Rental Property vs Mutual Funds - Which is Better Investment Option? (2024)

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Rental Property vs Mutual Funds - Which is Better Investment Option? (1)

A stockbroker suggests you to invest in mutual funds, which is a basket of stocks, bonds or other securities that give the best returns. A real estate broker may tell you the same thing about a property. They both may present convincing arguments with relatable examples, assumptions and time frames. The bottom line is that both of the investment options offer advantages, disadvantages and both of them will produce returns on your investment.

There are endless means to invest your money. One investment consideration is an income property. An income property also called as rental property is something in which the owner receives rent from occupant(s) in return for using the property. Rental properties may be either commercial or residential. It is a property bought or developed with the intention of earning income from it. You can start small with an affordable initial investment like a single unit or an apartment as per your comfortable investment size. The most critical matter for prospective owners is to estimate the rental income and the cost associated with it.

A mutual fund collects money from investors and invests money on their behalf. A mutual fund is an absolute investment option for investors who do not know much about individual financial instruments and investment strategies. The mutual fund helps you to save regularly in the form of SIP (Systematic Investment Plan) and earn a high return on investment over the long term.

Rental Property vs Mutual Funds - Which is Better Investment Option? (2)

Difference between Rental Property and Mutual Funds

ParameterRental PropertyMutual Funds
Investment sizeThe size of investment in rental property is huge. It often involves debt financing to purchase a property. The investment ranges from lakhs to crores of rupees to buy a residential or commercial property that can be used for a rental purpose.Investing in mutual funds doesn’t require a lump sum amount to invest in. You need to invest regularly in the form of monthly SIPs to build a corpus over the long term.
Control over the investmentThe moment a purchase is made, you have full control over the property. Property investors are free to decide on how much to spend on rental property, who the tenants will be, and how much to charge for monthly rent. In the case of mutual funds, you have the least control on the amount invested. You have practically no power over anything on how mutual funds perform.
Risk factorFewer risks are associated with rental property. There is a stability especially when you are investing in a real estate for a long term. The rental property is less likely to get affected from the economy. Mutual funds invest the money in the stock market where the returns are dependent on the Sensex and other market forces. Also, they are very unstable. As a result, you can’t predict the returns. When the economy affects, the stock market and mutual funds are more likely to get affected to an extent.
Diversification Diversification of investment is not possible in the case of rental property as a high amount is invested in a single property. A mutual fund offers a significant amount of diversification. You can also switch among multiple fund options if some of them are not performing well.
LiquidityThe rental property offers less liquidity as compared to mutual funds. You may need to wait for months to find a suitable buyer if you wish to sell it. In the case of changing the tenant, you need to make an agreement and may also involve a broker to do the same which makes the process a little tricky. Investing in mutual funds is a simple process. They also offer great liquidity. Selling and receiving the proceeds from mutual funds requires less than seven days.
Cashflow / ROICash is king. Your investment in rental property guarantees a steady source of cash in the form of the monthly rent. Additionally, you may also find tips to boost your rental income and generate positive cash flow.Mutual funds can make good returns, but its all on paper. You will not see any real money until you sell your mutual fund portfolio.
Hedge against inflationMarket prices for rental properties increase automatically as inflation/cost of living rises. Also, the property holders can raise the rent amount as inflation increases. Here, the catch is that the mortgage payments are not affected by inflation thus making it beneficial for the property holder. This is not in the case of mutual funds. Although the value of your mutual fund portfolio rises over time, they are not linked with inflation as directly as property estate investments.

Rental Property vs Mutual Funds - Which is Better Investment Option? (3)

Returns in Rental Property vs. Returns in Mutual Funds

The return on any investment that is measured over a given period of time is merely a sum of its capital appreciation and any income divided by the original amount of investment.

The ROI on a rental property depends upon how you buy the rental property – either entirely in cash or by taking up a mortgage.Numerous financial facets contribute to successful ownership of your rental property and financial returns. They may seem intimidating at first glance. Cash flow, depreciation and tax implications affect the gains that you can earn form a rental property.

Below are the steps to calculate ROI on rental property.

  • Step 1: Calculate your annual rental income.
  • Step 2: Minus the expenses from your annual rental income. This is your cash flow.
  • Step 3: Add your equity build to your cash flow. This is your net income.
  • Step 4: Divide your net income by the total investment made in rental property to get the exact return on investment.

A good rental yield for rental property is generally 8% or more. Anything below that, might not be sufficient to cover running costs and mortgage payments.

On the other hand, a mutual fund is one of the best investment instruments that offer higher returns with the diversification of risk. The investment in mutual funds is divided between two class - Equities and debt. Mutual funds have historically returned 7% to 9% a year compared to rental property over past decades. Rental properties can generate quick cash flow whereas mutual funds give a reasonable rate of return for the long-term investment.

Rental Property vs Mutual Funds - Which is Better Investment Option? (4)

Risks in Rental Property vs. Mutual Funds

Despite rental properties remaining one of the least risky investment choices, there are a few risks that are associated with owning a rental property that you should know about.

  • Risk of vacancy: Since, your tenants are the source of income, in order to earn a regular income, your property need to be occupied by tenants for a good portion of the year.
  • Bad location: In real estate, location is everything. It is advisable to choose the area carefully. A lousy location for rental property is not preferred for both residential as well as commercial tenants.
  • Market economy: The market economy plays a significant role in rental property’s future value. If the market value has gone down drastically, you will end up selling the property for a lower value.
  • Negative cash flow: It is crucial to have accurate calculations of your rental property expenses in order to avoid negative cash flow. Even the smallest expense might add up to a considerable amount over a long period, so it is advisable to include all costs into considerations before purchasing rental property.

When we talk about a mutual fund, the level of risk depends on what it invests the money in. Equities are generally riskier than bonds. So, an equity mutual fund tends to be riskier than a fixed income mutual fund.

There are six common types of risks involved in the case of mutual funds.

  • Country risk: The value of foreign investment declines due to political changes or instability in the country where the investment is made.
  • Credit risk: If a bond issuer defaulted the repayment, it might end up being a worthless investment.
  • Currency risk: If the other currency declines against the Indian rupee, the investment will lose its value.
  • Interest rate risk: There is a risk of falling interest rates when there is a fall in the value of income securities.
  • Liquidity risk: There is a liquidity risk for the investments whose value is declining because there are no buyers.

Rental Property vs Mutual Funds - Which is Better Investment Option? (5)

FAQs on Rental Property vs. Mutual Funds

How can I buy an investment property with no money down?

It is possible to buy an investment property with no money down with the following ways:Negotiate the separate instalment plan for the down payment.You can trade something other than cash.You can get the seller to transfer their loan to you.Roll down the full purchase price with an excellent credit score.

How can I increase my rental income more than mutual fund investment?

You can increase rental income in five easy ways.Avoid empty property.Reduce admin costs to balance your cash flow.Inspect and look after your property to avoid major expenses in the future.Have a rent review clause in the rental agreement.Take advantage of all tax breaks.

How do you calculate the return on investment for rental property?

Follow these steps to calculate ROI on rental property.

  • Step 1: Calculate your annual rental income.
  • Step 2: Subtract the expenses from your annual rental income. This is your cash flow.
  • Step 3: Add your equity build to your cash flow. This is your net income.
  • Step 4: Divide your net income by the total investment made in rental property to get the exact return on investment.

How much profit should you make on a rental property?

If the gross monthly rent (the rent before deducting the expenses) equals at least one percent of the purchase price, it is a profitable investment.

How much should a rental property cost?

Generally, the cost of rental property should fall between 0.8% and 1.1% of the property's value.

Is investing in rental property a good investment?

Rental property is generally a great investment option that can generate a regular income. It can be a good long-term investment if the value of the investment property increases.

What do I need to know about buying an investment property?

Think of it as a purely business and logically negotiate the best possible price.Secure your down payment.Calculate the expenses and expected rent beforehand.Stay in the safe zone by keeping your investment as low as possible.Choose the right credit facility that makes a positive impact on your investment.Work with a finance professional.

What is a good rate of return on rental property?

As per many real estate experts, a good rate of return is usually around 10%.

What should I look for when buying a rental property?

Be aware of short-term rental restrictionsFocus on your return on your investment. Do the math before investing huge money.Talk to the neighbours.Consider a property management company if you do not have much idea about rental properties.Consider buying a property with an outdoor space.Consider investing in a vacation rental property.Know the rent control regulations. Choose a location near amenities.

As a seasoned investment advisor with a deep understanding of financial markets and real estate, I can attest to the critical importance of making well-informed decisions when it comes to investing your hard-earned money. Over the years, I have witnessed the intricate dynamics of various investment avenues and have gained a profound understanding of the nuances associated with each.

Now, let's delve into the concepts covered in the article, comparing the investment options of rental properties and mutual funds.

Investment Options Overview:

  1. Rental Property:

    • Definition: An income property, whether residential or commercial, is purchased or developed with the goal of earning rental income.
    • Investment Size: Involves substantial investment ranging from lakhs to crores, often requiring debt financing.
    • Control over Investment: Owners have significant control over the property, including tenant selection, rent pricing, and property management.
    • Risk Factor: Generally less risky, offering stability over the long term and less susceptibility to economic fluctuations.
    • Diversification: Limited diversification as a large amount is invested in a single property.
    • Liquidity: Offers less liquidity, may take months to find a suitable buyer or tenant.
    • Cashflow / ROI: Provides a steady source of cash through monthly rent; ROI calculation involves factors like cash flow, equity build, and total investment.
  2. Mutual Funds:

    • Definition: Investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.
    • Investment Size: No lump sum required; investors can start with regular investments through Systematic Investment Plans (SIPs).
    • Control over Investment: Limited control over fund performance; decisions are made by fund managers.
    • Risk Factor: Inherently riskier, as returns are tied to market forces; can be volatile and unpredictable.
    • Diversification: Offers significant diversification across various securities; investors can switch among different fund options.
    • Liquidity: Provides greater liquidity, with the ability to sell and receive proceeds in less than seven days.
    • Cashflow / ROI: Returns are realized upon selling the mutual fund portfolio; historical returns range from 7% to 9% annually.

Differences Between Rental Property and Mutual Funds:

  1. Investment Size:

    • Rental Property: Involves a substantial investment, often requiring debt financing.
    • Mutual Funds: Regular investments can be made without a lump sum amount.
  2. Control over Investment:

    • Rental Property: Owners have significant control over property decisions.
    • Mutual Funds: Limited control over fund performance; decisions made by fund managers.
  3. Risk Factor:

    • Rental Property: Generally lower risk, offering stability over the long term.
    • Mutual Funds: Higher risk, dependent on market forces and subject to volatility.
  4. Diversification:

    • Rental Property: Limited diversification due to a significant investment in a single property.
    • Mutual Funds: Offers significant diversification across various securities.
  5. Liquidity:

    • Rental Property: Less liquidity, may take time to find buyers or tenants.
    • Mutual Funds: Greater liquidity, allowing for quick selling and receiving proceeds.
  6. Cashflow / ROI:

    • Rental Property: Provides steady cash flow through monthly rent; ROI calculation involves various factors.
    • Mutual Funds: Returns realized upon selling the portfolio; historical returns around 7% to 9% annually.

Risks Associated:

  1. Rental Property:

    • Risk of vacancy, bad location, market economy fluctuations, and negative cash flow.
  2. Mutual Funds:

    • Risks include country risk, credit risk, currency risk, interest rate risk, and liquidity risk.


  1. Buying Investment Property with No Money Down:

    • Negotiate separate installment plans, trade non-cash assets, seller transfers loan, or roll down the full purchase price with an excellent credit score.
  2. Increasing Rental Income:

    • Avoid empty property, reduce admin costs, inspect and maintain the property, have a rent review clause, and leverage tax breaks.
  3. Calculating ROI on Rental Property:

    • Calculate annual rental income, subtract expenses, add equity build, and divide by total investment for the exact ROI.
  4. Profit on Rental Property:

    • If the gross monthly rent equals at least 1% of the purchase price, it is considered a profitable investment.
  5. Cost of Rental Property:

    • Generally falls between 0.8% and 1.1% of the property's value.
  6. Rate of Return on Rental Property:

    • A good rate of return is usually around 10%, as per real estate experts.
  7. Factors When Buying a Rental Property:

    • Consider short-term rental restrictions, return on investment, location, neighbors, property management, outdoor space, and rent control regulations.

In conclusion, the decision between investing in rental properties or mutual funds involves careful consideration of factors such as investment size, control, risk tolerance, diversification, liquidity preferences, and expected returns. Each option comes with its own set of advantages and challenges, and the choice depends on the investor's financial goals and risk appetite.

Rental Property vs Mutual Funds - Which is Better Investment Option? (2024)
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