaling and doing other transactions which don’t require a lot of cash.

Photo: motoyen

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{ 25 comments… read them below or add one }

Lisa October 24, 2010 at 9:48 am

Thank you so much for this advice. I was JUST wondering that myself. I’m 35, and just paid off ALL of my credit card debt! Yay for me right?! Now, I have another problem (a good one at that though) – I have $2000 extra cash each month that I don’t know what to do with. The burning question is – put the money towards buying an investment property OR put it in gold, then cash out the gold in a 5-10 years (pay the horrible capital gains taxes of more than likely 25% +) and buy an investment property for cash! This article gives me some things to think about.

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Anonymous October 24, 2010 at 9:53 am

IMHO, real estate will worth more because ultimately it has more value compared to gold. At least from my point of view.

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Jess Robinson October 24, 2010 at 12:52 pm

Excellent point, Jason.

While gold may continue to increase in value along with inflation, the specious argument coming from gold bugs is that its inherent value lies in its base value as currency….especially in light of the mounting federal debt. Try buying a car or groceries or a cup of coffee with gold. In the event of a worthless dollar and a total economic meltdown, what vendor would accept gold in exchange for goods or services? I daresay barter would become the prevailing means of exchange.

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richard October 24, 2010 at 1:55 pm

Oh my god are you serious? Try buying a cup a coffee with gold? If I were selling coffe I would do that all day long and anyone who owns the coffee shop would too. I know this is on a real estate website but come on the dollar in your pocket today is worth 23% less than two months ago! Gold will go up until they stop printing money. And in regards to inflation helping real estate prices I say yes but could take a few years everyone will be struggling to buy gas, oil, food on thier current income. Then interest rates will go up also hurting real estate prices.

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Joshua Dorkin October 24, 2010 at 3:02 pm

Richard – Have you ever looked at a historic price charts of gold? Nothing goes up forever.

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richard October 26, 2010 at 2:23 pm

tell that to the people of Zimbabwe or the Weimar Republic because thats exactly what it did in thier dollars. US is in big time debt. The fed will print. And the dollar will continue to lose value. See gold isn’t really going up its the dollar in your pocket going down in value everytime they blow another billion here and there.
Dont get me worng I think a low leveaged cash producing property is a good investment also.

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Robert Mullen October 24, 2010 at 1:55 pm

I think gold could be challenging as a new investment class right now.I personally own precious metals BUT made my average cost gold purchase right at $400 and silver at $6.70. I have done well with that investment and generally speaking done quite well with mining equities in addition. Would I buy gold here? No. The time for that is past. I have much more interest in diversifying into real estate but the timing is a primary concern.

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Brian Brady October 25, 2010 at 9:46 am

“Would I buy gold here? No. The time for that is past.”

Then you’re selling gold now? I ask because you’re pointing out the biggest mistake investors make (playing not to lose). How many people did we see make the same mistake, with real estate in 2007? The rationale against buying is that “the price is too high” which means of course, you expect the price to fall.

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Robert Mullen October 26, 2010 at 2:42 pm

That is a common misconception. Just because you no longer wish to buy more of something does not necessarily mean it is time to sell it. I have sold a small amount of precious metals I purchased and intend another incremental sale in the spring but it will be dependent on price activity. The world seems to feel the need for constant activity but honestly doing nothing is the right reaction 80% of the time.

BTW – My rationale against buying is that the time is no longer right. I bought all I wanted when prices were considerably lower. Why would I buy now? Do I expect prices to go down now? No, I think the most likely outcome is another doubling in the price of gold. The risk/reward ratio is no longer attractive though. I think the risk/reward ratio in real estate is very attractive though. I do worry about how many “investors” still are attracted by the leverage. Leverage is what caused the crisis of 2008 to run out of control.

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Chris October 24, 2010 at 4:21 pm

I all ready own a little bit of gold in the form of mutual funds. I am more comfortable investing in something that I know about and that is real estate….

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Matt Rosen October 24, 2010 at 10:06 pm

Jason, well said.

Great post and very solid information

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Ron Borg October 25, 2010 at 4:03 am

The ability of real estate to provide a cash flow may make it a better investment than gold but more importantly, cash flow provides investors with a quantifiable method of placing a value on on that property. Does anyone truly know the value of gold? I mean sure, it’s what someone is willing to pay for it. But only on that particular day.

Real estate however, can be valued based on its cash flow; i.e. 5 times annual gross cash flow or 8 times net… whatever the historical mean is for real estate in your city. It’s something you can look up. Not to mention that in most cities, new inventory cannot be easily added, but new gold gets dug up every day. Do we really know how much gold is down there?

I’d much rather be invested in assets that offer an additional form of valuation rather than just what someone is willing to pay for it on a specific day.

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Julie Broad October 25, 2010 at 7:00 pm

I love gold. I actually paid for the first year of University through gold investments I made with my Dad’s help in High School. But I would take real estate over gold any day because of what you said Ron … gold only has one valuation and hundreds of factors play into how it’s valued. If nobody wants to buy my house at a price I’m willing to sell it for – I rent it out and make a little money from it that way. You can’t say the same thing about gold.

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Shae Bynes October 27, 2010 at 5:25 pm

You were investing in gold in high school, Julie? Nice :-) I only played the fake stock market in my Academy of Finance classes. LOL!

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Kevin Sproul October 25, 2010 at 2:42 pm

When they start running TV adds for new investors, it means they market is near it’s peek and about to nosedive.

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Bob October 26, 2010 at 11:27 am

Gold is meant to be a zero net gain item, in my opinion. Unless you can buy on margin with gold (which I don’t think you can-it’s just stocks you buy with margin, right?), you have to have all your money upfront. The beauty about real estate is that you can have little to nothing down and still get an asset worth over a 100 times what you put down. (I bought a house in MS with nothing down and got 4,500 back at closing-it was valued at 102K when i bought it just about 2 years ago. It’s still valued at over 85K and I owe 80). As inflation hits, all consumables and all assets will increase…that’s what it inherently means. So people keep touting how gold will go up when inflation goes up…DUH! Everything will! So take the following example:

I have $10K. I buy gold. How much? 10K of gold…it’s dollar for dollar. Inflation hits at 10% year one, It’s now worth 11K. Year 2 another 10%, now it’s worth 12,100.

I buy a house worth 100K with the 10K down. Year one 10% inflation…now my 10K down is worth 110K (a 100% gain from my down). Year 2, another 10% inflation. Now my house is worth 121K. If I sell my house now, I have my 10K I originally put down plus another 21K. I just tripled my money in 2 years. If you collected at the 1% rule, you also collected 12K year one and another 12K-13,200K year 2 if you had your rents inflation adjusted. So now you quintupled your money.

So, here’s my beef. In 2 years of inflation we all KNOW is coming, why would you buy gold and get a 21% increase when you can get a possible 450%-500% return in the same time frame?

I just bought a house in April worth 52K with 2K down. I bought multifamily properties with 20% down. Even if you bought property with 100% down, your return will likely be higher than if you invested in gold, unless you have really nasty tenants the whole time.

Thanks for the post,

Bob

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Robert Steele October 26, 2010 at 12:15 pm

Don’t forget leverage is a double edged sword. While everyone is certain we will have chronic high inflation there is another camp that believe we will have crushing deflation. In that case asset prices (like RE) will continue to fall. Gold however does very well in deflation. Many people think of gold as an inflation hedge. It is not. It went nowhere for 20 years while we had persistent mild inflation. It is a hedge against currency crisis. It does well at the extremes. Think of it more like insurance than a productive investment.

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Robert Steele April 18, 2011 at 10:45 am

Even in a climate of high inflation not all asset classes will appreciate or hold their value at the same pace. Look at the last few months. Gold is up in real terms. House prices still sliding. Look at what happened last time we had chronic inflation in the 70’s. House prices failed to keep pace with inflation because of the high mortgage rates. Whereas gold did keep pace with inflation and then some.

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macone March 29, 2013 at 3:54 am

What if the place you bought becomes dirty cheap. You could have taken the gold somewhere else and live like a millionaire. That’s what happened to our family, since we came from a warzone. Gold saved us, while our previous luxury homes are worthless at the today. Gold you can buy and sell anywhere. If gold becomes worthless, then the world is truly doomed, so not even real estate will help anyone.

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Robert Steele October 26, 2010 at 12:08 pm

I have been purchasing rentals since 2000 and precious metals since 2005. I am very happy with both of my investments. I do not own any stocks. However I feel I am currently underweight in gold and will continue to accumulate physical bullion. Just as I will continue to add rentals to my portfolio. You see, you don’t have to choose one over the other.

There are a few properties that gold has over RE that you failed to mention:
1. Gold is divisible. Try selling just part of a house.
2. Gold does not decay. Gold smelted in the 12th century and then recovered from a ship wreck is still in perfect condition. I bet your 900 year old house wont look that good without maintenance.
3. It is fungible. I can sell gold in a matter of days and know exactly what I will get for it. RE takes a hell of a lot longer and how much I will actually get for it can vary wildly.

If you think gold is in a bubble ask yourself this: how many people do you know that own gold? When everyone owns gold, like tech stocks in the late 90’s, and the gold price is displayed prominently everywhere that the Dow is on TV then the end will be nigh. I fully expect it to double, triple or more from here as the currency wars really start to take off.

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Shae Bynes October 27, 2010 at 5:24 pm

Robert, these are excellent points and its why I’ve chosen to invest in both. Diversification is the name of the game…but no more mutual funds for me.

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Dean October 26, 2010 at 3:12 pm

The problem with the original philosophy is there are an abundance of “ifs” and “cans” with few “wills”. Let’s also consider some other “wills”. Your tenants will damage your property. Don’t fool yourself that you’ll get lucky and they won’t. Some tenants even destroy properties. And the thing is, you won’t fully know which tenants you have until after the day they have moved out. At that point, there is the possibility that “the property you own will generate a monthly income” – all of the income will go into repair. And there is the possibility that additional money will be needed. You could end up with a net loss. For rentals. If you can flip the property quickly, you can turn a quick profit. However, that is an “if” sentence. The overall thing to consider, if this was such a great way to make money, why aren’t more people jumping in and doing it? Right, fear. We’ve heard it a billion times from a billion real-estate investing sites, forums, gurus and investors. Call me a skeptic, but I just can’t believe that that many people are afraid.

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p.b April 17, 2011 at 7:23 pm

Dear chaps,
I have to disagree to the article, since it neglects to point out demand and supply for gold and houses respectively. Gold price is not increasing magicaly, it has been a good reason for this. Gold is limited and as demand for gold driven by people lost faith in fiat currency is rising, price of gold rise. Houses on the other hand are plenty to offer and constructors can always make more. At this point demographicly we reached a peak of the baby boomers, unemployment is high and income is deteriorating by previus loans and interets while taxes are increasing and social benefits in the environment of housing is decreasing. In times like this history shows go for gold. Whell I go with history, you can take your chance with your hunch.

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edward August 27, 2011 at 4:53 pm

very helpful…. thankyou !!! im not an investor and I guess you can say all my life I’ve been scrapping the bottom just trying to make ends meet. I’ve been home hunting as a first time buyer but im afraid of the bottom falling out and now being stuck for 3o yr mortgage in an unstable economy and so much uncertainty with the job market………. so I figured maybe – Gold !!!!

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John July 15, 2012 at 9:40 pm

I realize this post is from 2010, but I’d have to say the no-brainer investment is Gold. Anybody that buys a house today at value will not ever get that value. The value will not increase, at least not in our lifetime. You would have to buy a house or property at 20-30% of assessed value (TOPS) to get any equity. Banks won’t give out loans right now, and REOs are a real crapshoot.

If you buy gold, you NEVER lose. The price of gold has gone up from $400/oz in 2007 to right around $1600/oz today. That isn’t really an increase in gold, but a mega decrease in the value of the US dollar. The price should actually be higher but the good old fed is messing with that. If the price of gold goes down to, let’s say, $400/oz over the next five years, that means the value of the dollar has increased. If gold skyrockets to $10,000/oz, well that means your investment has increased.

You win regardless. Gold goes up, your protected and your investment pays off. If gold goes down, you really dont lose because the dollar can buy more. Its the ultimate investment!

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